Nonprofit Organizations

Conceptual Overview

Nonprofit organizations vary greatly in size. The great majority in all countries are small, voluntary, grassroots organizations, often with strong traditional roots, but with no formal legal structure. Other voluntary organizations are very large indeed, with a national or international reach, with thousands of volunteers and several hundred paid employees. Nonprofits globally contribute an average 5.4% of the [Page 988]combined gross domestic product of their national economy.

Despite the diversity, there are several characteristics of nonprofit organizations that generally set them apart from other organizations. They must be independent of both the market and the state. The nonprofit distribution principle is central. While profits may be made and used to enhance or expand services, they may not be distributed to individual shareholders, a fundamental principle that has implications for internal accounting and external tax and legal considerations. It also means that, unlike business entities, the bottom line cannot be used as a measure of performance. The mission of a nonprofit defines the value of the organization to society and creates the organization's purpose.

The form of human resources is often quite different in voluntary organizations. Volunteer labor, including the voluntary overtime of paid professional staff, often underwrites the performance of the organization. Professional staff are often primarily motivated by the mission/value base of the organization rather than by personal financial rewards.

Critical Commentary and Future Directions

Given that the organization is voluntary, the forms of governance are likely to be distinctive, being controlled by stakeholders who are citizens rather than shareholders or delegates of government instrumentalities. There are, however, no specific ideal forms of organizational structure or governance. Historically, voluntary organizations have experimented with various forms of dispersed or flat structures designed to maximize the opportunities for participatory democracy. These include variations of the collective model, the cooperative model, and the community management model, all of which apply the subsidiarity principle, in which decisions are made by those most affected by the outcomes of the decision. Broad citizen participation is particularly important for those organizations that are seen as schools for democracy or the location for social capital.

Because nonprofits do not normally create a direct revenue stream, they remain dependent on other sectors for financial resources, through corporate sponsorship or government funding, or else rely on the wider public for donations. Some organizations have attempted to escape the uncertainty that these dependent relationships engender by moving to a user-pays or membership-fee basis, or by developing a profit-generating arm of the organization to cross-subsidize the nonprofit arm, thus leading to complaints of unfair tax advantage by for-profit competitors.

Those nonprofit organizations seeking government funding or corporate sponsorship are particularly vulnerable to the impact of the isomorphic assumptions of their donors. That is, funding bodies tend to be suspicious of organizations that don't look like them. Thus, as nonprofits incorporate to obtain legal status, and develop more formal procedures for decision making and accountability, they tend to move to a corporate model to be deemed acceptable. They may acquire large bureaucratic structures and hierarchical systems of accountability, overseen by formal boards of management. Within this corporate model, there is increasing requirement of the nonprofit organization to be an effective and efficient business.

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