Nonprofit Organizations: How They Work and What They Do
Nick Price
May 30, 2023
In simple terms, a nonprofit organization is one that functions to further a mission, social cause, or shared goal. Unlike businesses, nonprofit organizations do not exist to make a profit.
Nonprofit organizations exist in most communities and governments, businesses, and citizens support them in various ways for the overall benefit of the communities they serve.
To help you get a greater perspective on nonprofit organizations, we’ll explain:
- What a nonprofit is
- What nonprofits do
- Who governs nonprofits
- Best practices for nonprofits
We’ll also provide lots of examples of impactful nonprofits at the national, regional, and local levels.
What Is a Nonprofit Organization and What Does It Do?
Nonprofit organizations are organized groups of people that form for the purpose of providing goods and services state and federal governments cannot do on their own. Each nonprofit established a board of directors to oversee the organization. Often, nonprofits have an executive director that leads teams of employees and volunteers to get the work done.
While state and federal taxes support many vital programs and services, there aren’t enough funds to supply every need. Nonprofit organizations fill the gaps in services that everyday people could not access any other way.
How Do Nonprofits Work?
Nonprofit organizations must file certain founding documents with the IRS. From a leadership standpoint, the board of directors must hold meetings at least annually. Board positions carry many important duties and responsibilities as board members make important decisions regarding the nonprofit.
Nonprofit organizations engage in fundraising activities to ensure they have the funds to support the organization. Because nonprofit organizations provide valuable services to communities, state and federal governments do not require nonprofit organizations to pay taxes. It’s their way of supporting the good work that nonprofits do.
What Are the 4 Types of Nonprofit Organizations?
While people loosely refer to nonprofit organizations as charities, other organizations also qualify as nonprofit organizations.
The four main types of nonprofit organizations are listed below:
- Charitable organizations
- Churches and religious organizations
- Private foundations
- Political organizations
Various other types of organizations including civic leagues, homeowner associations, labor unions, social welfare organizations, and volunteer fire departments also operate as nonprofit organizations.
Nonprofit organizations commonly prepare for board meetings and activities using a board management system for maximum efficiency.
Board effectiveness reflects the board’s ability to deliver on its mission and achieve its goals. Download the Board Effectiveness Checklist, organized into key areas, to help your nonprofit board operate even more effectively.
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Who Governs Nonprofit Organizations?
State governments have the primary responsibility for governing and regulating nonprofit organizations. In at least 39 states, nonprofits must register their nonprofits with the appropriate state department.
Generally, nonprofits must take the following steps to establish a nonprofit organization:
- Fill out an application to become a nonprofit organization
- File a charter stating the nonprofit’s purpose with the designated state department (usually the Secretary of State)
- Draw up articles of incorporation
- Form a board of directors
- Hold the first board meeting
- Follow any other requirements as the state mandates
Once the nonprofit is up and running, the board must continue to follow all applicable rules and file Form 990 with the IRS annually.
Best Practices for Nonprofit Organizations
While nonprofit organizations aren’t as heavily regulated as for-profit companies, reputable nonprofits abide by ethical standards and best practices as a means of practicing good governance.
Take a look at these common best practices for nonprofit organizations:
- Forming a diverse board of directors
- Avoiding conflicts of interest
- Maintaining financial viability
- Being overseers rather than managers
- Establishing reasonable compensation for employees
- Creating policies and workflows that support efficiency and cost-effectiveness.
- Assessing board performance at least annually
- Purchasing applicable insurance policies
- Having appropriate succession plans
The National Council of Nonprofits provides a link of state-by-state resources for best practice resources for nonprofits.
Examples of Nonprofit Organizations
The following table includes nonprofit organization examples according to the area they serve.
Nonprofit Organizations: Doing Good at Every Level
There are over a million nonprofits in the United States, each with its own mission and vision. As our list of nonprofit organizations shows, each of them provides programs, activities, or services for people who could otherwise not get them.
While state and federal governments do their best to oversee nonprofits, it is ultimately up to the board to ensure compliance and good governance. Overall, a highly competent board is the driving force behind the good nonprofits do.
We’re passionate about the work of nonprofit organizations, which drives how we develop the BoardEffect solution. Boards operate in a series of overlapping cycles: a regularly scheduled meeting cycle, an annual operating cycle, and the cycle of longer-term board development and engagement. BoardEffect’s solution supports a modern approach to governance, powering nonprofit boards’ interdependent responsibilities across these ongoing cycles.
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