What is a Nonprofit Organisation?

 

What is a nonprofit organisation?  

  A nonprofit (also spelled non-profit) organisation (NPO) refers to a legal entity, which is established, organised, and operated for a mutual, public, or social benefit, contrary to a business that is founded to generate profits for owners or investors.     

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Features of Nonprofit Organisations 

  Nonprofit organisations, commonly called nonprofits, have a variety of features, of which the following are examples: 

• Operate to benefit a public (social) cause and good. 
• Mostly operated by volunteers. 
• They are non-profit distributing, meaning they generate profits but do not distribute them to owners and other stakeholders. 
• NPOs have diverse funding sources such as donations from individuals, corporate sponsorships, grants, membership fees, fundraising projects, and in-kind donations, to name a few. 
• They are private legal entities - separate from governments. 
• They are mission-driven entities. 
• NPOs are self-governing. 

 

Financial resources of a nonprofit organisation’s funding 

  Nonprofit organisations (NPOs) receive their funds to operate from a variety of resources. Nonprofits use a variety of digital and traditional communication methods for fundraising.  The list below indicates some of the most common ways available to these organisations to raise funds to continue their operations.   

• Individual donations  

It is estimated that most of the funds of NPOs come from individuals who contribute in numerous ways, such as money, goods, products, and services.    Benefactors can contribute by giving once-off or recurring donations (monthly, quarterly, or annually), using various methods such as online payments, cash payments, or during events held by a nonprofit organisation. Some individuals may also request their employers to automatically deduct donations from their monthly salary, on behalf of the particular NPO.       

• Grants 

Based on their corporate social responsibility, foundations, companies, and corporations tend to give grants to nonprofit organisations.  Grants are usually awarded for specific programs, situations, or projects, and may require the NPO to adhere to specific conditions and reporting requirements.  Typically, a nonprofit organisation is required to apply for a grant, which can be an extensive process.   

• Fundraising events 

NPOs often host events to raise money and awareness for their cause and projects. These events include, amongst others, fun runs or walks, competitive races, charity auctions, golf tournaments, and charity runs.    

• In-kind donations 

In-kind donations refer to contributions of goods or services that companies and organisations donate to nonprofit organisations. These contributions typically include things such as professional services, office and building supplies, or products like food and drinks for a specific event.  In-kind donations usually come from businesses and organisations with whom an NPO has a good and standing relationship.   

Differences between a nonprofit organisation and a not-for-profit organisation 

  Occasionally, the terms nonprofit organisation (NPO) and not-for-profit organisation (NFPO) are used interchangeably. This could be confusing because there are key differences between the two types of entities.    Contrary to a nonprofit organisation (NPO), a not-for-profit organisation (NFPO) does not exist explicitly to serve the public good but to serve the interests of its members and their organisational goals. For instance, a sports club exists for the recreation and enjoyment of its members.  Furthermore, NPOs can have a legal entity, but NFPOs are not allowed to have a separate legal entity.    

Examples of international nonprofit organisations  

  According to Largest.org, the Bill & Melinda Gates Foundation is the largest nonprofit organisation in the world. The foundation advocates education, health, sustainability, and good health for everyone.’    Doctors without Borders was established in 1971 by a group of doctors with the objective of helping war victims and disaster-stricken areas. The organisation focuses on ‘directly and effectively providing assistance to those who need it the most.’    Amnesty International was founded in 1961 and has a global presence in more than 150 countries. The goal of the organisation is ‘to promote and protect human rights through awareness campaigns and mobilizing the public.’    Oxfam International (established in 1942) is an anti-poverty organisation that focuses on issues such as gender justice, conflicts, disasters, and sanitation.    Gift of the Givers is a South African disaster relief group and is considered ‘Africa’s largest independent humanitarian organisation,’ according to Wikipedia. The well-known South African, Imtiaz Sooliman, founded the organisation in 1992 with the goal of providing disaster relief and humanitarian work worldwide. The organisation is impartial and apolitical, aiming to serve with kindness, compassion, and mercy.     

Nonprofit organisations in South Africa 

  When contemplating nonprofit organisations in South Africa, it is important to consider the following subjects: relevant legal forms, registrations of nonprofit organisations, and Public Benefit Organisations (PBOs).   

Relevant legal forms 

  Voluntary associations A voluntary association is the most common legal form of a nonprofit organisation in South Africa.   The only requirement to form a voluntary association is that three or more individuals agree to achieve a common nonprofit public goal.  The agreement can be verbal or in writing. However, it is customary and preferable that the agreement be in the form of a written constitution. Voluntary associations are operated in terms of the common law and are not regulated by a formal written law, referred to as a statute.   Voluntary associations may be categorised into the following two categories: 

• Non-corporate associations that remain unincorporated in terms of the common law, or 
• corporate bodies under the common law, referred to as ‘universitas,’ implying it is a ‘separate legal entity that has a perpetual succession with rights and duties independent from the rights and duties of its members.’  

Generally, an organisation must comply with three requirements to qualify as a ‘universitas,’ namely: 

1. It must be organised in a structured manner to carry on as a legal entity regardless of a change in its membership. 
2. It must be able to hold property separated from its members. 
3. Members are not allowed to have any rights to the property of the association because of their membership of the association. 

  Nonprofit trusts Trusts in South Africa are regulated by the Trust Properties Control Act (Act 57 of 1998) and common law. A trust can be created for private benefit or as a charitable trust, aiming to fulfil a charitable purpose.  The trust deed of a trust will indicate whether the property of the trust is managed by the trustee(s) for the benefit of a public or social cause.  A trust is not a separate legal entity, although trustees have limited liability.  All responsibilities and rights are bestowed collectively in the hands of the trustees in their capacity as trustees.    Non-profit companies In South Africa, the Companies Act (Act 71 of 2008) describes a ‘non-profit company’ as a company:

• ‘Incorporated for a public benefit or other object as required by item 1(1) of Schedule 1, and 
• the income and property of which are not distributable to its incorporators, members, directors, officers, or persons related to any of them except to the extent permitted by item 1(3) of Schedule 1.’ 

Item 1 (1) of Schedule 1 of the Companies Act regulates that the Memorandum of Incorporation (MOI) of a non-profit company must ‘set out at least one object of the company,’ which must be either: 

• ‘a public benefit object, or 
• an object relating to one or more cultural social activities, or communal or group interests.’ 

Item 1 (2) of Schedule 1 requires that a non-profit company ‘must apply all of its assets, however derived, to advance its stated objects, as set out in its Memorandum of Incorporation.’  In addition, item 1 (3) of Schedule 1 states clearly that a ‘non-profit company must not, directly or indirectly, pay any portion of its income or transfer any of its assets, regardless the income or asset was derived, to any person who is or was an incorporater of the company, or who is a member or director, or person appointing a director of the company.’  The regulation above is not applicable if: 

• It is remuneration for goods delivered or services rendered to the company. 
• If it is a ‘payment of, or reimbursement for, expenses incurred to advance a stated object of the company.’ 
• It is ‘in respect of any legal obligation binding on the company.’  

(All the accentuations in the quotations from the Companies Act are by the article writer.)   A non-profit company can be constituted with or without a member, but it must have a minimum of three directors.   

Registration of a nonprofit organisation 

  The Nonprofit Organisations Act (NPO Act - Act 71 of 1997) was adopted to ‘create an enabling environment in which NPOs can flourish, and allow for voluntary registration,’ according to the South African government.  As indicated, registration under the NPO Act is voluntary, but it is often necessary to access funding from some corporate donors or government departments.  To qualify, an organisation must comply with the following requirements cited in the NPO Act. 

• It must be a trust, company, or other association of persons created for a ‘public purpose’ - a term that is not described in more detail. 
• It does not distribute income or property to officers or members unless it is ‘reasonable compensation for services rendered.’ 
• It does not operate as ‘an organ of the state.’ 
• Its founding document includes certain internal governance provisions. 

An organisation intending to register as a nonprofit organisation in terms of the NPO Act is required to apply to the Directorate for Non-Profit Organisations, which operates under the authority of the Department of Social Development.  Organisations which qualify receive a registration certificate and number from the Directorate. To retain the status of an NPO, the organisation is required to submit descriptive reports and financial statements to the Directorate annually.   

Public Benefit Organisations 

  Nonprofit organisations that meet the conditions and requirements according to section 30 of the Income Tax Act (Act 58 of 1962) are referred to as Public Benefit Organisations (PBOs). They typically include religious institutions, daycare centres, health clinics, and the Bible Society of South Africa, which exists to provide ‘affordable Bibles for everyone in their own language and in suitable formats.’  SARS mentions that PBOs receive ‘preferential tax treatment’ which provides for ‘the exemption from normal tax of certain receipts and accruals of approved PBOs.’ Furthermore, approved PBOs enjoy the privilege (accompanied by the required responsibility) of spending public funds, which they obtain from donations or grants, in the interest of the public, on a tax-free basis.   

Pros of nonprofit organisations 

 

• One of the major advantages of nonprofits is that they are exempt or partially exempt from tax obligations. For instance, in South Africa, PBOs enjoy fiscal benefits such as a partial income tax exemption and an exemption from donations tax. Some PBOs are also exempted from transfer duty on immovable property. The South African Revenue Service (SARS) also allows public benefit organisations to apply for the right to receive tax-deductible donations from donors.  
• NPOs usually focus on a specific cause or mission, which can motivate their personnel and volunteers, allowing them a greater sense of purpose.  
• They have a great range of funding resources.  
• NPOs have a statutory right to exist in perpetuity.  
• Another primary advantage of an NPO is that it has a measure of liability protection. 

 

Cons of nonprofit organisations 

 

• Funding resources can be inconsistent and unpredictable, making it difficult for NPOs to maintain their programs and continue operations over the long term. 
• It takes time and much effort to start a nonprofit organisation. 
• NPOs often struggle to implement programs and reach their goals effectively due to limited personnel, expertise, technology resources, and limited funds to remunerate personnel. 
• The nonprofit accounting process may pose some hurdles for an NPO. Similar to other organisations, PBOs are required to operate in compliance with certain regulations to maintain their tax exemption status. NPOs must also convince their contributors and donors that they utilise their funds in accordance with their mandate. 

 

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