Concepts

Concepts are important tools for understanding and communicating; they are the building blocks of theories.

Clearly, each of the terms depicts one aspects of the social realty of the sector at the expense of overlooking or de-emphasizing other aspects.

For instance, the term charity emphasizes the support these organizations receive from private charitable donations and assumes a certain motivation on behalf of both donor and recipient.

The term independent sector highlights the role these organizations play as a “third force” outside of the realm of government and private business.

In reality these organizations are far from independent, politically or financially.

Politically, many are engaged in advocacy, and in financial terms, they depend heavily on both government and private business for revenue.

The term NGO (nongovernmental organization) is the term used to depict these organizations in the developing world and in international relations, but it tends to refer only to a portion of what elsewhere is considered to be part of this sector- namely, the organizations engaged in the promotion of economic and social development, typically at the grassroots level.

The term nonprofit organizations / sector, a term used by the UN System of National Accounts and as we will see, economic theories, is not without its problems.

The term emphasizes the fact that these organizations do not exist primarily to generate profits for their owners.

But, these organizations sometimes do earn profits, and sometimes they generate more revenues than they spend in a given year.

The term economie sociale is the term used to depict a broad range of non-governmental organizations in France and Belgium, and increasingly within the European community, but it embraces a wide variety of business-type organizations such as mutual insurance companies, savings banks, cooperatives, and agricultural marketing organizations that would be considered part of the business sector in most parts of the world.

These organizations have 4 main components;

- organizational purpose of service to members or some specified larger community rather than profit to shareholders.

– Independent management.

– A democratic decision making process. –

- Precedence of social aspects over capital in the distribution of income.

Different Approaches

We should not forget that a definition must be simpler than the reality it seeks to describe.

In social sciences, we are particularly interested in definitions that facilitate communication, generate insights, and lead to better understanding.

Perhaps the most certain and straightforward system for defining the nonprofit sector is the one provided in a country’s laws and regulations.

In the US, for example, nonprofit organizations are defined in the Internal Revenue Code, and for the most part in sections 501.

There are over 20 different categories of nonprofit or tax-exempt organizations in the US, which cover a great diversity of entities.

But, mainly, there are two major types of nonprofits in the US: 501©(3) and 501©(4) organizations.

Most importantly, while both 501©(3) and ©(4) organizations are exempt from income and other forms of taxation, only those categorized as 501©(3), the so-called public benefit organizations, can receive tax-deductible contributions from individuals and corporations.

Organizations falling into this last category include many civic leagues and advocacy organizations that support particular social and political causes.

To qualify for 501©(3) status, an organization must pass three tests: the organizational test, the political test, and the asset test.

The organizational test for 501©(3) status requires that they operate exclusively in one or more of eight functional purpose areas: educational, religious, charitable, scientific, literary, testing for public safety, fostering certain notional and international amateur sports competitions and prevention of cruelty to children and animals.

The political test requires organizations with 501©(3) status not to participate in the political electoral process of promoting any specific candidates for office.

A 501©(3) organization can spend up to 20 percent of annual expenditure on lobbying activities relating to the organization’s mission.

By contrast, 501©(4) organizations have no restrictions on their lobbying activities.

To pass the asset test, the nonprofit organization has to demonstrate procedures that prohibit assets or income being distributed to individuals as owners, managers, or their equivalents, except for fair compensation for services rendered; meaning that the organization may not be used for the personal benefit of founders, board members, managers, staff, or associates.

Religious Congregations

There is privileged treatment of religious congregations in the US.

Among all private organizational entities in the US, they are the only type automatically entitled to tax exemption under Section 501©(3).

What is more, religious congregations are exempt from the reporting requirements imposed on all other nonprofits with 501©(3).

The reasons for the privileged treatment are found in US constitutional law, the strict separation between state and church, and the limitations imposed on government to regulate the religious establishment, even for purposes of granting and supervising tax exemption.

Civil Law Systems

In contrast to common law countries such as the US, Australia, or the UK, civil law countries such as France, Germany, and Japan have a different starting point for defining nonprofit organizations.

The civil law system is based on the fundamental distinction between private law, regulating the rights and responsibilities of individuals and private legal personalities, and public law (e.g. administrative, fiscal, and ecclesiastical law), dealing with relations between individuals and the state, public agencies, and public law corporations.

The central point is that the state is regarded as a legal actor and in possession of its own legal subjectivity that requires laws and regulations qualitatively different from those addressing private individuals.

The civil law systems have two principal types of organizations: private law associations and corporations.

To achieve legal personality, an association must be registered in some association registry which, depending on the country’s administrative system, is typically maintained either locally at city or county courts or nationally at the Ministry of the Interior or an equivalent government department.

To register, an association must pursue a non-commercial objective; have a specified minimum number of members, a charter, and a governing board.

A non-registered association possesses no legal personality; the board legally represents it, and members are personally liable.

However, registration does not necessarily imply tax exemption for the organization.

The law concerning public benefit is more complex than in common law countries and involves a legal act separate from registration.

What is more, while many civil law countries have relatively simple registration procedures for associations and corporations, the achievement of public benefit status is much more demanding.

In France and Japan, there are many more nonprofit organizations than tax-exempt nonprofit organizations.

What is the situation in civil law countries, where the state puts more onerous requirements on private actors that seek to work for the public good?

In most civil law countries, the legal status of associations was a center stage in the emergence of civil society in the 19th century and became enshrined in the Civil Code, with the definition of what constitutes public benefit essentially defined by provisions in various tax laws.

In the German tax code, it is stipulated that private activities for public benefit must be carried out in a certain manner:

Selfless - in the sense of altruistic, whereby members of the organization are neither allowed to receive profits nor other profit-like compensations.

It also implies that the cost behavior of nonprofits must be “reasonable” in terms of salaries and fringe benefits.

Exclusive – in the sense that the organization pursues only

purposes defined as public benefit: if an organization carries out other activities, it may lose the nonprofit tax status altogether.

In practice, the organization may declare some of its activities as public benefit and others as “commercial”.

Direct – in the sense that the charitable purpose has to be served by the organization itself rather than through third parties.

This provision contains many exceptions that basically relate to inter-organizational structures, financing, and special institutions.

Timely – in the sense that the organization has to spend its resources for the specified purposes within a certain time period, usually a given fiscal year.

The functional definition, under both common law and civil law, has at its core the notion that nonprofit organizations are identifiable by their financial behavior, in particular their lack of a financial profit motive or restriction of profit distributions.

The Economic Definition

According to this definition, the key feature that sets the nonprofit sector apart from the others is the revenue structure of nonprofits.

According to economic definition, nonprofit institutions (NPI) do not receive the bulk of their income from the sale of goods and services in the market, or through taxation, but from the voluntary dues and contributions of their members and supporters.

In the economic terms, nonprofit institutions are defined as,

legal or social entities created for the purpose of producing goods and services whose status does not permit them to be a source of income, profit, or other financial gain for the units that establish, control or finance them.

In practice their productive activities are bound to generate either surpluses or deficits but any surpluses they happen to make cannot be appropriated by other institutional units.

Thus, from an economic perspective, nonprofits are primarily defined by their revenue structure.

As institutions barred from being a source of income to their owners or equivalents, they rely neither on sales and fees from market transactions nor do they depend on tax revenue.

The Structural-Operational Definition

This definition does not emphasize the purpose of the organization or its sources of income but its basic structure and operation.

According to this definition, an organization is defined as a nonprofit entity if it shows these five characteristics:

organized and institutionalized,

private – institutionally separate from government,

self-governing – equipped to control their own activities,

nonprofit-distributing,

and voluntary. To clarify each:

Organized – institutionalized to some extent.

What is important is that the organization has some institutional reality, such as having regular meetings, officers, rules of procedure, or some degree of organizational permanence.

By contrast, purely ad hoc and temporary gatherings of people are not considered part of the nonprofit sector.

Private – institutionally separate from government.

Nonprofit organizations are not part of the apparatus of government.

They are nongovernmental in the sense of being structurally separate from the instrumentalities of government.

This does not mean that they may not receive government support in cash or in kind, or even that government officials cannot sit on their boards.

The borderline is not always clear, and the most obvious of these are the many quasi-nongovernmental organizations, found in a number of European countries as well as elsewhere.

Self – governing: Organizations must be in a position to control their own activities to a significant extent.

This implies that they must have their own internal governance procedures and enjoy a meaningful degree of autonomy.

Under this criterion, the presence of government or corporate representatives on the boards of nonprofit organizations does not disqualify the organizations from being nonprofit.

The degree of autonomy a particular organization retains is important at this point.

Nonprofit-distributing: Nonprofit organizations may accumulate profits in a given year, but the profits must be plowed back into the basic mission of the agency, not distributed to the organizations’ owners, members, founders, or governing boards.

The fundamental question is how the organization handles profits.

If profits are not distributed as income, what happens to them then?

Nonprofit organizations are private organizations that do not exist primarily to generate profits, either directly or indirectly, and that are not primarily guided by commercial goals and considerations, which differentiate nonprofits from for profits.

Voluntary: To be included within the nonprofit sector, organizations must embody the concept of voluntarism to a meaningful extent.

The organization must engage volunteers in its operations and management, either on its board or through the use of volunteer staff and voluntary contributions.

The presence of some meaningful voluntary input, even if only a voluntary board of directors suffices to qualify an organization as in some sense “voluntary”.

“Voluntary” also carries the meaning of “non-compulsory”.

Organizations in which membership is required or otherwise stipulated by law would be excluded from the nonprofit sector.

Some professions may require compulsory membership in a particular professional association; owners of small-scale industries may be required to join the local chamber of commerce, or employees may be required to join a union.

In such cases the criterion of “voluntary” would not be met, and the associations consequently excluded from the nonprofit sector.

Establishing Foundations and Associations in Turkey

The nonprofit organizations in Turkey are established as foundations and association and are governed by the “Law for Foundations” and the “Associations Law”.

The Turkish associations are membership nonprofit organizations created in order to achieve an objective stated in its Statute and with no permission to achieve profits for its members.

At least seven founders are needed for establishing an association.

The associations opened in Turkey have a Statute which contains the name and headquarter, the objectives and the activities planned to be performed in order to achieve those, details regarding the founders (their names, their profession, their address and nationality), the conditions for obtaining the membership or to be withdrawn, the method of appointing and the frequency of meeting of the association's general council, the responsibilities and powers of the general council and the methods and forms of voting and decision making, responsibilities and powers of the board of management and audit board, method of election, the number of permanent and reserve members, if the association is to have branches and details regarding it (how many, their responsibilities and powers, and the method of representation in the general council), the yearly membership fee amount, the methods of internal audit, how the statute can be amended, modality of dividing the remaining assets in case of dissolution.

The recognition of the statute of association is earned after the submission of foundation deed and other documents, such as the Statue and a list with all the members to the Ministry of Interior Department of Associations.

It is not easy for associations to gain tax-exempt status; there are lots of requirements to fulfill.

The Turkish foundations are nonprofit organizations without membership established in order to achieve a certain objective prescribed in its Statute.

The foundations are governed by “The new Foundation Law” adopted and put into effect on February 20, 2008.

A minimum of 50,000 Turkish Liras is necessary to establish a Turkish foundation.

The body that is handling the registration of the foundations opened in Turkey is the General Directorate of Foundations.

Annual reports have to be delivered to this body and if the foundation setup in Turkey is also performing activities for the public benefit, then the reports has to be delivered to the Ministry of Finance.

There are some foundations that can get special status, which provides special benefit of not paying any taxes on some of its activities.