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non-profit organization (NPO)

Contributor(s): Matthew Haughn

A non-profit organization (NPO) is one which is not driven by profit but by dedication to a given cause that is the target of all income beyond what it takes to run the organization.

Non-profit organizations are often used for trusts, cooperatives, advocacy, charity, environmental and religious groups.

Many but not all NPOs have paid staff in management positions; almost all use volunteers. NPOs have no owners for surplus profits to go to and any surplus after operating expenses are used to further its goals instead of being distributed between members or employees of the organization. For an NPO to qualify as a government-recognized and tax-exempt organization it has to fulfill conditions set out by government agencies. In the United States, the IRS determines the validity and tax status of NPOs.

NPOs often rely on the dedication of employees who believe in their cause because it’s hard for them to compete with private sector wages. On the other hand, executive salaries are often quite high as a means of competing with equivalent positions in the private sector.

Funding can be an issue for non-profits as they often rely on external sources, such as donations. Scrupulous accounting, transparency and accountability are essential to continuation of operations, as mismanaged or misdirected funds could result in the loss of funding from both public and private sources and loss of status.

Non-profit and not-for-profit are both widely used to refer to NPOs but there are subtle differences. The United States Internal Revenue Service (IRS), for example, uses not-for-profit to refer to activities like hobbies in which revenues are not involved.

The terms NPO and NGO (non-government organization) are also often used interchangeably but they are different. NGOs are separate from government and require no government council but depend on the government for funding. However, most NGOs are also non-profit organizations.

This was last updated in January 2015

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