How does the government operate as a nonprofit organization? It actually operates as a sovereign entity, which is different from a nonprofit organization in several key ways. One difference is in the way each organization handles its finances and accounting.

Big Differences between NPO and Government Accounting

Every business entity and organization must follow certain accounting principles and guidelines. Both government agencies and nonprofit organizations follow the Generally Accepted Accounting Principles, or GAAP. The main objective of these principles is to make sure all financial details are reported on efficiently and effectively.

Nonprofits and governmental agencies have to follow several additional standards, along with GAAP:

  • Nonprofit organizations: Financial Accounting Standards Board (FASB)
  • Government agencies: Government Accounting Standards Board (GASB)

Both of these boards issue and develop standards through an inclusive and standard process that promotes useful information in all financial reports. However, the principles put out by the GASB are meant for investors, public officials, taxpayers, and other similar individuals who use these reports, while the FASB principles are meant for investors.

The three main types of financial statements used by government entities and nonprofit organizations include:

  • Statement of Cash Flows
  • Statement of Activities
  • Statement of Net Assets (referred to as the Statement of Financial Position in nonprofits)

The three financial statements are similar to the balance sheets used by other types of business entities. They include the organization's net assets and liabilities. Net assets help to assess the organization or department's financial health.

Government Reporting

All governmental agencies must produce a Comprehensive Annual Financial Report (CAFR) every year. This document will outline the entity's financial status and is produced with GASB and GAAP. The CAFR may also include details about specific funds available, along with overall financials and consolidated accounting statements.

Nonprofit Reporting

A nonprofit organization doesn't have to publish a CAFR, but it does have to produce annual financial reports. These reports are given to potential investors and members of the board of directors. Since most nonprofits use some type of fund accounting software, putting these reports together is fairly easy thanks to the templates that are built into the program.

Is the Government a Nonprofit Organization?

The government is not a nonprofit organization, but rather is a sovereign entity that has operating authority over all formally chartered and informal organizations in the land over which it reigns. A nonprofit organization is not a sovereign entity. Rather, this type of organization can only operate in compliance with the regulations set forth by the government in the form of state and federal laws and rules. A nonprofit can only operate with the permission of the government.

All for-profit and nonprofit entities are required to receive that permission, called operating authority, from the government through the process of incorporation. Registering a business entity also grants the taxable status, which is typically done at the state or county level. For example, sole proprietorships and unincorporated partnerships would incorporate through the county tax office, while a corporation or LLC will go through the Secretary of State's office.

Some religious groups do not incorporate but operate as if they are nonprofit organizations. Churches, temples, associations, and organizations can all be guilty of this practice, believing that their religions are superior to any authority granted by the government.

Government Regulations for Nonprofit Organizations

Both state and federal governments offer the reward of not having to pay taxes to non-profit organizations because of the help they provide and good they do in their local communities. However, in order to qualify for this benefit, all funds must be used for the purpose as stated in the organization's charter. A nonprofit organization may still receive profits, but it cannot distribute any of those profits to the owners, founders, or shareholders, nor can it use the funds to increase the salaries of its employees to levels that are beyond what is reasonable for each position.

All nonprofit organizations are subject to government regulations. Failure to comply with these regulations could result in the organization losing its tax-exempt status. Most of the oversight and regulatory responsibilities are delegated by the federal government to each state's governmental agencies. Nonprofit organizations currently don't have much impact on the national political landscape, but that could change.

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