We can broadly categorize the business into two units:
The Commercial categories of the businesses are those that aim at earning a profit for the business and to expand it in size, location and extent; whereas Non-Commercial activities are those activities which do not aim at earning a profit; rather they aim at providing social services to the public. Unlike profit-making companies; their aim is not to earn profit but indulge in the social welfare. They have specified missions to do welfare through Education, Health, Religion etc.
We can understand the difference between Non- Profit Organization and profit-making organization through the following table:
|Basis||Non-Profit Organization||Profit making Organization|
|GAAP Applicability||Yes- SFAS117 is applicable||All the GAAP principles are applied.|
|Taxation Exemption||Exempted- if verified by IRS.||No Tax Exemption.|
|Primary Objective||Social Welfare.||To earn profits for shareholders.|
|Secondary Objective||To maintain revenues more than the expenditure.||To provide satisfactory goods and services to the consumers|
The sources of funds in the Non- Profit Organizations are:
1. Unrestricted Donations: These are the donations which have no restriction as to their usage. This happens when the donor while donating does not enforce any restriction or condition as to the usage of the funds. Such funds can be utilized in any way the company deems fit. It is the sole discretion of the NPO how it wants to utilize the donation i.e. for capital expenditure or revenue expenditure. The treatment for the same will be done accordingly in the Books of Accounts of the NPO.
2. Partially Restricted Donations: These are the donations received by the NPO to which the donor annexes some restrictions as to the utilization of the funds for some specific task or activity. The company cannot use the restricted amount of the donation for any activity other than the activity so stated. The rest of the unrestricted amount can be used by the NPO as it deems fit.
3. Permanently Restricted Donations: These are the donations to whose usage the donor applies restrictions. These donations cannot be used by the NPO for any expense other than the specific task stated. There is a strict restriction and such donations are taken care so that no misappropriation occurs on its usage.
The Accounts maintained by the Non-Profit Organizations are:
Sometimes Non Profit Organizations face problems for its working. These problems are:
1. Mismanagement of Resources: There is always a lack of control in the Non-Profit Organizations. Due to a number of people working in the organization, there is not sufficient control on the resources. The resources can be mismanaged without leaving any trail behind. This is a major drawback of the working of the Non-Profit Organizations. This happens due to the ignorant behavior of the employees and increasing Red Tapism in the organizations. This is the major hindrance to the growth of the organization and stopping it from achieving its goal.
2. Power in few hands: Once the organization is setup, the initial founders try to take control of the organization due to the lack of any leader initially. They try to drive the organization as per their assumptions and discretion. This will vest the whole power in few hands which is not an ideal situation for the organization to operate in. Thus it should be taken care of that a single person does not rule the whole organization’s work.
3. Lack of Talented and Competitive Employees: The Non-Profit Organizations face a direct competition from the Profit Making or Private Sector organizations. The employees generally find higher salaries and growth opportunities in the profit-making organizations and tend to move towards that sector. Thus, the Non- Profit Organization faces this competition and is devoid of talent in the organization. This is one of the major reasons that the Non- Profit Organizations stay behind and are often unable to earn surplus and run into deficits.
In U.S. there are no separate laws for Non-Profit Organization’s working. The same laws as Profit Making Organization’s apply to Non- Profit Organization’s incorporation. But it has separate laws for taxation. If it satisfies certain conditions, then it can be exempted from paying taxes; otherwise, it will have to pay taxes as per the applicable rates.
The organization needs to meet several complex conditions of IRS i.e. Internal Revenue Service Regulations to become tax exempted. The IRS will not only help in considering if the organization is Tax Exempted but will also help in deciding if the members making a donation to the organization will also get deduction upon the donation made by them. If an organization is able to meet the rule and regulations for the formation of Non- Profit Organization and getting tax exempt in the state; but fails to achieve the same status at the federal level, then it will have to pay the tax at the federal level even when it is exempt from paying the tax at the state level.
Thus while operating a Non- Profit Organization; several things are to be taken care of. The incorporation of the organization must be done carefully and there should be a proper check on the working of the organization. Any shortcoming and lacking should be eliminated at the earliest.
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