Lets start with what it doesn’t mean.
- A ‘not for profit’ or ‘non-profit’ organization can make a profit, and in fact any prudent person will realize that if it doesn’t make a profit it’s not going to last for very long.
- ‘Not for profit’ is not a legal term defined in legislation to identify a particular type of organisation. It is a part of common language.
- Just because an organization is ‘not for profit’ does not mean that it is a recognised or registered charity, nor that it has to be.
Ok, so we know its not a legal term, not necessarily a charity and it can make a profit. So why is it called a ‘not for profit’ (NFP)? The term is used to describe organisations which are not operated with the primary aim of making a profit for shareholders, but rather have a focus of providing programs and services of public benefit.
More consideration of the influence of the language we use has generated an increasing number of alternative descriptions including: ‘for social profit’, ‘civil society organization’, ‘citizen sector organization’ and ‘public sector organisation’. To avoid any public confusion in the near future, it is advisable for such organisations to explain their NFP position until people (including governments and courts) are more familiar with the new terminology.
Changes in terminology do not affect the fact that there are numerous ways of structuring a NFP organization to meet the needs for which it is established. Many professional membership organisations are structured as incorporated entities with Boards of directors and members. The members may have similar voting entitlements to shareholders, but will never be entitled to any distribution of the profits of the organization, whether by dividend or upon the dissolution of the company. The usual structure requires that, upon the dissolution of an NFP for any reason, after the liabilities are paid any surplus monies must be distributed to another organization with a similar purpose.
Other NFPs are structured without membership at all and simply have a Board who appoint their own replacements. No model, corporate or otherwise, need ever be permanent. Some aspects may be changed with the involvement of members, and other parts may be changed at the board level to facilitate operations.
In Australia, NFPs are generally either incorporated associations governed by stated based laws under the administration of the Departments of Consumer Affairs or Fair Trading for each state, or incorporated nationally pursuant to the Corporations Act which is administered by the Australian Securities and Investment Commission (ASIC). The compliance and reporting requirements differ between incorporated associations and companies.
NFPs that are correctly founded and able to demonstrate the requirement that funds will not be distributed to members may apply for tax exemptions. Application for recognition as a charity and a tax status which allows for people to claim tax deductions on their donations is a different and more involved process. There are only limited circumstances under which an NFP can gain what is called deductible gift recipient status. That means that people donating money can claim a tax deduction on their donation receipts.
So there you have it. A NFP can be structured in a variety of ways, has a purpose for public benefit, can make a profit, may seek tax exemptions and must reapply its profits in support of the purpose of the organization or else give them to another organization with a similar purpose.