Not-for-Profit Organizations

A term used to describe a group whose primary goal is typically to support or address matters or circumstances of personal or public concern

Author: Patrick Curtis
Patrick Curtis
Patrick Curtis
Private Equity | Investment Banking

Prior to becoming our CEO & Founder at Wall Street Oasis, Patrick spent three years as a Private Equity Associate for Tailwind Capital in New York and two years as an Investment Banking Analyst at Rothschild.

Patrick has an MBA in Entrepreneurial Management from The Wharton School and a BA in Economics from Williams College.

Reviewed By: Rohan Arora
Rohan Arora
Rohan Arora
Investment Banking | Private Equity

Mr. Arora is an experienced private equity investment professional, with experience working across multiple markets. Rohan has a focus in particular on consumer and business services transactions and operational growth. Rohan has also worked at Evercore, where he also spent time in private equity advisory.

Rohan holds a BA (Hons., Scholar) in Economics and Management from Oxford University.

Last Updated:November 6, 2023

What are Not-for-Profit Organizations?

A non-profit organization (NPO) is a term used to describe a group whose primary goal is typically to support or address matters or circumstances of personal or public concern. 

As a result, NPOs operate in various fields, including the arts, philanthropy, education, politics, public policy, religion, academia, environmental protection, etc. In addition, they are in charge of bridging the gap between social demand and government supply.

Non-profit organizations operate similarly to businesses in reality. Still, they vary because they stimulate interest in the service objects and content they promote, typically seen as their primary distinguishing feature. 

Some experts contend that the primary distinction between businesses and non-profit organizations is that the latter cannot distribute the surplus to owners or shareholders due to legal or moral restrictions, making the former autonomous, public, and private.

As a result, non-profit organizations are frequently referred to as the "third sector" in today's society, which, together with the "first sector" of the government and the "second sector" of the corporate world, make up the third significant social impact strength.

Non-profits still need to make money, nevertheless, to support their operations. 

The majority of non-profit organizations, however, are frequently free from paying corporate tax; private donations to non-profit organizations can occasionally be tax-deductible. 

Non-profit organizations raise money through public fundraisers or donations from the public and private sectors. When submitting annual tax returns, personal income tax is subtracted.

A non-profit organization can be anything from a charity to a Non-Government organization, and vice versa.

History of Non-For-Profit Organization

People's reflections on the two wars, which resulted in exceptional catastrophes and enormous damage to society, intensified after World War II.

The demand for a balance between social and economic activity and public needs has been determined to be unmet by the two major societal sectors.

A third sector made up of non-profit organizations or social welfare sectors, eventually formed due to how society was organized starting to pupate.

  • The World Health Organization supports health issues in underdeveloped countries and regions.
  • The World Bank was established to provide loans to underdeveloped countries and regions to help alleviate poverty.
  • The United Nations and WTO organizations are examples of such NGOs.

The birth and growth of these organizations have had a significant positive impact on global progress and social cohesion. These public welfare organizations are likewise becoming more and more powerful and influential.

However, as society has continued to advance and grow, the three main societal sectors have also undergone modifications. Reforms focused on the market were implemented gradually in accordance with the market's demands for construction and refurbishment. 

Government corruption has been gradually reduced due to market-oriented electoral competition, and the application of norms and social service standards has significantly increased. 

Through fair competition, public self-discipline, and reciprocal discipline, non-profit organizations work to increase the efficiency of public welfare organizations, the market's transparency, and social civilization and peace.

Legal Definition of Not-for-Profit Organizations

There are numerous legal definitions of non-profit organizations throughout the world.

The existence of tax-exempt status, or the fact that an organization satisfies the requirements for tax-exempt status, determines the legal definition of a non-profit organization in the United States.

In the UK, the following standards must be met to qualify as a non-profit organization:

  1. The organization is established for public rather than private interests; 
  2. The organization employs some voluntary, unpaid personnel; 
  3. Salary personnel give up their due remuneration (such as accepting more) 
  4. The surplus shall not be distributed to members; 
  5. The director of the unpaid member is responsible for managing the affairs of the organization; 
  6. Its funds come from different organizations.

According to Japanese law, a non-profit organization is defined as a social organization whose objective is not to make a profit and whose income cannot be used to distribute to members. 

A non-profit organization is not necessarily prohibited from engaging in for-profit business activities; rather, it must use its various income sources to support public welfare initiatives.

The United Nations defines a non-profit organization based on its funding source. 

A company is considered a non-profit if more than half its income is derived from dues paid by its members and donations from supporters rather than from selling goods and services at market pricing. 

This requirement is not universal because the funding models for these organizations vary greatly among nations.

Classification of not-for-profit organization (NPO)

Salamon established an international classification of non-profit organizations based on comparative research in 26 countries: 

  1. Education and academics; 
  2. Medical care; 
  3. Social welfare; 
  4. Cultural and leisure; 
  5. Vocational groups; 
  6. Residential development; 
  7. International affairs; 
  8. Civic initiatives; 
  9. Environmental protection; 
  10. Philanthropy; 
  11. Religion and others. 

This taxonomy makes it easy to identify which organizations are not-for-profit. Still, it is not conducive to in-depth academic research, and the background varies from country to country.

The United Nations International Standard Industrial Classification system divides non-profit organizations into three major categories and 15 sub-categories, which are: 


  • Primary education
  • Secondary education
  • University education
  • Adult education
  • Others; 

Medical and social work: 

  • Health care
  • Veterinary
  • Social Work

Other community and personal services: 

  • Environmental Health
  • Chambers of commerce and professional organizations
  • Trade unions
  • Other membership organizations (including religious and political organizations)
  • Recreational organizations
  • News organizations
  • Libraries
  • Museums and cultural institutions
  • Sports and leisure.

The European Community Industrial Classification System of Economic Activities divides non-profit organizations into five categories and 18 items: 


Medical and health:

  • Hospitals
  • Clinics
  • Other medical institutions
  • Dentists and veterinarians

Other public services:

  • Social work, charities
  • Professional organizations
  • Employers' associations
  • Trade unions
  • Religious organizations and societies
  • Travel agencies

Leisure and culture: 

  • Recreational institutions
  • Libraries
  • Archives
  • Museums
  • Zoos
  • Sports organizations 

Organizational role of nPOs

The various organizational roles of NPOs are:

1. Social service

Provide intermediary services and direct services to members of society. (such as consulting services for studying abroad various nursing homes, and private schools)

2. Social communication

It acts as a bridge for the communication between government and enterprises, government and society. 

On the one hand, it reflects the opinions and suggestions of enterprises and society to the government and provides information for the government; on the other hand, it assists the government in the work of publicity, guidance, and supervision.

3. Social evaluation

Make a fair evaluation of production and consumer goods (such as various survey agencies).

In a cooperative setting, social evaluation pits the preference for prosocial partners (positivity bias) against the avoidance of antisocial people (negativity bias).

4. Social judgment

Mediation of disputes between members of society, such as consumer protection associations. According to the social judgment hypothesis, an individual's cognitive map determines whether they accept or reject a proposition or message. Depending on one's ego participation and whether it falls within their latitude of acceptance, you accept or reject a message.

5. Monitor government power

Non-profit organizations provide space for people to organize themselves freely. 

These organizations aim at public interests and protect the overall interests of mankind. Furthermore, through organized activities, they can arouse the public's public awareness and influence the government's public decision-making.

6. Promoters of Citizens' Participation and Deliberation Quality

Improving the quality of citizens' political participation in democratic political participation in many non-profit organizations is an effective method that has been proven by practice.

Common Misconceptions Around NPOs

The first myth regarding non-profit concerns is that the general public frequently believes that non-profit organizations are administered solely by volunteers. 

In reality, most non-profit concerns have regular employees handling business for the organization. Still, they may also engage volunteers in their tasks to provide pro-gratis services while being supervised by the organization's paid employees. 

The operator or manager of a non-profit organization must carefully balance the sums paid for the services rendered to the organization's beneficiaries with the wages paid to the organization's personnel. 

Regulators may scrutinize non-profits whose personnel expenditures are excessive compared to their services.

The second myth is that charities cannot make money or support themselves financially through for-profit endeavors. 

Non-profit organizations must nevertheless be in charge of their financial affairs even though their goal is not to operate as profit-maximizing entities. 

To maintain the organization's financial stability, the operator or manager of a non-profit organization must manage and monitor the organization's income (including grants, donations, organizational service income, etc.) and expenses.

The secret to management is a non-profit organization, even though non-profit organizations use different management strategies than for-profit businesses. 

This is because non-profit organizations must effectively communicate their philosophy, mission, and reasons for being to establish their sustainable growth. 

How can for-profit organization management set up efficient job descriptions and labor divisions to ensure that every employee efficiently carries out the non-profit organization's concept?

Fundraising for non-Profit Organizations

Non-profit concerns don’t generate profits through their activities. They focus on raising funds for short and long-term operations.

Money may come from internal fundraising efforts, public events, individual or corporate donations, or subsidies from the government. 

Non-profit organizations can also raise their capital income by offering more services or selling more products.

Lack of working capital is the primary challenge faced by non-profit organizations in running their operations. 

Along with potential losses in government subsidies, contributions or sponsorships from private, corporate, or governmental bodies change from year to year, or according to the terms of the government. 

Non-profit management must comprehend the aim of its service, be relatively innovative in its fundraising strategies, and enhance the diversification of funding sources to deliver its services due to the absence of annual fundraising funds.

To accomplish its social objectives, a non-profit must expand, produce income, and maintain its financial stability.

The key to running a non-profit going concern

One of the most significant elements in determining whether a non-profit can continue to operate over the long term is if it has enough financing sources to remain operational. 

The ability of a non-profit to raise money depends heavily on public confidence. 

Establishing a solid and reliable relationship with donor units or groups is one approach to guaranteeing enough working capital. The development of this relationship is tied to the management, oversight, and marketing strategies of non-profit organization operators. 

And this is something that many managers of non-profit organizations lack and need to develop.
The accountability of a non-profit organization's managers and workers is essential to its long-term success. 

Non-profit organizations are becoming more and more focused on their aims. 

They can help non-profit organizations get more public confidence and then support non-profit organizations by using effective business management methods or by planning various activities that are consistent with their organizational philosophy. 

Researched and authored by Yiqing Qiao | LinkedIn

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