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Several papers in the ACCA What is a not-for-profit organisation? Types of not-for-profit organisation
Several papers in the ACCA Qualification may feature questions
these include Papers F1, F5, F7 and F8. At the Professional level
organisations. At the not pursue profit as an objective private sector. Most, but not all,
Fundamentals level, these is a not-for-profit organisation. public sector organisations do
include Papers F1, F5, F7 and This is an incorrect assumption, not have profit as their primary
F8. At the Professional level they as many such organisations do objective and were established in
include Papers P2, P3 and P5. make a profit every year and order to provide what economists
Although many of the principles overtly include this in their formal refer to as public goods. These
of management and organisation plans. Quite often, they will are mainly services that would
apply to most business models, describe their profit as a ‘surplus’ not be available at the right
not-for-profit organisations rather than a profit, but as either price to those who need to use
have numerous features that term can be defined as an excess them (such as medical care,
distinguish them from the of income over expenditure, the museums, art galleries and
profit maximising organisations difference may be considered some forms of transportation),
often assumed in conventional rather semantic. or could not be provided at
economic theory. Not-for-profit organisations all through the market (such
This article explains some of are distinguished from profit as defence and regulation of
these features. The first part maximising organisations by markets and businesses). Private
of the article broadly describes three characteristics. First, most sector examples include most
the generic characteristics of not-for-profit organisations do forms of charity and self-help
not-for-profit organisations. not have external shareholders organisations, such as housing
The second part of the providing risk capital for the associations that provide housing
they include Papers P2, P3 and P5.
article, to be published in the business. Second, and building for low income and minority
October 2009 digital issue on the first point, they do groups, sports associations
of Student Accountant, takes not distribute dividends, so (many football supporters’ trusts
a specific and deeper look at any profit (or surplus) that is are set up as industrial and
charities, which are one of generated is retained by the provident societies), scientific
the more important types of business as a further source of research foundations and
not‑for‑profit organisations. capital. Third, their objectives environmental groups.
usually include some social,
cultural, philanthropic, welfare
or environmental dimension,
which in their absence, would
not be readily provided efficiently
through the workings of the
market system.
student accountant 09/2009
02
organisations
Corporate form Formation, constitution, If it is a company, it will have a
provided the company commits to never distributing a dividend.
or unincorporated bodies. The invariably set up with a purpose the latter entrenched to ensure
organisation that have been set up as companies to dispense
common business forms include or set of purposes in mind, and that the objectives cannot be
the following: the organisation will be expected altered easily in the future.
¤ in the public sector, they may to pursue such objectives beyond Not‑for-profit organisations
be departments or agents the lifetime of the founders. that are not companies most
of government On establishment, the founders commonly have a set of Rules,
¤ some public sector bodies will decide on the type of which are broadly equivalent to
are established as private organisation and put in place Articles of Association.
companies limited by a constitution that will reflect As with any type of
guarantee, including their goals. The constitutional organisation, the objectives of
the Financial Services base of the organisation will not-for-profit organisations are
Authority (the UK financial be dictated by its legal form. laid down by the founders and
services regulator) their successors in management.
¤ in the private sector they may Unlike profit maximisers,
be established as cooperatives, Not-for-profit however, the broad strategic
industrial or provident societies objectives of not-for‑profit
(a specific type of mutual
organisations organisations will tend not to
organisation, owned by its are invariably set change over time.
members), by trust, as limited The purposes of the latter
companies or simply as clubs
up with a purpose are most often dictated by the
or associations. in mind, and the underlying founding principles.
Within these broad objectives,
A cooperative is a body owned
organisation however, the focus of activity
by its members, and usually will be expected may change quite markedly. For
governed on the basis of ‘one example, during the 1990s the
member, one vote’.
to pursue such British Know-How Fund, which was
A trust is an entity specifically objectives beyond established by the UK government
constituted to achieve certain to provide development aid,
objectives. The trustees are
the lifetime of switched its focus away from the
appointed by the founders to the founders. emerging central European nations
manage the funds and ensure in favour of African nations.
compliance with the objectives
On establishment,
of the trust. Many private the founders will
foundations (charities that do
not solicit funds from the general
decide on the type
public) are set up as trusts. of organisation
and put in place a
constitution
that will reflect
their goals.
03 technical
self‑financing and therefore generate profit in order to survive and grow.
It is important to recognise that although not-for-profit organisations
do not maximise profit as a primary objective, many are expected to be