What is a nonprofit or­gan­isa­tion (NPO)?

So-called nonprofit or­gan­isa­tions (NPOs) operate in various corners of society: Some campaign for sus­tain­able energy policy, the pre­ser­va­tion of cultural heritage, species pro­tec­tion, knowledge sharing, or political education for the general public. Generally speaking, their goals benefit the common good or the in­ten­tions of its members. What they all have in common, is that none of them are profit ori­ent­ated, but instead pursue a zero-growth strategy by re­in­vest­ing any profits made through the or­gan­isa­tion.

There is no uniform defin­i­tion of what a nonprofit or­gan­isa­tion is. Generally speaking, both negative and positive defin­i­tions of the term exist. What comes closest is an ex negativo defin­i­tion, as the term even leaves out nonprofit or­gan­isa­tions of cor­por­a­tions that pursue a profit (profit or­gan­isa­tion). To start dif­fer­en­ti­at­ing between profit and nonprofit or­gan­isa­tions, one must begin by looking at their common approach within the cap­it­al­ist system.

If we use this broad defin­i­tion as a starting point, then nonprofit or­gan­isa­tions include both public and private or­gan­isa­tions and in­sti­tu­tions, for example schools, prisons, political parties, churches, as­so­ci­ations, and museums.

The positive defin­i­tion is usually a little more precise: According to these, an NPO is not only an or­gan­isa­tion without any financial pursuits, but also one that’s to a certain extent defined by self-or­gan­isa­tion and formal struc­tures. Decisions must be made in the NPO itself – i.e. from the inside out – without any external in­flu­ences. In research papers on the topic, some authors even state that an or­gan­isa­tion can by no means pay out any surpluses made to its employees and that it must even be based on voluntary work to secure the status of a nonprofit or­gan­isa­tion.

Agreeing on a defin­i­tion based on these varying re­quire­ments allows for a broad consensus, leaving the following key char­ac­ter­ist­ics:

The term NPO has no legal backbone. Possible legal struc­tures for nonprofit or­gan­isa­tions include – based on their defin­i­tion – re­gistered as­so­ci­ations, found­a­tions, co­oper­at­ives, nonprofit limited companies, or public com­mer­cial op­er­a­tions.

Often, the terms NPO and NGO (non­gov­ern­ment­al or­gan­isa­tion) are used syn­onym­ously. It’s also not unusual for the term NGO to even be used to describe nonprofit-ori­ent­ated cor­por­a­tions.

In research papers, some authors also point to clear dif­fer­en­ti­at­ing factors: According to these, NGOs ex­clus­ively refer to or­gan­isa­tions that are privately held and campaign for so­ci­opol­it­ic­al goals. Often, they’ll play a role in the process of political decision making. Typical topics that NGOs are concerned with include sus­tain­ab­il­ity, human rights, and hu­man­it­ari­an help and de­vel­op­ment policy. The playing field of NGOs, however, often takes place on a national or transna­tion­al scale, while NPOs focus on local and regional topics. NGOs are financed through donations and mem­ber­ship con­tri­bu­tions, while NPOs are financed purely through their self-generated resources.

Nonprofit or­gan­isa­tions can be cat­egor­ised in a number of ways. The most common clas­si­fic­a­tions of nonprofit or­gan­isa­tions include:

• Public and private NPOs
• Self-generated and third-party generated NPOs
• Clas­si­fic­a­tions based on the field of ap­plic­a­tion

Public NPOs, for example, include schools, hospitals, and ad­min­is­trat­ive bodies. Private NPOs, on the other hand, cover unions, citizens’ ini­ti­at­ives, (sports) clubs, political parties, and churches.

Self-generated NPOs pursue their goals ex­clus­ively for the good of its members – as, for example, political parties and as­so­ci­ations do. When it comes to third-party NPOs, it’s not the rep­res­ent­at­ives them­selves that profit, but a third-party group that is supported (for example charity or­gan­isa­tions).

A nonprofit or­gan­isa­tion requires a different ma­na­geri­al approach as is practiced in profit-ori­ent­ated cor­por­a­tions. Probably the most important dif­fer­ence is the diverging notion of success. For most NPOs, success is not measured in numbers or revenue. Often, success is not directly meas­ur­able, since NPOs measure their success in impact and not in profit. Standing up to certain prin­ciples, for example, can be regarded as success, without requiring re­volu­tion­ary de­vel­op­ments, like in the fields of hu­man­it­ari­an help or en­vir­on­ment­al pro­tec­tion.

When it comes to con­trolling, the challenge is therefore de­vel­op­ing meas­ure­ments with which to measure success. While within NPOs, revenue streams also need to be monitored, spe­cial­ist con­trolling is still much more important. The classic toolset of con­trolling therefore needs to be expanded to nonprofit or­gan­isa­tions. This is the only way that the worth of its activ­it­ies can truly be com­pre­hen­ded. The efficient use of the of­ten­times sparse financial resources and workforce also play an important part.

Since many nonprofit or­gan­isa­tion members are not employed in their or­gan­isa­tions, and instead work as vo­lun­teers and unpaid workers, the personnel policy is not able to fall back on bonus payouts and salary increases. Instead, the cor­por­a­tion must awaken the intrinsic mo­tiv­a­tion of its employees – for example by high­light­ing the social im­port­ance of the cor­por­a­tion.

In finance man­age­ment, fun­drais­ing plays an essential role, since NPOs rely on donations and sponsors to stay above water, as opposed to profit-ori­ent­ated cor­por­a­tions.

Since the start of the 20^th century, the nonprofit sector is ex­per­i­en­cing far-reaching change. The financial means of public bodies are sparse, and in­sti­tu­tion­al grants are receding. At the same time, demand for services in the nonprofit field are in­creas­ing, for example due to demo­graph­ic change, increased migration, or heightened en­vir­on­ment­al awareness. In the United Kingdom, non­profits account for over 1 million jobs in 2018. As such, nonprofit or­gan­isa­tions are growing in im­port­ance as employers.

But it’s not only demand that has grown. Com­pet­i­tion, too, has steadily increased over the last few years. Due to changing reg­u­la­tions on both national and in­ter­na­tion­al levels, countless NPOs are ex­per­i­en­cing com­pet­i­tion from com­mer­cial providers. Legal changes within NPOs influence the pro­cure­ment process, struc­tures, and pro­ced­ures. Last but not least, di­git­al­isa­tion within the nonprofit sector is also posing ad­di­tion­al chal­lenges. How well or­gan­isa­tions master the trans­form­a­tion brought about by tech­no­lo­gic­al change will be measured by their future success or failure.

Please note the legal dis­claim­er relating to this article.