NPO Structure: Everything You Need to Know
NPO structure refers to the setup of a nonprofit organization (NPO). Most nonprofits are structured like a corporation.3 min read
NPO structure refers to the setup of a nonprofit organization (NPO). Most nonprofits are structured like a corporation.
Nonprofit organizations offer liability protection to their owners and directors. If the organization incurs debts or runs into legal trouble, its members cannot be held personally liable under most circumstances. Most nonprofits will hopefully never need liability protection, but it is good to know it is there either way.
The corporate structure has been around for many years and offers the protection and organization that successful nonprofits need.
Nonprofits are business structures that function in very similar ways to any company, except for their purpose. A nonprofit's main purpose is to offer goods and services to the needy rather than to turn a profit. This can confuse some people into thinking that nonprofits never have or need money. On the contrary, they do need money to operate and can earn money, but their main goal isn't to make money.
If an individual is considering starting and nonprofit organization, they should know the advantages that structure as a nonprofit corporation offers. These advantages include the following:
- Limited liability protection for owners, directors, and members.
- Federal tax exemption.
- A long history with the IRS (Internal Revenue Service).
- State tax exemptions.
- Reviewers are familiar with the corporate structure when considering grants.
- Donors being comfortable and familiar with the corporate structure.
Benefit corporations, also called B corporations, came onto the business scene recently and aren't yet recognized in every state. This structure is sort of a mix between a standard corporations and a nonprofit corporation.
B corporations do have a goal of making money, but they are also required to uphold certain standards not required of standard corporations. Along with turning a profit, B corporations also must be able to prove they are benefiting society and the environment in some way. Specifically, they must prove:
- Social benefits.
- Environmental benefits.
- Accountability to the public.
- Transparency with the public.
These types of corporations are assessed by third-party standards to be sure that they earn the title of benefit corporation.
Directors of B corporations can make decisions for the company that may seem more appropriate for a nonprofit, because the bottom line isn't their only concern.
Flexible Purpose Corporations
In the state of California, a business owner can choose to form an FPC, or a flexible purpose corporation. FPCs are similar to B corporations because they are still trying to turn a profit but also must keep social benefits in mind in their company goals.
The board of directors and managers are encouraged to pursue social purpose over making profits for their shareholders, and they are protected from liability if this leads to risky decisions.
Low-Profit Limited Liability Companies
Low-profit LLCs, also called L3Cs, are business structures that fall somewhere between nonprofits and traditional limited liability companies (LLCs). L3Cs have federal taxation rules for PRI (program-related investing). These companies allow for some nonprofit advantages with the flexible taxation offered to standard LLCs.
When a nonprofit chooses not to incorporate, they forfeit liability protection but give themselves a bit more flexibility when it comes to company structure and filing requirements.
Unincorporated nonprofits are the ideal structure for short-term projects, services, and fundraising.
How Are Nonprofits Governed?
A traditional nonprofit organization with a corporate structure is governed by a board of directors. The number of directors on a board can be as low as three to as large as necessary for the company's success and needs. Certain states have more specific rules when it comes to the number of directors allowed or required, so it's best to double check these requirements if forming a nonprofit and creating a board of directors.
Board of Directors
The board of directors in a nonprofit corporation are required to oversee the company and make decisions in its best interest.
Basic duties for a board of directors include:
- Making rules for company operations.
- Overseeing company finances.
- Hiring executive staff.
- Forming strategic plans for the company.
- Developing policies and procedures.
The directors of a nonprofit board are usually unpaid volunteers. Usually, the owners of the nonprofit will elect directors for their particular experience with or interest in the goals of the company.
Boards should hold regular meetings to ensure the nonprofit is heading in the right direction.
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