Nonprofit organizations are the organizations whose aim is not to generate profit but to provide services in different forms. Also known as non-stock corporations, such organizations do not distribute profits in any form. They take the form of a nonprofit and are required to follow the same since the time of its incorporation. Examples of nonprofit organizations are temples, churches, public schools, public charities, clinics and hospitals, research institutes, museums and government agencies. Each state defines a nonprofit in a different manner. Different exemptions are given to organizations. Some are exempted from state tax, some states give immunity to the organizations from liability of tort. Nonprofit organizations aim to serve public and provide services to the society.
Financial management in profit and nonprofit organization is completely different. For profit organizations, they base income on a quarterly basis whereas nonprofit organizations prepare their financial statements concerned around their main activity only. For profit organizations prepare a balance sheet on a quarterly basis which comprises of income statement, balance sheet and cash flows. While a nonprofit organization does not prepare a balance sheet because it has no shareholders, instead they prepare a statement of financial position which shows only the assets and liabilities of the organization. As for an income statement, a nonprofit organization prepares a statement of activities which lists the revenues minus expenses. It does not distribute the profits to anybody. The net earnings are used for the organization only. They are turned into the business for the provision of services. A profit organization shows all the income as well as expenses and shows the net profit of the organization. It then distributes the profits among its shareholders who are owners of the organization. Profit organizations are required to pay taxes on their income at the right time. While nonprofit organizations are helped by the government and tax exemptions are available to them. Certain nonprofit organizations are accessed on the secondary taxes which consist of sales tax and or estate tax.
For any organization, source of funds is very important. No business can progress unless it has adequate funding. For profit organizations the source of funds are many. They can obtain long term funds from investors as well as banks. They can also borrow money from family and friends. Shareholders are also the owners of the business who invest in the company in the form of purchase of equity shares. The organizations choose from equity funding or debt funding. For a nonprofit organization, funding is difficult. It solely depends on donations and government aids. Institutional donors are a main source of long term funding for a nonprofit. Where the income and mission of an organization matches with the institutional donors interest, they provide funds to the organization. Examples of large institutional donors are Bill Gates Foundation and United Way. There are individual donors who also help nonprofit organizations. The amount may be insignificant in comparison to institutional donors but they are treated like customers and with utmost respect. Governments provide aid to help the nonprofit organizations in achieving their mission. But with government funding there may be restrictions with the spending and the organization is also required to submit regular audit reports to them. As for initial contribution, a nonprofit depends on the Board and only after the organization has been able to achieve a recognition in the society will it be able to raise funds from other donors. Institutional donors only contribute when they see that the organization is achieving recognition and making good progress in providing services to the society.
Profit organizations use the debt in purchase of assets or for investing into other profitable resources. The debt is also used to maintain the working capital of business. Sometimes an organization may run out of working capital or enough cash, in such circumstances it is required to obtain long term debt so as to manage the working of the business and run it accordingly. A firm may also require funds to obtain a long term asset like land or machinery which could help in increasing profits. Nonprofit organizations use debt to serve the main purpose of their organization which is to serve the society. The organizations also need funds to maintain their assets like building and furniture, funds are also required for managing day to day activities. Hence for nonprofit organizations the sources of funds are vastly different and so is the use of available debts. Nonprofit organizations have a main purpose to serve the society in the best possible ways, they also have ancillary purposes with which they are registered with the Government. Once the main mission is achieved, they may spend towards ancillary purposes. No amount of money is spent towards the benefit of the contributors or the Board. This is basically illegal to use the funds for personal benefits. Nonprofit organizations also do not have an inventory or huge assets to purchase or maintain hence their spending is largely restricted to the service of society and achievement of their goals. The organization is required to produce an audited copy of financial statements to the Government. This ensures that excessive amounts are not spent anywhere and a proper record is maintained for the donors. Hence all donors are ensured that the amount is spent for the right purpose.
Performance evaluation of a profit oriented company is based on the net earnings and the distribution of the same among the various shareholders of the company. The financial statements of the company show the financial stability of the company and the ability to pay off the debts on time. As for a nonprofit company, the performance evaluation is based on the achievement of its goals or mission of serving the society. The performance of a nonprofit organization is solely based on the achievement of its primary goals. Nonprofit organizations are also measured on the way they use the donations received. No amount should be allotted for the personal benefit of any contributor or the person who manages the organization. Large institutional donors judge the performance of an organization based on the way and manner it serves the society and achieves its purpose. The allocation of funds in various areas helps gather the knowledge and performance of the organization.
Government specially helps a nonprofit in achieving its objectives because it aims to serve the society. Government tries to help the organization in achieving its objectives. Various incentives are formed and provided to a nonprofit organization. Profit making organizations are not provided with such incentives and they are required to pay various taxes on time like income tax, sales tax, excise and such other applicable duties. Nonprofit are not required to pay certain duties. Though they are accessed on secondary duties like sales tax. The assessment of income tax of profit organizations is regularly made and sometimes it is also brought under scrutiny by the Government. Nonprofit organizations only need to present an audited financial statement to the Government so that the application of funds is clearly seen by it. Government also provides aids to the organizations and helps in the achievement of its purpose.
We can conclude that a nonprofit organization aims to serve the society and has no other purpose of financial profits or serving its shareholders. It only aims for the betterment of the society and for serving the people better. This may seem like a difficult goal to achieve but if it works efficiently it could reach heights and make good progress. As for profit oriented organizations their aim is maximization of profits and increasing the wealth of the shareholders. Any means maybe adopted by the organization which sometimes gets into trouble due to the greed of the management which tends to take up wrong methods for the same. If a nonprofit organization gets into a profit generating business or steers away from the primary purpose, other than the specified ancillary purposes then it may come under the scrutiny of the Government and may lose its status of a nonprofit organization. This means that it will be required to pay taxes and file reports for the year. Any profit generated by wrong means will take away its nonprofit organizations status and bring it under a tax paying organization. Hence a nonprofit organization needs to be aware of the policies and regulations of the Government and function after keeping in mind all the relevant circumstances that their actions may have to face.
References
Fritz, J. (n.d.). How is a nonprofit different from a for profit business? Retrieved from About money: http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=6&ved=0CD0QFjAF&url=http%3A%2F%2Fnonprofit.about.com%2Fod%2Fqathebasics%2Ff%2Fnopvspro.htm&ei=nmOIVI2lBsaWuAS8oIHIBQ&usg=AFQjCNFXNCPvrY3i7wbpHYIm4y9JEEHC0g
Starting an organization. (n.d.). Retrieved from Sector Source: http://sectorsource.ca/managing-organization/charity-tax-tools/starting-organization
