Basic Overview of Nonprofit Organizations

Written by johntalaguit | Edited by Rory Hart
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    People in the Office

    © Copyright Carter McNamara, MBA, PhD, Authenticity Consulting, LLC.
    Adapted from the Field Guide to Leadership and Supervision in Business
    and Field Guide to Leadership and Supervision for Nonprofit Staff.

    This applies to nonprofits unless otherwise noted.

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    Learn More in the Library’s Blogs Related to Nonprofit Organizations

    In addition to the articles on this current page, see the following blogs which have posts related to Nonprofit Organizations. Scan down the blog’s page to see various posts. Also, see the section “Recent Blog Posts” in the sidebar of the blog or click on “Next” near the bottom of a post in the blog.

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    Suggested Previous Reading

    Note that the reader might best be served to first read the document Introduction to Organizations to understand the overall general nature of all organizations. As noted in that document, today’s leaders are faced with continual change in their organizations. Consequently, today’s leaders should have a strong sense of what their organizations are about. This document will accomplish that for nonprofit leaders.

    An organization is a collection of resources arranged to accomplish an overall goal. The purpose of a nonprofit organization is to meet one or more needs in a community. Each nonprofit describes its overall purpose in a mission statement. (Very simply put, the word “nonprofit” means an organization that does not distribute a profit.)

    Typical types of nonprofit services are advocacy, arts, civic, cultural, education, health, and human service. Nonprofits range in size from extremely large (e.g., Red Cross, large hospitals, etc.) to extremely small (e.g., organizations that have no full-time personnel, and operate only with volunteers).

    What is a “Nonprofit”?

    Some Basics …

    (by Carter McNamara)
    Before you start your nonprofit, it’s helpful to realize that the phrase “starting a nonprofit” can mean many things. Read the following very basic information to begin thinking about what you mean when you set out to “start a nonprofit”.

    – You can be a nonprofit organization just by getting together with some friends, eg, to form a self-help group. In this case, you’re an informal nonprofit organization.

    – Consider incorporating your nonprofit so it exists as a separate legal organization in order to a) own its own property and its own bank account; b) ensure that the nonprofit can continue on its own (even after you’re gone); and c) protect yourself personally for operations of the nonprofit. You incorporate your nonprofit by filing articles of incorporation with the appropriate local state office. (An incorporated nonprofit requires a board of directors.)

    – If you want to be exempt from federal taxes (and maybe some other taxes, too), you should file with the IRS to be a tax-exempt organization. (The IRS states that you must be a corporation, community chest, fund, or foundation to receive tax-exempt status. Articles of association may also be used in place of incorporation.) (Probably the most well-known type of nonprofit is an IRS classification of 501(c)(3), a “charitable nonprofit’.)

    – Depending on the nature of your organization, you may also be granted tax-deductible status from the IRS. Publication 526 lists the types of organizations to which donations are deductible.

    – So, if you did all of these steps, you’d be an incorporated, tax-exempt nonprofit that could receive tax-deductible donations.

    – The particular steps you take depend on your plans for your organization, including the nature of its services. They also depend on how the IRS interprets the nature of your organization, including its services.

    And Now Some Refinement on the Description of “Nonprofit”

    (by Putnam Barber)
    (Items in brackets “[!]” are added by Carter McNamara.)

    The word “nonprofit” refers to a type of business — one which is organized under rules that forbid the distribution of profits to owners. “Profit” in this context is a relatively technical accounting term, related to but not identical to the notion of a surplus of revenues over expenditures.

    Most [registered!] nonprofit businesses are organized into corporations [or associations!]. Most corporations are formed under the corporate laws of a particular state. Every state has provisions for forming nonprofit corporations; some permit other forms, such as unincorporated associations, trusts, etc., which may operate as nonprofit businesses on slightly (but sometimes importantly) different terms.

    The Internal Revenue Service (IRS) gets involved because corporations are, in general, required to pay federal corporate income taxes on their net earning (another technical term, pointing to a slightly different way to the idea of a surplus of revenue over expenses).

    Section 501 of the Internal Revenue Code lists several circumstances under which corporations [or unincorporated nonprofits!] are exempt from these taxes. Section 501(c)(3) — the famous one — describes
    [nonprofit!] (1) serving charitable, religious, scientific, or educational purposes (2) no part of the income of which “inures to the benefit of” anyone.

    Tax-exempt nonprofit organizations can, and do, operate in all other particulars like any other sort of business. They have bank accounts; own productive assets of all kinds; receive income from sales and other forms of activity, including donations and grants if they are successful at finding that sort of support; make and hold passive investments; employ staff; enter into contracts of all sorts; etc.

    There are some specialized tax rules and accounting practices that apply to nonprofit organizations. If they are of a certain size, they are required to disclose many details of their operations to the general public and to state regulators and watchdog agencies using IRS form 990. This form shows any salaries paid to officers or directors [for incorporated nonprofits!] and to the five highest-paid employees and contracts if any receive over $50,000 in the tax year.

    The form also requires the organization to divide its expenses into “functional categories” — program, administration, and fund-raising — and report the totals for each along with the amounts expended on each program activity.

    Nonprofit organizations file for tax exemption by using IRS Publication 557, “Tax-Exempt Status for Your Organization“.

    To view various kinds of tax-exempt (Section 501) organizations, see IRS Tax-Exempt Organization Reference Chart

    Key Roles

    (by Carter McNamara)
    · Clients – Everything in a nonprofit is ultimately directed to serving clients. Clients are the “consumers” or “customers” of the nonprofit’s services. Note that services can be in the form of tangible or intangible products.

    · Board – The board is comprised of individuals from the community and, ideally, is representative of the organization’s clients. Law and theory dictate that the board is in charge, and directly accountable for the overall direction and policies of the organization. Powers are given to the board by the Articles of Incorporation (or other governing document, for example, Articles of Association, Constitution, etc.).

    The board can configure the nonprofit in whatever structure it prefers to meet the organization’s mission and usually does so via specifications in bylaws. Members of nonprofit boards are generally motivated by a desire to serve the community and the personal satisfaction of volunteering. Nonprofit board members may not receive monetary compensation for serving on the board.

    See the library topic Boards for a description of the overall responsibilities of a board, keyboard roles, how meetings are carried out, etc.

    · Board Chair – A board chair’s role is central to coordinating the work of the board, executive director, and committees. The chair’s role may have appointive power for committees, depending on what is specified about this role in the bylaws. The power of the board chair is usually through persuasion and general leadership. See the topic Board Chair for an overview of the board chair’s role.

    · Committees – Typically, the board chooses to carry out its operations using a variety of board committees. The topic Description of Typical Committees for a description of typical board committees.

    · Executive Director – The board typically chooses to have this one person who is ultimately responsible
    to carry out the wishes of the board. The executive director is directly accountable for the work of the staff and supports the work of the board committees. For more information, see the library topic Chief Executive Role.

    · Staff – Staff report to the executive director and may support the work of the committees.

    · Volunteers – Volunteers are unpaid personnel who assist staff, serve on committees, and generally work under the direction of the executive director. See the topic Volunteer Programs for an understanding of the role of volunteers.

    Three Major Aspects of Nonprofit Structure

    (by Carter McNamara)
    Typically, nonprofit operations are organized into major functions. These functions usually include central administration and programs.

    · Governance – The governance function of a nonprofit is responsible to provide overall strategic direction, guidance, and controls. Often the term “governance” refers to board matters. However, many people are coming to consider governance as a function carried out by the board and top management. Effective governance depends to a great extent on the working relationship between the board and top management.
    · Programs – Typically, nonprofits work from their overall mission, or purpose, to identify a few basic service goals which must be reached to accomplish their mission. Resources are organized into programs to reach each goal. It often helps to think of programs in terms of inputs, processes, outputs, and outcomes. Inputs are the various resources needed to run the program, e.g., money, facilities, clients, program staff, etc.

    The process is how the program is carried out, e.g., clients are counseled, children are cared for, art is created, association members are supported, etc. The outputs are the units of service, e.g., the number of clients counseled, children cared for, artistic pieces produced, or members of the association. Outcomes are the impacts on the clients receiving services, e.g., increased mental health, safe and secure development, richer artistic appreciation and perspectives in life, increased effectiveness among members, etc.

    · Central administration – Central administration is the staff and facilities that are common to run all programs. This usually includes at least the executive director and office personnel. Nonprofits usually strive to keep the costs of central administration low in proportion to the costs to run programs.

    Management Skills Generally Unique to Nonprofits

    The following link provides a wide list of areas of knowledge and skills needed in management activities. The link also lists skills that are somewhat unique to nonprofit management. The nonprofit-unique skills are also listed below.
    Areas of Knowledge and Skills Needed in Management
    What is Management? How Do I Manage?

    Areas of Knowledge and Skills that are Generally Unique to Nonprofits

    How to Manage Nonprofit-Specific Activities

    Current Major Challenge: Devolution

    (by Keri Poeppe)
    “Devolution” is a word used a great deal these days among nonprofit funders and leaders. Essentially devolution is the short-hand word for a strong trend of cutbacks in federal funding to nonprofits (especially for programs such as welfare (AFDC and certain SSI programs) and the resulting changes in responsibility for administering such programs. Legislation passed by Congress reduces (and in some cases) eliminates a federal commitment to automatically provide assistance to the poor.

    Instead, blocks of funds (usually at reduced levels) will be passed through to states, allowing them to decide who will receive aid and who will not. Thus, devolution is associated with the end of what is often called “entitlements” to services previously guaranteed by the federal government.

    While devolution provides an opportunity for more local control and possibly less bureaucratic waste, human services programs will be at great risk due to reduced federal (and therefore state) funding. Nonprofits (which, on average, receive approximately 30 percent of their revenues from federal sources) will suffer significant loss of funds which may be very difficult to replace. Meanwhile, public demand for human services continues to increase.

    Devolution brings many challenges to nonprofit leaders. They must operate more effectively in the face of reduced funding. They must consider substantial changes in the way they have operated. Concepts such as strategic alliances and restructuring will become commonplace.

    Revenue: Fees and Fundraising

    (by Keri Poeppe)

    Fees

    Fees may be associated with these services and billed to either the person receiving the service (e.g. the parent with a child in daycare) or to a third party such as a government agency that supports such services. Unlike the private sector where the price of a product or service must cover all costs, nonprofit agencies rarely meet all their costs based upon sales and fees. Instead, nonprofits must engage in fundraising and seek additional revenue sources.

    It is important to note that while many nonprofits provide services that are valuable to our community, it is often difficult to measure the actual results of their services. Changes in an individual’s or a community’s behavior may take years to be realized. Nonetheless, nonprofits are challenged to demonstrate results as donors become more savvy and funding sources become increasingly limited.

    Fundraising

    As noted above, nonprofit managers (and the board of directors) must engage in fundraising in order to meet the fiscal needs of their organization. Generally, fundraising is not one of an executive director’s favorite tasks. It can be an all-consuming activity, tapping an executive director’s creative and social energy.

    Executive directors are constantly challenged to strike a balance between the time they devote to fundraising and program management. Too little attention to one area can leave an organization bereft of cash or quality services.

    There are several basic sources of funding in the nonprofit sector. The first is a grant. Grants may be given by government agencies, foundations, or corporations, usually to operate a specific program. As noted earlier, agencies receiving government grants to operate human service programs base their reimbursement on fees for the services. Grants from foundations or corporations are generally provided upfront and require a report on program activities and expenditures at the end of the grant period.

    Nonprofit organizations will solicit individuals for funds, also. Individual donations may come from an organization’s membership or constituents (e.g. viewers of public television or residents of a neighborhood community). These are generally small donations, ideally from a large number of people. Sizable gifts may come from individuals who are referred to as major donors. Cultivating relationships with major donors requires the energy and resourcefulness of the board and director. Many nonprofits will hold special events to raise dollars. These vary from bake sales to major events.

    Fundraising can be a full-time job (or a full-time obsession) for nonprofit executive directors. Executive Directors are challenged to balance their time between raising money and program management. If too much time is spent on fundraising, programs, and staff may not get the direction and coaching they need. On the other hand, if fundraising takes a back seat to program management, the organization’s cash flow will suffer.

    Two factors will enhance fundraising efforts. One is good programs. Programs that are meeting important community needs and demonstrating results will sell themselves. A board that is committed to its fundraising responsibilities will also be an asset to the organization. Board members who take their role in fundraising very seriously will promote the organization and help bring resources to it.

    It is important to note, however, how the political climate can affect an organization’s fundraising. Foundations and corporations may choose specific issues or causes for priority in grantmaking. In the 1980s organizations working with the elderly received major support from foundations and the government. These same organizations saw their support decrease as youth issues became a major focus in the 1990s.

    Unique Nature and Struggles of Traditional Small Nonprofits

    (by Sandra Larson)

    The Heart of the Matter: Leadership and Management

    At the heart of any successful nonprofit is an effective chief executive and board of directors. These leaders must work as a team with vision, skill, and sufficient resources to accomplish the organization’s mission. While leadership is shared, critical management skills must rest with the chief executive. However, the board must be sufficiently skilled in management to assess the work of this director and assist in strategic decision-making.

    Values as the Bottom Line

    Values are the driving force in a nonprofit. The bottom line is the realization of a social mission, not profits. This poses complex problems for the leadership team. How are programs agreed upon, progress monitored, and success measured? How are priorities set and consensus reached? How are staff rewarded and what control systems are applicable? Skilled consultants may be needed from time to time to assist the team in answering these qualitative, value-laden questions and focus on appropriate management systems.

    Nonprofit Personnel are Often Highly Diverse

    Diversity is reflected, not only by different races and ethnic groups but ultimately by different values and perspectives. This strong diversity is a major benefit to the nonprofit because input from a wide variety of perspectives usually ensures complete consideration of situations and new ideas. However, nonprofit personnel must ensure they cultivate and remain open to various values and perspectives.

    Problems are Especially Complex for the Small Nonprofit

    The majority of nonprofits have small staffs and small budgets, e.g., less than $500,000, which compounds the leadership and management problems they face, especially given their charters and the magnitude
    of community needs with which they deal. Those new to nonprofits may react that, because nonprofits tend to be small in size, issues in nonprofits should be simple in nature. On the contrary, the vast majority of organizations (regardless of size) experience similar issues, e.g., challenges in planning, organizing, motivating, and guiding. However, when these issues are focused in a small organization, the nature of the organization becomes very dynamic and complex.

    Sufficient Resources to Pay Leadership May Be Lacking

    With a lack of sufficient money, attracting and retaining paid management also can be problematic. Hard work with few career development opportunities encourages turnover of chief executives and staff. This can stall the organization’s work. Expertise that is brought in to advise the management may be lost once that leadership leaves.

    Lack of Managerial Training is Problematic for the Small Nonprofit

    Many nonprofit managers have been promoted primarily out of non-management disciplines and do not have the managerial skills that are needed to run a nonprofit organization. Training and consultation can do much to help these new leaders/managers gain the skills they seek and help them up a myriad of learning curves that rainbow out in front of them.

    Chief Executives Wear Too Many Hats

    A nonprofit chief executive has to be a current expert in planning, marketing, information management, telecommunications, property management, personnel, finance, systems design, fundraising, and
    program evaluation. Obviously, this is not possible, regardless of size. A larger organization may be able to hire some internal experts, but this is certainly not the case for a smaller organization.

    Furthermore, the technology of management progresses today too rapidly for the non-specialist to keep abreast of new thinking and expertise, whatever the size. Outside expertise, therefore, is often a must for both large and small organizations.

    Too Small to Justify or Pay for Expensive Outside Advice

    Most nonprofits, even larger ones, often hesitate to spend money on administrative “overhead” such as consultants or other outside experts because this is seen as diverting valuable dollars from direct service. Of course, most nonprofits have no choice. They don’t have enough money to even consider hiring consultants at for-profit rates. Low-cost, volunteer-based assistance often is an appropriate solution.

    One-shot Assistance Often is Not Enough

    While most consultant organizations want to teach managers “how to fish” rather than give them a “fish,” “fishing” (management skills) is not something that often can be learned in one consultation. Especially in more technical arenas such as computerization, learning comes while grappling with an issue or management problem over a period of time. Building internal management capacity takes more time than a one-shot consultation. Repeat help, therefore, is not a sign of failure but of growth — a new need to know has surfaced.

    Networks are Lacking

    Everyone outside the nonprofit sector observes, “Why don’t those chief executives get together more, share more ideas, and undertake cooperative ventures?” There are many reasons. First of all, running a successful organization (delivering quality service that fulfills the organization’s mission) isn’t enough.

    Most nonprofit directors run a second business — raising money to support the first. Both are complex and very time-consuming activities, especially when the director wears all the management hats. Second, developing networks or researching joint ventures is time-consuming, expensive, and risky.

    Nonprofits Usually Have Little Time and Money

    Funders do not seem to think research and development activity justifies new expenditures; at least many are hesitant to fund what might not succeed. While nonprofits may be more entrepreneurial than funders, they have little capital to risk. Collaborative planning will be enhanced by computerization and telecommunications, but these investments also are difficult to fund.

    In some ways, affordable consultants can substitute for expensive, up-front research and development costs, at least at the feasibility level. In many cases, they can carry an organization through the needed planning to actually develop a new system of collaboration, merger, or automation.

    Nonprofits Need Low-Cost Management and Technical Assistance

    Nonprofits are valuable community assets that must be effectively managed. The need to provide affordable, accessible management and technical assistance to nonprofit organizations is clear for all the reasons stated above: the complexity of the task, the lack of board and internal expertise, the lack of time and money, changing needs, the learning curve, and, finally the importance of the results to the community. What is well done is based on what is well run.

    Typical Nature of Planning in Nonprofits

    For most nonprofits, they don’t have a lot of time, money, or resources for sophisticated, comprehensive strategic planning. The focus is usually on the major issues facing the nonprofit and quickly addressing them. Typical major challenges for the facilitator are basic training of personnel about planning concepts and processes, helping the nonprofit to focus and sustain its limited resources on planning, ensuring strategies are really strategic rather than operational/efficiency measures, and helping design small and focused planning meetings that produce realistic plans that become implemented.

    General Resources

    For the Category of Organizational Development:

    To round out your knowledge of this Library topic, you may want to review some related topics, available from the link below. Each of the related topics includes free, online resources.

    Also, scan the Recommended Books listed below. They have been selected for their relevance and highly practical nature.


    johntalaguit