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Home arrow Business & Finance arrow Financial Sustainability for Nonprofit Organizations


A nonprofit corporation exists based on the model of the for-profit corporation. It is also referred to as a nonprofit organization. The Internal Revenue Service defines a charitable organization as follows:

To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.

Organizations described in section 501(c)(3) are commonly referred to as charitable organizations. Organizations described in section 501(c)(3), other than testing for public safety organizations, are eligible to receive tax-deductible contributions in accordance with Code section 170. The organization must not be organized or operated for the benefit of private interests, and no part of a section 501(c)(3) organization's net earnings may inure to the benefit of any private shareholder or individual. If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any organization managers agreeing to the transaction. (IRS, 2014a, para 1)

As the IRS definition indicates, nonprofit organizations are "charitable organizations," and are exempt from federal taxation under section 501(c) of the IRS Tax Code. There are various other terms used in the United States and around the world to refer to nonprofit organizations. Equivalent terms include, but are not limited to "charities," "voluntary associations," "independent sector organizations," "civil society organizations," "civic sector organizations," "social sector organizations," "tax-exempt organizations," "philanthropic sector," "third sector organizations," or "nongovernment organizations." According to Willets (2012), a nongovernment or nonprofit organization is "an independent voluntary association of people acting together on a continuous basis for some common purpose other than achieving government office, making money or illegal activities." This definition has similarities with the IRS determination of a nonprofit organization, in the sense that there must be a social community purpose, and the organization must not exist to further a partisan political agenda. The United Nations (UN) provides a definition that considers a nonprofit organization on a larger scale as "a not-for-profit group, principally independent from government, which is organized on a local, national or international level to address issues in support of the public good" (United Nations Rule of Laws, 2014).


Nonprofit organizations exit as corporations in the eyes of the law and in the context of legal and financial transactions. However, as social entities, nonprofit corporations are nonprofit organizations created by collectives of people who share common goals that they want to achieve through a formal structure. Max Weber (Handel, 2002) conceptualized the formal structure of organization or bureaucracy as encompassing key elements such as (a) a division of labor or assignment of tasks to members, (b) empowerment of people through training that enables them to develop expertise in their assignment, (c) a formal hierarchy of decision making, and (d) rules of communication. By contrast, Etzioni (1975) categorized formal organizations as normative, coercive, and utilitarian. Normative organizations are created by people to pursue common goals. People join such organizations voluntarily. Coercive organizations are created to perform functions of social coercion (e.g., prisons). Individuals are forced to join coercive organizations. Finally, utilitarian organizations exist to provide opportunities to people. Members join utilitarian organizations (e.g., school, work) to gain a reward that they would not receive otherwise. A nonprofit organization is fundamentally a normative organization, because it is supposed to be a membership-based or open social or community entity. However, there are nonprofit organizations that are partially or completely coercive (e.g., a mental health residential agency) or utilitarian (e.g., a nonprofit college or university).

Various organizational theories have implications for nonprofit organizations. For example, the rational choice perspective argues that a rational bureaucracy or organizational structure is essential to achieving the goals of the collective that created an organization (Morgan, 2006; Shafritz & Ott, 2005). The system perspective counter-argues that formal structures in organizations do not guarantee efficiency and effectiveness if an organization does not account for the multiple social, political, economic, cultural, and technology factors that constitute its environment and affect its efficiency and effectiveness (Morgan, 2006; Northouse, 2004). Furthermore, an organization is subject to the dynamics of conflict of interests and perspectives in a society. Consequently, the conflict perspective theorizes that an organization can reproduce patterns of inequality in society by prioritizing the interests of the owners and managers over the interests of the workers (Morgan, 2006; Shafritz & Ott, 2005). In the context of a nonprofit organization, the conflict would be between the interests of leaders and managers and the interests of clients and communities. It is not always easy to avoid such conflict dynamics in organizations, including nonprofit organizations. As the interpretive perspective explains, organizations are social constructions of reality that reflect the human consciousness and worldview of the founders (Hutchison, 2008). To sum up, although formal structures and common goals are important for the efficiency and effectiveness of a nonprofit organization, they are not enough. In addition, a nonprofit organization must account for factors in its external environment, and have safeguards to avoid conflict of interests, as well as to ensure inclusion and responsiveness to multiple worldviews or viewpoints.

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