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Collaborative knowledge by the Charity Labs members.

What is a not-for-profit organisation

Generally, a not-for-profit is an organisation that does not operate for the profit, personal gain or other benefit of particular people. This can include people such as its members, the people who run it or their friends or relatives. The definition of not-for-profit applies both while the organisation is operating and if it ‘winds up’ (closes down).

In Australia, nonprofit organisations include trade unions, charitable entities, co-operatives, universities and hospitals, mutual societies, grass-root and support groups, political parties, religious groups, incorporated associations, not-for-profit companies, trusts and more. Furthermore, they operate across a multitude of domains and industries, from health, employment, disability and other human services to local sporting clubs, credit unions and research institutes. A nonprofit organisation in Australia can choose from a number of legal forms depending on the needs and activities of the organisation: co-operative, company limited by guarantee, unincorporated association, incorporated association (by the Associations Incorporation Act 1985) or incorporated association or council (by the Commonwealth Aboriginal Councils and Associations Act 1976). From an academic perspective, social enterprise is for the most part considered a sub-set of the nonprofit sector as typically they too are concerned with a purpose relating to a public good, however these are not bound to adhere to a nonprofit legal structure and many incorporate and operate as for-profit entities.

An organisation does not fail to be a not-for-profit if it simply provides a benefit to a member while genuinely carrying out its purpose. For example, organisations such as self-help groups can be not-for-profits if the benefits provided to members are consistent with the purposes of the organisation. In this example, a self-help group for young parents can provide counselling services to a young parent who is a member of the organisation. The member is also a person in need who is helped by the organisation.

The benefits provided by a not-for-profit can be direct (such as distributing money or gifts) or indirect (such as a member receiving assistance from the organisation that is not consistent with its purpose). Staff or responsible persons (such as board or committee members or trustees) can of course be paid for their work, but not an unreasonable amount.

Not-for-profits can make profit, but any profit made must be applied for the organisation’s purpose(s). Organisations can retain profits (instead of applying it towards their purpose), as long as there is for a genuine reason for this related to its purpose. For example, a good reason to retain money may be to save up for starting a new project, building new infrastructure or to accumulate a reserve to ensure an organisation remains sustainable. By contrast, if an organisation continues to retain significant profits indefinitely without applying this to its charitable purpose, this may indicate that the organisation is not working solely towards its stated charitable purpose.

How do I show my organisation is a not-for-profit?

You can show that your organisation meets the requirements of being a not-for-profit by having particular statements (clauses) in its governing rules, and following these. These clauses (the non-profit clause and the dissolution clause) may include wording like:

  • the non-profit clause
    ‘The assets and income of the organisation shall be applied solely in furtherance of the above-mentioned objects and no portion shall be distributed directly or indirectly to the members of the organisation except as bona fide compensation for services rendered or expenses incurred on behalf of the organisation.’
  • the dissolution clause
    ‘In the event of the organisation being dissolved, the amount that remains after such dissolution and the satisfaction of all debts and liabilities shall be transferred to another organisation with similar purposes which is not carried on for the profit or gain of its individual members.’

The Australian Taxation Office (ATO) also provides guidance on the definition of not-for-profit and the different types of not-for-profits.

New law – the Charities Act 2013 (Cth) – was passed on 27 June 2013, introducing a statutory definition of charity from 1 January 2014. Read more about the ACNC’s approach to the legal meaning of charity.

Problems experienced by NFPs

Capacity building is an ongoing problem experienced by NFPs for a number of reasons. Most rely on external funding (government funds, grants from charitable foundation, direct donations) to maintain their operations and changes in these sources of revenue may influence the reliability or predictability with which the organization can hire and retain staff, sustain facilities, create programs, or maintain tax-exempt status. For example, a university that sells research to for-profit companies may have tax exemption problems. In addition, unreliable funding, long hours and low pay can result in employee retention problems.

Founder’s syndrome is an issue organizations face as they grow. Dynamic founders with a strong vision of how to operate the project try to retain control of the organization, even as new employees or volunteers want to expand the project’s scope or change policy.

Competition for employees with the public and private sector is another problem that Nonprofit organizations will inevitably face, particularly for management positions. There are reports of major talent shortages in the nonprofit sector today regarding newly graduated workers,and NFPs have for too long relegated hiring to a secondary priority, which could be why they find themselves in the position many do. While many established NFP’s are well-funded and comparative to their public sector competetitors, many more are independent and must be creative with which incentives they use to attract and maintain vibrant personalities. The initial interest for many is the wage and benefits package, though many who have been questioned after leaving an NFP have reported that it was stressful work environments and implacable work that drove them away.

Public and private sector employment has, for the most part, been able to offer more for their employees than most nonprofit agencies throughout history. Either in the form of higher wages, more comprehensive benefit packages, or less tedious work, the public and private sector has enjoyed an advantage in attracting employees over NFPs. Traditionally, the NFP has attracted mission-driven individuals who want to assist their chosen cause. Compounding the issue is that some NFPs do not operate in a manner similar to most businesses, or only seasonally. This leads many young and driven employees to forego NFPs in favour of more stable employment. Today however, NFP organizations are adopting methods used by their competitors and finding new means to retain their employees and attract the best of the workforce.

It has been mentioned that most nonprofits will never be able to match the pay of the private sector and therefore should focus their attention on benefits packages, incentives and implementing pleasurable work environments. Pleasurable work conditions are ranked as being more preferable than a high salary and implacable work. NFPs are encouraged to pay as much as they are able, and offer a low stress work environment that the employee can associate him or herself positively with. Other incentives that should be implemented are generous vacation allowances or flexible work hours.