Blog / Nonprofit organizations: How they work and what they do

Nonprofit organizations: How they work and what they do

Mark Wilson

December 18, 2025

If you don’t already work for or serve one, you likely interact with nonprofit organizations every day, receiving email solicitations, dropping off a donation, volunteering or interacting with a membership or interest-centered group. What sets these not-for-profits apart from other companies or corporations?

In simple terms, a nonprofit organization is one that functions to further a mission, social cause or shared goal. Unlike businesses, nonprofit organizations do not exist to make a profit.

Nonprofit organizations exist in most communities — there are nearly two million in the U nited States alone — and governments, businesses and citizens support them in various ways for the overall benefit of the communities they serve.

To help you get a greater perspective on nonprofit organizations, we’ll explain:

What a nonprofit is, what it does and how it works
How nonprofits are funded
Primary types of nonprofits
Who governs nonprofits
How to establish a nonprofit
Best practices for nonprofits
Risks and opportunities for nonprofits

We’ll also provide lots of examples of impactful nonprofits at the national, regional and local levels.

What is a nonprofit organization, and what does it do?

People form nonprofit or not-for-profit organizations to provide goods and services that state and federal governments cannot or will not do on their own. While state and federal taxes support many vital programs and services, there aren’t enough funds to supply every need. Nonprofit organizations fill the gaps in services that everyday people could not access any other way.

In the U.S., they may be referred to as 501(c)(3) organizations, referring to the federal tax code that gives them their status. Other terms are mission-driven organizations, associations or NGOs (nongovernmental organizations).

While different countries or states may regulate nonprofits differently, some aspects are common, like special tax-related exemptions. They may also be limited in the type of political action they can take, such as endorsing candidates.

How do nonprofits work?

In the U.S., nonprofit organizations must file certain founding documents with the IRS. Each nonprofit establishes a board of directors to oversee the organization. Often, nonprofits have an executive director who leads teams of employees and volunteers to get the work done.

From a leadership standpoint, the board of directors must hold meetings at least annually. Board positions carry many important duties and responsibilities, as board members make important decisions regarding the nonprofit.

Nonprofit organizations engage in fundraising activities to ensure they have the funds to support the organization. Because nonprofit organizations provide valuable services to communities, state and federal governments do not require nonprofit organizations to pay taxes. It’s their way of supporting the good work that nonprofits do.

Nonprofit organization funding sources

Nonprofit organizations can pursue a wide variety of funding sources to support their missions:

Foundation and government g rants: Competitive funding from private, family or community foundations for programs or operations and public funding for services, often with strict reporting requirements.
Individual donations: Gifts from supporters; often the largest revenue source for many nonprofits. Some nonprofits have success with monthly or recurring giving.
Corporate donations and sponsorships: Funding or in-kind support from businesses in exchange for visibility or community impact.
Membership dues: Annual fees from members who receive benefits or belong to a professional/community association.
Program fees: Revenue from offering classes, services or ticketed events.
Fundraising events: Galas, auctions, fun runs and other activities that raise money and engage supporters.
Earned income: Selling products or services that align with the mission.
Bequests and planned giving: Gifts arranged through donors’ estate plans.
Endowment income: Investment earnings from a dedicated fund designed to provide long-term financial stability.

Leaders of successful nonprofits learn early that managing the activities around fundraising and budgeting requires strong organizational skills, persistence and consistency.

What are the 3 primary types of nonprofit organizations?

While people loosely refer to nonprofit organizations as charities, other organizations also qualify as nonprofit organizations. There are three primary nonprofit types.

Public charity: These types of nonprofits, which run the gamut from food banks to nonprofit hospitals, may spring to mind first. They are formed to provide goods or services to the public. They are often funded by government sources, grants and public donations. Charitable organizations in the U.S. must file IRS Form 990 each year.
Private foundation: Foundations can be established by individuals, families or companies to give grants to other individuals or charitable causes. They are usually funded by a single source, which can include an endowment.The governance is usually handled by a small board, which can include family members for a family-founded entity. They have their own IRS form, 990-PF.
Member benefit organization: These are trade associations and other types of groups, such as the veterans’ organizations, business leagues, fraternal organizations or employee benefits organizations. They can be funded by member dues and fees, including selling services, and are often run by an elected board. They may have different requirements for tax exemption based on the type of organization, and they usually exist to provide benefits to their membership rather than the general public.

Who governs nonprofit organizations?

Like businesses, nonprofits require effective leadership and have developed standardized roles to oversee their operations.

Internal governance

Nonprofit organizations are led by a board of directors or trustees. Within that board, individuals take on other roles depending on the size of the organization and need: board president and vice president, board secretary and treasurer. Together, this team is responsible for ensuring the nonprofit stays on the path of serving its mission. In meetings, board members discuss and vote on policies, strategic plans, budget and other issues related to oversight.

Board members have fiduciary responsibility, meaning that they have to act in the best interest of the organisation that they govern. Depending on the size of the organization, the board may oversee an executive director, who would themself oversee the nonprofit’s staff.

The important thing to understand about the board’s role is that it is meant to have oversight of governance — to do the strategic planning and give direction to other staff and resources to carry out day-to-day activities. Board members or trustees can also carry substantial responsibility for networking and fundraising.

External oversight

In exchange for their tax-exemption privileges, nonprofit organizations must submit to a variety of external monitoring to ensure that financial resources are being used legally.

In the United States, the IRS establishes requirements for nonprofit reporting, and individual states have their own requirements for records retention and other accountability activities for organizations within their borders. State governments have the primary responsibility for governing and regulating nonprofit organizations. In at least 39 states, nonprofits must register their nonprofits with the appropriate state department.

Many stakeholders are keenly interested in how a nonprofit manages its resources, so a number of watchdog groups report on charity activities, including Charity Navigator, GuideStar and the BBB Wise Giving Alliance. These watchdogs look at numerous metrics related to accountability, transparency and financial practices.

How nonprofits are established

Generally, you must take the following steps to establish a nonprofit organization:

Fill out an application to become a nonprofit organization
File a charter stating the nonprofit’s purpose with the designated state department (usually the relevant secretary of state)
Draw up articles of incorporation
Form a board of directors
Hold the first board meeting
Follow any other requirements as the state mandates

Once the nonprofit is up and running, the board must continue to follow all applicable rules and file Form 990 with the IRS annually.

Best practices for nonprofit organizations

While nonprofit organizations aren’t as heavily regulated as for-profit companies, reputable nonprofits abide by ethical standards and best practices as a means of practicing good governance.

Take a look at these common best practices for nonprofit organizations:

Form a diverse board of directors: A nonprofit’s board should consist of members with different backgrounds, experiences, skills and perspectives. A diverse group will bring more ideas and solutions to the table than a homogenous board, and it is more likely to reflect the interests of a diverse community.
Avoid conflicts of interest: Board members have many reasons for serving on a board, but they shouldn’t be financial or similarly beneficial. Ensure your board has a strong conflict of interest policy and asks board members to self-report regularly.
Protect financial viability: Financial reporting should be part of every board meeting. Ensure prospective board members understand what is expected of them in fundraising and donor solicitation. Undertake a regular auditing process to ensure funds are being managed appropriately.
Be overseers, not managers: Very small nonprofits may need more hands-on help from board members, but trustees must remember that their role is to provide oversight, strategy and guidance, not make the day-to-day decisions around nonprofit operations.
Create policies and workflows that support efficiency and cost-effectiveness: Organization policies should not be set in stone, and nonprofit boards have the opportunity to review risk management, human resources, whistleblower and other policies regularly to ensure they specify how the nonprofit should be organized to protect itself and best serve the mission.
Assess board performance at least annually: A board should regularly turn the mirror on itself to see how it can improve. Both new and seasoned board members can have insight into how the board can perform better.
Develop (and update) a succession plan: Board members and key staff leaders can depart at any time. To ensure continuity of operations, your succession plan should reflect changes that would need to happen now, and the document should be reviewed regularly to ensure it still meets the needs.

The National Council of Nonprofits provides state-by-state resources for best practice resources for nonprofits.

Examples of nonprofit organizations

The following list includes nonprofit organization examples according to the area they serve.

Nonprofit organization risks and opportunities

The board of trustees is responsible for leading its organization through good times and bigger challenges. Here are some situations the board should be prepared to handle and how to approach them:

Financial uncertainty: Changing government priorities and economic conditions can shake up an organization’s financial outlook almost overnight. Boards should prioritize creating reserve funds and diversifying their funding sources from the outset and throughout their service.
Conflict and poor communication: Egos, emotions and opinions can be strong in the nonprofit world. Ensure board recruitment includes individuals experienced in team-building and effective communication, and offer training resources on these topics.
Board turnover: Board changes will happen, but excessive turnover can be a sign of an unhealthy board dynamic, such as conflict issues noted earlier. Regular pulse surveys can identify issues early, and every board member should have access to training on effective board service and related issues throughout their term.
Mission creep: Out of a desire to serve, nonprofit leaders can find themselves providing goods or services significantly outside their original mission. Expansion isn’t per se a bad thing, but changes to the organization’s original mission should be discussed and codified by the board. Otherwise, boards risk using precious resources on out-of-scope efforts.
Burnout risk: Burnout is a real and frequent risk among mission-driven volunteers and staff, and maintaining board engagement is an ongoing effort. Board and staff service should consist not just of meetings and networking, but also of having opportunities to recharge batteries with hands-on contributions, professional events and fun.

Nonprofit organizations: Doing good at every level

Nonprofits are as diverse as the communities they serve, each providing programs, activities or services for those who could not get them. Board service for these organizations can be time-consuming and complicated — but it doesn’t have to be.

A good board management solution like BoardEffect can make board service easier in a number of key ways. BoardEffect supports a modern, efficient approach to nonprofit governance with these features:

Streamline meeting management: BoardEffect simplifies the entire board cycle, from agenda building and document distribution to archiving past meeting materials. This significantly cuts down on administrative prep time, freeing up staff resources for mission-related work.
Enhance communication and collaboration: Board members can access all necessary information and communicate through a single, secure platform rather than relying on a jumble of emails. This platform facilitates real-time collaboration with shared workrooms, annotations, polls and surveys — useful for committees, remote participants and evaluation efforts.
Better secure your board’s sensitive data: Rising cyber risks are affecting nonprofits of every size. BoardEffect provides a secure environment for any sensitive data or key board discussions with advanced security features, granular permission controls and compliance with standards like ISO 27001 and SOC 2.
Improve governance and ensure compliance: By centralizing documents and providing tools for tracking attendance, terms and skill sets, BoardEffect helps boards adhere to legal and ethical responsibilities and best practices. It also aids in compliance reporting, which is critical for federally funded programs or other grant requirements.
Enable better decision making: The platform provides a "single source of truth" by centralizing reports and data, allowing board members to make more informed and strategic decisions during meetings. AI features such as AI Smart Book Summary can condense lengthy documents into concise insights to speed up the process.
Enhance board member engagement and onboarding: The user-friendly mobile app and easy access to training materials help keep volunteer board members, who often have busy schedules, informed and engaged. This leads to better attendance and participation in governance responsibilities.
Strengthen strategic planning and risk management: BoardEffect supports long-term planning by providing a space to store strategic plans, conduct risk assessments and plan for future challenges like leadership succession.

We’ve developed BoardEffect to support the board’s important role in serving the mission. Request a demo today and learn more about how we can strengthen your board’s work.

Nonprofit organization FAQ’s

What is a 501(c)(3)?

The term 501(c)(3) refers to the IRS regulation that establishes requirements for the most common type of nonprofit organization, such as a public charity or private foundation, to be tax-exempt. Other regulations for tax-exempt orgs include 501(c)(4) for social welfare organizations and 501(c)(5) for labor organizations.

How does a CEO of a nonprofit get paid?

Staff salaries, including the CEO’s salary, are established in the budget by the board of directors. Salaries are paid from organization revenue and can vary based on the organization’s size and means.

Which is better, LLC or nonprofit?

Neither is inherently better; they just serve different purposes. A nonprofit forms to provide goods and services to a community as part of an established mission, while an LLC or corporation exists to make a profit for its owners or shareholders.

What is the goal of a nonprofit organization?

Nonprofits have a wide variety of goals, from protecting animals to helping people with food, housing and legal aid to offering healthcare or professional resources. The main commonality is that they follow requirements for tax-exemption set by the IRS for their particular type of entity. They may also have state requirements for operations and accountability.

Mark Wilson is an Account Manager at BoardEffect which is a division of Diligent Corporation. In his role, Mark works with a range of organisations from government departments, HEIs, Healthcare, schools, and charities across UK & Ireland. Having been working within Governance for over 7 years, Mark understands how BoardEffect’s governance platform can be used to achieve an organisation’s governance strategic aims. Mark has over two decades of experience working in the technology sector.

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