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.

NPO – definition and explanation

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:

Definition: nonprofit organization

A nonprofit organization is an organization that works to pursue a goal deemed as meaningful by society, without the aim of making a profit. It is managed and organized from the inside out, and employment is based on voluntary participation.

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.

What’s the difference?: NPO vs. NGO

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.

The different types of nonprofit organizations

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).

Fact

Common areas of activity of nonprofit organizations include, among others: culture, education, science; politics; economics; the environment; human rights and humanitarian purposes; leisure and recreation; health and social topics.

Characteristics of NPO management

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.

Current challenges for nonprofit organizations

Since the start of the 20th 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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