What is a nonprofit or­ga­ni­za­tion (NPO)?

So-called nonprofit or­ga­ni­za­tions (NPOs) operate in various corners of society: Some campaign for sus­tain­able energy policy, the preser­va­tion of cultural heritage, species pro­tec­tion, knowledge sharing, or political education for the general public. Generally speaking, their goals benefit the common good or the in­ten­tions of its members. What they all have in common, is that none of them are profit oriented, but instead pursue a zero-growth strategy by rein­vest­ing any profits made through the or­ga­ni­za­tion.

There is no uniform de­f­i­n­i­tion of what a nonprofit or­ga­ni­za­tion is. Generally speaking, both negative and positive de­f­i­n­i­tions of the term exist. What comes closest is an ex negativo de­f­i­n­i­tion, as the term even leaves out nonprofit or­ga­ni­za­tions of cor­po­ra­tions that pursue a profit (profit or­ga­ni­za­tion). To start dif­fer­en­ti­at­ing between profit and nonprofit or­ga­ni­za­tions, one must begin by looking at their common approach within the cap­i­tal­ist system.

If we use this broad de­f­i­n­i­tion as a starting point, then nonprofit or­ga­ni­za­tions include both public and private or­ga­ni­za­tions and in­sti­tu­tions, for example schools, prisons, political parties, churches, as­so­ci­a­tions, and museums.

The positive de­f­i­n­i­tion is usually a little more precise: According to these, an NPO is not only an or­ga­ni­za­tion without any financial pursuits, but also one that’s to a certain extent defined by self-or­ga­ni­za­tion and formal struc­tures. Decisions must be made in the NPO itself – i.e. from the inside out – without any external in­flu­ences. In research papers on the topic, some authors even state that an or­ga­ni­za­tion can by no means pay out any surpluses made to its employees and that it must even be based on voluntary work to secure the status of a nonprofit or­ga­ni­za­tion.

Agreeing on a de­f­i­n­i­tion based on these varying re­quire­ments allows for a broad consensus, leaving the following key char­ac­ter­is­tics:

The term NPO has no legal backbone. Possible legal struc­tures for nonprofit or­ga­ni­za­tions include – based on their de­f­i­n­i­tion – reg­is­tered as­so­ci­a­tions, foun­da­tions, co­op­er­a­tives, nonprofit limited liability companies, or public com­mer­cial op­er­a­tions.

Often, the terms NPO and NGO (non­govern­men­tal or­ga­ni­za­tion) are used syn­ony­mous­ly. It’s also not unusual for the term NGO to even be used to describe nonprofit-oriented cor­po­ra­tions.

In research papers, some authors also point to clear dif­fer­en­ti­at­ing factors: According to these, NGOs ex­clu­sive­ly refer to or­ga­ni­za­tions that are privately held and campaign for so­ciopo­lit­i­cal goals. Often, they’ll play a role in the process of political decision making. Typical topics that NGOs are concerned with include sus­tain­abil­i­ty, human rights, and hu­man­i­tar­i­an help and de­vel­op­ment policy. The playing field of NGOs, however, often takes place on a national or transna­tion­al scale, while NPOs focus on local and regional topics. NGOs are financed through donations and mem­ber­ship con­tri­bu­tions, while NPOs are financed purely through their self-generated resources.

Nonprofit or­ga­ni­za­tions can be cat­e­go­rized in a number of ways. The most common clas­si­fi­ca­tions of nonprofit or­ga­ni­za­tions include:

• Public and private NPOs
• Self-generated and third-party generated NPOs
• Clas­si­fi­ca­tions based on the field of ap­pli­ca­tion

Public NPOs, for example, include schools, hospitals, and ad­min­is­tra­tive bodies. Private NPOs, on the other hand, cover unions, citizens’ ini­tia­tives, (sports) clubs, political parties, and churches.

Self-generated NPOs pursue their goals ex­clu­sive­ly for the good of its members – as, for example, political parties and as­so­ci­a­tions do. When it comes to third-party NPOs, it’s not the rep­re­sen­ta­tives them­selves that profit, but a third-party group that is supported (for example charity or­ga­ni­za­tions).

A nonprofit or­ga­ni­za­tion requires a different man­age­r­i­al approach as is practiced in profit-oriented cor­po­ra­tions. Probably the most important dif­fer­ence is the diverging notion of success. For most NPOs, success is not measured in numbers or revenue. Often, success is not directly mea­sur­able, since NPOs measure their success in impact and not in profit. Standing up to certain prin­ci­ples, for example, can be regarded as success, without requiring rev­o­lu­tion­ary de­vel­op­ments, like in the fields of hu­man­i­tar­i­an help or en­vi­ron­men­tal pro­tec­tion.

When it comes to con­trol­ling, the challenge is therefore de­vel­op­ing mea­sure­ments with which to measure success. While within NPOs, revenue streams also need to be monitored, spe­cial­ist con­trol­ling is still much more important. The classic toolset of con­trol­ling therefore needs to be expanded to nonprofit or­ga­ni­za­tions. This is the only way that the worth of its ac­tiv­i­ties can truly be com­pre­hend­ed. The efficient use of the of­ten­times sparse financial resources and workforce also play an important part.

Since many nonprofit or­ga­ni­za­tion members are not employed in their or­ga­ni­za­tions, and instead work as vol­un­teers and unpaid workers, the personnel policy is not able to fall back on bonus payouts and salary increases. Instead, the cor­po­ra­tion must awaken the intrinsic mo­ti­va­tion of its employees – for example by high­light­ing the social im­por­tance of the cor­po­ra­tion.

In finance man­age­ment, fundrais­ing plays an essential role, since NPOs rely on donations and sponsors to stay above water, as opposed to profit-oriented cor­po­ra­tions.

Since the start of the 20^th century, the nonprofit sector is ex­pe­ri­enc­ing far-reaching change. The financial means of public bodies are sparse, and in­sti­tu­tion­al grants are receding. At the same time, demand for services in the nonprofit field are in­creas­ing, for example due to de­mo­graph­ic change, increased migration, or height­ened en­vi­ron­men­tal awareness. In the United States, non­prof­its account for over 12 million jobs as of 2018. As such, nonprofit or­ga­ni­za­tions are growing in im­por­tance as employers.

But it’s not only demand that has grown. Com­pe­ti­tion, too, has steadily increased over the last few years. Due to changing reg­u­la­tions on both national and in­ter­na­tion­al levels, countless NPOs are ex­pe­ri­enc­ing com­pe­ti­tion from com­mer­cial providers. Legal changes within NPOs influence the pro­cure­ment process, struc­tures, and pro­ce­dures. Last but not least, dig­i­tal­iza­tion within the nonprofit sector is also posing ad­di­tion­al chal­lenges. How well or­ga­ni­za­tions master the trans­for­ma­tion brought about by tech­no­log­i­cal change will be measured by their future success or failure.

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