Nonprofit organization

Nonprofit organization is an entity organized for purposes other than generating profit for owners or shareholders, typically pursuing charitable, educational, religious, scientific, or social welfare missions, with any surplus reinvested in the organization's purpose rather than distributed to private parties (Drucker P.F. 1990, p.xiv)^[1]. The local food bank distributes meals to hungry families. The university educates students. The symphony orchestra performs concerts. The advocacy group fights for policy change. Each operates without shareholders expecting dividends, pursuing missions rather than profits.

The nonprofit sector is substantial. In the United States alone, over 1.8 million registered nonprofits employ roughly 12 million people and contribute about 6% of GDP. Globally, nonprofits provide essential services—healthcare, education, social services, arts—that governments and markets inadequately supply. While often associated with volunteers and charitable giving, many nonprofits are sophisticated organizations with professional management, substantial budgets, and complex operations.

Characteristics

Nonprofits share defining features:

Mission focus

Purpose over profit. The organization exists to advance a mission—feeding the hungry, curing disease, preserving art—not to enrich owners^[2].

Nondistribution constraint. Any surplus must be reinvested in the mission, not distributed to individuals who control the organization.

Legal structure

Tax exemption. Qualifying nonprofits are exempt from income taxes and, for charitable organizations, donations may be tax-deductible for donors.

Regulatory oversight. Nonprofits face reporting requirements, governance standards, and restrictions on lobbying and political activity^[3].

Governance

Board of directors. Volunteer boards provide oversight, set strategy, and ensure accountability. Board members typically serve without compensation.

No owners. Nonprofits have no shareholders with ownership claims. The board holds the organization in trust for its mission.

Types

Nonprofits serve various purposes:

Charitable organizations

Direct service. Hospitals, universities, soup kitchens, and housing providers deliver services to beneficiaries^[4].

Grantmaking. Foundations fund other nonprofits' work rather than providing services directly.

Membership organizations

Trade associations. Industry groups serve member companies' interests through advocacy and services.

Professional associations. Groups like bar associations and medical societies serve practitioners.

Advocacy organizations

Policy change. Organizations work to influence legislation, regulation, and public opinion on issues from environment to civil rights^[5].

Social enterprises

Mission-driven business. Organizations blend commercial activity with social purpose, using business models to fund mission work.

Governance

Effective nonprofit governance requires:

Board responsibility. The board sets direction, hires and evaluates the executive director, ensures financial health, and maintains accountability.

Oversight versus management. Boards govern; staff manage. The distinction matters: boards set "what" while executives determine "how"^[6].

Fiduciary duties. Board members owe duties of care, loyalty, and obedience to the organization's mission.

Transparency. Public reporting of finances and activities maintains donor trust and regulatory compliance.

Funding

Nonprofits access multiple revenue sources:

Donations. Individual giving, foundation grants, and corporate contributions.

Earned revenue. Fee-for-service programs, product sales, and membership dues^[7].

Government contracts. Many nonprofits deliver services funded by government agencies.

Investment income. Endowments and reserves generate returns supporting operations.

Management challenges

Nonprofits face distinctive difficulties:

Resource constraints. Most nonprofits operate with limited budgets relative to their missions.

Mission measurement. Unlike profit, social impact is difficult to quantify. Did the program actually help?

Stakeholder complexity. Nonprofits serve donors, beneficiaries, staff, volunteers, and communities—sometimes with conflicting expectations^[8].

Talent competition. Lower compensation makes recruiting and retaining talent challenging.

Sustainability. Dependence on donations creates volatility when giving declines.

Nonprofit organization — recommended articles

Organizational governance — Strategic management — Social enterprise — Corporate social responsibility

References

• Drucker P.F. (1990), Managing the Nonprofit Organization, HarperCollins.
• Salamon L.M. (2012), The State of Nonprofit America, 2nd Edition, Brookings Institution Press.
• BoardSource (2023), Nonprofit Governance.
• National Council of Nonprofits (2023), Good Governance Policies.

Footnotes

1. ↑ Drucker P.F. (1990), Managing the Nonprofit Organization, p.xiv
2. ↑ Salamon L.M. (2012), State of Nonprofit America, pp.34-56
3. ↑ BoardSource (2023), Nonprofit Governance
4. ↑ National Council of Nonprofits (2023), Types of Nonprofits
5. ↑ Drucker P.F. (1990), Managing the Nonprofit Organization, pp.89-104
6. ↑ BoardSource (2023), Board Responsibilities
7. ↑ Salamon L.M. (2012), State of Nonprofit America, pp.134-148
8. ↑ National Council of Nonprofits (2023), Management Challenges

Author: Sławomir Wawak