Boundless Business: "What is a

Business?"
Section 1: The Goals of a Business
The primary purpose of a business is to maximize profits for its owners or
stakeholders while maintaining corporate social responsibility.

Learning Objective
 Differentiate among potential goals of a business.

Key Points
o Economic value added suggests that a principal challenge for a business is
balancing the interests of parties affected by the business, interests that are
sometimes in conflict with one another.
o Alternate definitions state that a business' principal purpose is to serve the
interests of a larger group of stakeholders, including employees, customers,
and even society as a whole.
o Many observers hold that concepts such as economic value added are useful
in balancing profit-making objectives with other ends.
o Social progress is an emerging theme for businesses. It is integral for
businesses to maintain high levels of social responsibility.

Terms
 stakeholder

A person or organization with a legitimate interest in a given situation, action, or

enterprise.

 corporation

A group of individuals, created by law or under authority of law, having a

continuous existence independent of the existences of its members, and powers
and liabilities distinct from those of its members.
 corporate social responsibility (CSR)

A company’s sense of responsibility towards the community and environment

(both ecological and social) in which it operates. Companies express this
citizenship (1) through their waste and pollution reduction processes, (2) by
contributing educational and social programs and (3) by earning adequate
returns on the employed resources.

Examples
o America has surpassed Europe in revenue growth over time. However, social
responsibility may also have a critical role in business operations, so
American revenue growth should not be solely considered
in corporatesuccess.
o Stakeholder theorists believe that people who have legitimate interests in a
business should influence its operation. Consumers, and
evencommunity members who could be affected by what the business does,
ought to have some voice in the decision making.
o Advocates of business contract theory believe that a business is a community
of participants organized around a common purpose. Contract theorists see
the enterprise being run by employees andmanagers as a kind of
representative democracy.

The Goals of a Business

Profit Maximization
According to economist Milton Friedman, the main purpose of a business is to
maximize profits for its owners, and in the case of a publicly-traded company,
the stockholders are its owners. Others contend that a business's principal purpose is
to serve the interests of a larger group of stakeholders, including employees,
customers, and even society as a whole. Philosophers often assert that businesses
should abide by some legal and social regulations. Anu Aga, ex-chairperson of
Thermax Limited, once said, "We survive by breathing but we can't say we live to
breathe. Likewise, making money is very important for a business to survive, but
money alone cannot be the reason for business to exist. "
Profit Maximization
This chart depicts profit maximization using the totals approach, where TR = Total
Revenue and TC = Total Cost. The profit-maximizing output level is represented as
the one at which total revenue is the height of C and total cost is the height of B; the
maximal profit is measured as CB.

Social Benefit
Many observers would hold that concepts such as economic value added are useful
in balancing profit-making objectives with other ends. They argue that sustainable
financial returns are not possible without taking into account the aspirations and
interests of other stakeholders such as customers, employees, society and the
environment. This concept is called corporate social responsibility (CSR).

This conception suggests that a principal challenge for a business is to balance the
interests of parties affected by the business, interests that are sometimes in conflict
with one another. Former President Bill Clinton stated adamantly that major
multinational companies must put their customers and employees' interests before
those of shareholders in order to promote economic development and growth,
especially in emerging markets. For example, Alibaba, a Chinese Internet venture,
strives to operate in the zone that Clinton calls "double-bottom line capitalism. " The
emerging new mantra is to create social progress as well as create profits. In a
sense, corporate social responsibility highlights the fact that business, consumers
and society are part of a shared ecosystem, and that the long-term health of this
ecosystem must be maintained above all else.

Innovation as a Goal
Rohit Kishore persuades that business can also be viewed to exist for the purpose of
creative expansion. Successful firms like Google manage to align their activities
towards the purpose of creative expansion from the perspective of all stakeholders,
especially employees. This also validates the growing importance of innovation as a
core principle for corporation survival and success.

Contract Theory
Advocates of business contract theory believe that a business is a community of
participants organized around a common purpose. These participants have legitimate
interests in how the business is conducted and, therefore, they have
legitimate rights over its affairs. Most contract theorists see the enterprise being run
by employees and managers as a kind of representative democracy.

Stakeholder Theory
Stakeholder theorists believe that people who have legitimate interests in a business
also ought to have voice in how the business is run. However, stakeholder theorists
take contract theory a step further, maintaining that people outside of the business
enterprise ought to have a say in how the business operates. Thus, for example,
consumers, even community members who could be affected by what the business
does (for example, by the pollutants of a factory) ought to have some control over the
business.

Business as Property
Some people believe that a business is essentially someone's property, and, as
such, that its owners have the right to dispose of it as they see fit (within the confines
of the law and morality). They do not believe that workers or consumers have special
rights over the property, other than the right not to be harmed by its use without their
consent. In this conception, workers voluntarily exchange their labor for wages from
the business owner; they have no more right to tell the owner how he will dispose of
his property than the owner has to tell them how to spend their wages. Similarly,
assuming the business has purveyed itsgoods honestly and with full disclosure,
consumers have no inherent rights to govern the business, which belongs to
someone else.

People who subscribe to this view generally point out that a property owner's rights
are constrained by morality. Thus, a homeowner cannot burn down his home and
thereby jeopardize the entire neighborhood. Similarly, a business does not have an
unlimited right to pollute the air in the manufacturing process.

Section 2: Benefits of Organization

Organization helps businesses achieve focus and success in reaching their goals.

Learning Objectives
 Explain the role of specialization, delegation, efficiency and departmentalization
in effective organization.
 Recognize the benefits of effective organization

Key Points
o Organization is the composition of individuals and groups directed towards
coordinated goals.
o Division of labor is the assigning of responsibility for each organizational
component to specific workers or group of workers.
o Specialization is division of labor with the added stipulation that the
responsibility for a specific task lies with a designated expert in that field.
o Good organization structure is essential for expanding business activity.
Organization structure determines the input resources needed for the
expansion of a business activity.

Terms
 efficiency

The extent to which time is well used for the intended task.

 resource
 Something that one uses to achieve an objective. An examples of a resource
could be a raw material or an employee.

Example
o Functional authority is where managers have formal power over a specific
subset of activities. For instance, the Production Manager may have the line
authority to decide whether and when a new machine is needed but the
Controller demands that a Capital Expenditure Proposal is submitted first,
showing that the investment will have a yield of at least x%; or, a legal
department may have functional authority to interfere in any activity that could
have legal consequences. This authority would not be functional but it would
rather be staff authority if such interference is "advice" rather than "order".

Organization and Goal Orientation

Organizations have their own purposes and objectives. An organization employs the
function of organizing to achieve its overall goals. It can serve to harmonize the
individual goals of the employees with the overall objectives of the firm. Individuals
form a group, and the groups form an organization. Organization, therefore, is the
composition of individuals and groups. Individuals are grouped into departments, and
their work is coordinated and directed towards organizational goals. Effective
organization allows a firm to achieve continuity, effective management, and growth
and diversification, and optimize the use of resources and provide proper treatment
to employees.

Specialization and Division of Work

The philosophy of organization is centered on the concepts of specialization and
division of work. Division of work refers to assigning responsibility for each
organizational component to a specific individual or group. Specialization occurs
when the responsibility for a specific task lies with a designated expert in that field.
Certain operatives occupy positions of management at various points in
the process to ensure coordination.

Efficiency
To make optimum use of resources such as labor, material, money, machine, and
method, it is necessary to design an organization properly. Work should be divided
and specific people should be given specific jobs to reduce the wastage of resources
in an organization. In other words, effective organization promotes a high level of
efficiency.

Delegation
Delegation is the process managers use to transfer authority and responsibility to
positions below them. Today, organizations tend to encourage delegation from the
highest to lowest possible levels. Delegation can improve an
organizations flexibility to meet customers' needs and help organizations adapt to
competitive environments.

Departmentalization
Departmentalization is the basis on which individuals are grouped into departments,
and departments into total organizations. Departmentalization allows organizations to
simultaneously work on various projects and tasks. Approach options include:

 Functional - by common skills and work tasks

 Divisional - common product, program, or geographical location
 Matrix - combination of functional and divisional
 Team - to accomplish specific tasks
 Network - departments are independent, providing functions for a central core
breaker
Organization
Any organization -- in this case, a professional society -- employs the function of
organizing to achieve its overall goals.

Section 3: Addressing Market

Needs
In today's business environment, ascertaining market needs is vital for a firm's future
viability, and even existence, as a going concern.

Learning Objectives
 Recognize the needs for markets
 Describe the relationship between the market, a firm, and a consumer
Key Points
 A market is one of many varieties of systems, institutions, procedures, social
relations, and infrastructures whereby parties engage in exchange.
 Many companies today have a customer focus (or market orientation). This
implies that the company focuses its activities
and products on consumer demands.
 Market research is for discovering what people want, need, and believe; and how
they behave.
 Market segmentation is the division of the market or population into subgroups
with similar motivations.

Terms
 Market

A group of potential customers for one's product.

 demand

The desire to purchase goods or services, coupled with the power to do so, at a
particular price.

Example
 Markets vary in form, scale, location, and types of participants, as well as the
types of goods and services traded. Examples of markets include: Physical retail
markets, such as local farmers' markets, shopping centers and shopping malls
Non-physical internet markets Ad hoc auction markets Markets for intermediate
goods used in production of other goods and servicesLabor markets and
international currency and commodity markets Stock markets, for the exchange
of shares in corporations Artificial markets created by regulation to
exchange rightsfor derivatives that have been designed to ameliorate
externalities, such as pollution permits. Illegal markets such as the market for
illicit drugs, arms, or pirated products
What is a Market?
In mainstream economics, the concept of a market is any structure that allows buyers
and sellers to exchange any type of goods, services, and information. The exchange
of goods or services for money is called a transaction. Market participants consist of
all the buyers and sellers of a certain good, thus influencing its price.

This influence is a major study of economics and has given rise to several theories
and models concerning the basic market forces of supply and demand . There are
two roles in markets, that of a buyer and that of a seller. The market facilitates trade
and enables the distribution and allocation of resources in a society.

Supply and Demand - This graph depicts where a supply, such as a business,
intersects with demand, such as the market need.

Markets allow any tradeable item to be evaluated and priced. They emerge more or
less spontaneously or are constructed deliberately by human interaction in order to
enable the exchange of services and goods. Historically, markets originated in
physical marketplaces which would often develop into—or from— small communities,
towns and cities.
A firm in the market economy survives by producing goods that persons are willing
and able to buy. Consequently, ascertaining market needs is vital for a firm's future
viability, and even existence, as a going concern.

Many companies today have a customer focus (or market orientation). This implies
that the company focuses its activities and products on consumer demands. In the
consumer-driven approach, consumer wants are the drivers of all
strategic marketing decisions. No strategy is pursued until it passes the test of
consumer research.

Every aspect of a market offering, including the nature of the product itself, is driven
by the needs of potentialconsumers. The starting point is always the consumer.

Market Research
Market research is a key factor in obtaining an advantage over competitors and is
necessary in order to determine market needs that can and should be met.

It is the systematic gathering and interpretation of information about individuals or

organizations through the use of statistical and analytic methods in order to gain
insight or support decision making, and includes both social and opinion research.
Market research provides important information that identifies and analyzes the
market's need, size, and competition; thus making it possible to determine how to
market a product.
Market segmentation is the division of the market or population into subgroups with
similar motivations. It is widely used for segmenting the various differences within the
market: geographic, personality, demographic, technographic, use of
product, psychographic, and gender. This allows firms to further distinguish market
needs by subdividing and focusing on various groups within markets.

Market Trends
Market trends are the upward or downward movement of a market during a period of
time. Analyzing these trends is another method that allows firms to decipher the
needs of markets and strive to meet them.

The market size is more difficult to estimate if one is starting with something
completely new. In this case, one would have to derive the figures from the number
of potential customers, or customer segments. Besides information about the target
market, one also needs information about one's competitors, customers, and
products. Lastly, one needs to measure marketing effectiveness.

As an example of a process of addressing market needs, imagine the release of a

new film. When performing marketing research on it, here are several practices that a
studio may use:
 Concept testing, which evaluates reactions to a film idea and is fairly rare,
 Positioning studios, which analyze a script for marketing opportunities,
 Focus groups, which probe viewers' opinions about a film in small groups prior to
release,
 Test screenings, which involve the previewing of films prior to theatrical release,
 Tracking studies, which gauge (often by telephone polling) an audience's
awareness of a film on a weekly basis prior to and during theatrical release,
 Advertising testing, which measures responses to marketing materials such as
trailers and television advertisements,
 Exit surveys, which measure audience reactions after seeing the film in the
cinema.

Section 4: Profit and Value

Profit is equal to a firm's revenue minus its expenses, while value is the present value
of the firm's current and future profits.

Learning Objective
 Differentiate between profit and value

Key Points
o Normal profit represents the total opportunity costs (both explicit and implicit)
of a venture to an investor, whereas economic profit is the difference
between a firm's total revenue and all costs (including normal profit).
o Given that profit is defined as the difference in total revenue and total cost, a
firm achieves a maximum profit by operating at the point where the difference
between the two is at its greatest.
o The value of a firm is linked to profit maximization. A firm looking to maximize
its profits is actually concerned with maximizing its value.

Term
 game theory
 A branch of applied mathematics that studies strategic situations in which
individuals or organisations choose various actions in an attempt to maximize
their returns.

Examples
o Which of the following statements is true regarding a firm's value? A) The
value of a firm is the sum of its expected profits; B) The value of a firm is the
sum of the PV of its current and future profits; or C) The value of a firm is its
current profit. The answer is B. The present value of a firm is determined by
considering both the current and expected profits of a firm.
o 1) If a firm's current profits are $10,000 and the firm is expected to earn
$10,500 in profits in each of the next 3 years, What is the value of the firm in
present term. The interest rate is 8%. A) 41,500 B) 39,170 C) 37,060 D)
40,000 The answer is C. The following equation is used to determine the
firm's value: PV(firm)=p(0) + [p(1)/(1+i)]+ [p(2)/(1+i)^2]+ [p(3)/(1+i)^3], where
p=10,00 p(1), p(2) and p(3)=10,500, and i=.08.
PV(firm)=10,000+[10,500/(1+.08)]+ [10,500/(1+.08)^2]+ [10,500/(1+.08)^3]
PV(firm)=10,000+9722+9002+8335 PV(firm)=37,060

Profit
In accounting, profit refers to the difference between the purchase and the
component costs of delivered goodsand/or services, and any operating or
otherexpenses. In neoclassical microeconomic theory, the term profit has two related
but distinct meanings. Normal profit represents the total opportunity costs (both
explicit and implicit) of a venture to an investor, whereas economic profit is the
difference between a firm's total revenue and all costs (including normal profit). In
both classical economics and Marxian economics, profit refers to the return
ofcapitalstock (means of production or land) to an owner in any productive pursuit
involving labor, or a return on bonds and money invested in capitalmarkets. By
extension, in Marxian economic theory, the maximization of profit corresponds to the
accumulation of capital, which is the driving force behind economic activity within
capitalist economic systems. Some common-use definitions of profit include the
following:
 Gross profit equals sales revenue minus cost of goods sold (COGS), thus
removing only the part of expenses that can be traced directly to the production
or purchase of the goods.
 Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
equals sales revenue minus cost of goods sold and all expenses, except for
interest, amortization, depreciation and taxes.
 Earnings Before Interest and Taxes (EBIT), or operating profit, equals sales
revenue minus cost of goods sold and all expenses except for interest and taxes.
This is the surplus generated by operations.
 Earnings Before Tax (EBT), or net profit before tax, equals sales revenue minus
cost of goods sold and all expenses except for taxes. It is also known as pre-tax
book income (PTBI), net operating income before taxes, or simply pre-tax
income.
 Earnings After Tax, or net profit after tax, equals sales revenue after deducting all
expenses, including taxes (unless some distinction about the treatment of
extraordinary expenses is made). In the U.S., the term net income is commonly
used.

Profit Maximization
It is a standard economic assumption (though not necessarily a perfect one in the
real world) that other things being equal, a firm will attempt to maximize its profits.
Given that profit is defined as the difference in total revenue and total cost, a firm
achieves a maximum by operating at the point where the difference between the two
is at its greatest. In markets that do not show interdependence, this point can either
be found by looking at graphical representations of revenue and cost directly, or by
finding and selecting the best of the points where the gradients of the two curves
(marginal revenue and marginal cost respectively) are equal.
In interdependent markets, game theory must be used to derive a profit maximizing
solution.

Value
Economic value is a measure of the benefit that an economic actor can gain from
either a good or service. It is generally measured relative to units of currency. The
interpretation, therefore, is "what is the maximum amount of money a specific actor is
willing and able to pay for the good or service? " Note that economic value is not the
same as market price. If a consumer is willing to buy a good, this willingness implies
that the customer places a higher value on the good than the market price. The
difference between the value to the consumer and the market price is called
"consumer surplus. " It is easy to see situations where the actual value is
considerably larger than the market price; the purchase of drinking water is one
example. Value is linked to price through the mechanism of exchange. When an
economist observes an exchange, two important value functions are revealed: those
of the buyer and those of the seller. Just as the buyer reveals what he is willing to
pay for a certain amount of a good, so, too, does the seller reveal what it costs him to
give up the good. Said another way, value is how much a desired object or condition
is worth relative to other objects or conditions.

In terms of a business, value is the present value of the firm's current and future
profits. The value of a firm is linked to profit maximization. A firm looking to maximize
its profits is actually concerned with maximizing its value. As such, it is important for a
firm to be able to accurately determine its present value.

Profit and Value

Profit is equal to a firm's revenue minus its expenses, while value is the present value
of the firm's current and future profits.

Section 5: Profit and Stakeholders

A stakeholder is any group or individual who can affect or who is affected by
achievement of a group's objectives.

Learning Objectives
 Understand the responsibilities of stakeholders
 Compare and contrast stakeholders and shareholders

Key Points
o The stockholders are the owners of the company, and the firm has a
binding fiduciary duty to put their needs first to increase value for them.
o Stakeholder theory argues that there are other parties involved, including
governmental bodies, political groups, trade associations, trade
unions,communities, associated corporations, prospective employees,
prospective customers, and the public at large.
o In some scenarios, even competitors are included as stakeholders.
o Stakeholders believe that an organization should strive to achieve
satisfaction among all parties involved, as opposed to solely pursuing the
highest profit.
o In some scenarios, even competitors are included as stakeholders.

Terms
 fiduciary duty

A legal or ethical relationship of confidence or trust between two or more parties.

Typically, a fiduciary prudently takes care of money for another person.

 stockholder

One who owns stock.

 stakeholder

A person or organization with a legitimate interest in a given situation, action, or

enterprise.
Examples
o In the case of a professional landlord undertaking the refurbishment of some
rented housing that is occupied while the work is being carried out, key
stakeholders would be the residents, neighbors (for whom the work is a
nuisance), and the tenancy management team and housing maintenance
team employed by the landlord. Other stakeholders would be funders and
the design and construction teams.
o In the case of a professional landlord undertaking the refurbishment of some
rented housing that is occupied while the work is being carried out, key
stakeholders would be the residents, neighbors (for whom the work is a
nuisance), and the tenancy management team and housing maintenance
team employed by the landlord. Other stakeholders would be funders and the
design and construction team.

What is a Stakeholder?
A stakeholder is an individual or group with an interest in an entity's or organization's
ability to deliver intended results while maintaining viability of
the product and/or service. The stakeholder concept was first used in a 1963 internal
memorandum at the Stanford Research Institute. It defined stakeholders as "those
groups without whose support the organization would cease to exist" .
Stakeholders
This diagram shows the typical stakeholders of a company.

In the traditional view of the firm, the stockholders are the owners of the company,
and the firm has a binding fiduciary duty to put their needs first and to increase value.
In older input-output models of the corporation, the firm converts the inputs of
investors, employees, and suppliers into salable outputs which customers buy,
thereby returning some capital benefit to the firm. By this model, firms only address
the needs and wishes of those four parties: Investors, employees, suppliers, and
customers. However, stakeholder theory argues that there are other parties involved,
including governmental bodies, political groups, trade associations, trade unions,
communities, associated corporations, prospective employees, prospective
customers, and the public at large. Sometimes even competitors are counted as
stakeholders.

Types of Stakeholders
Market stakeholders (sometimes called "primary stakeholders") are those that
engage in economic transactions with the business. Examples of primary
stakeholders could be customers, suppliers, creditors or employees. Non-market
stakeholders (sometimes called "secondary stakeholders") are those who generally
do not engage in direct economic exchange with the business, but are affected by or
can affect its actions. Examples of non-market stakeholders include the general
public, communities, activist groups, business support groups, or the media.
Stakeholders, Profit
and Corporate Responsibility
Stakeholders, as opposed to shareholders, tend to focus on corporate responsibility
over corporate profitability. Stakeholders believe that an organization should strive to
achieve satisfaction among all parties involved, as opposed to solely pursuing the
highest profit. An organization is a coalition between all stakeholders and exists to
increase the common wealth of all parties.

In the field of corporate governance and corporate responsibility, a major debate is

ongoing about whether the firm or company should be managed for stakeholders,
stockholders (called "shareholders"), or customers. Proponents in favor of
stakeholders may base their arguments on the following four key assertions:

1. Value can best be created by trying to maximize joint outcomes. For instance,
by simultaneously addressing customer wishes in addition to employee and
stockholder interests, both of the latter two groups also benefit from increased
sales.
2. Supporters also take issue with the preeminent role given to stockholders by
many business thinkers, especially in the past. The argument is
that debt holders, employees, and suppliers also make contributions and take
risks in creating a successful firm.
3. These normative arguments would matter little if stockholders had complete
control in guiding the firm. However, many believe that due to certain kinds
of board of directors' structures, top managers like CEOs are mostly in control
of the firm.
4. The greatest value of a company is its image and brand. By attempting to fulfill
the needs and wants of many different people ranging from the local population
and customers to their own employees and owners, companies can prevent
damage to their image and brand, prevent losing large amounts of sales, avoid
having disgruntled customers, and prevent costly legal expenses. While the
stakeholder view has an increased cost, many firms have decided that the
concept improves their image, increases sales, reduces the risks of liabilityfor
corporate negligence, and makes them less likely to be targeted by pressure
groups, campaigning groups and NGOs (non-governmental organizations).

Section 6: The Role of the

Nonprofit
Non profits play a vital role in society by focusing resources and providing services to
community needs without regard to profit.

Learning Objectives
 Identify the role of nonprofits in society
 Outline the characteristics of a nonprofit

Key Points
 While NPOs are permitted to generate surplus revenues, these revenues must
be retained by the organization for its self-preservation, expansion, or plans.
 Some NPOs may also be charity or service organizations. They may be
organized as corporations, trusts, or cooperatives; or they may exist informally.
 Both NPOs and for-profit corporate entities must have board members,
steering committee members, or trustees who owe the organization
a fiduciary duty of loyalty and trust.
 NPOs have controlling members or boards. Many have paid staff
including management, while others employ unpaid volunteers and even
executives who work with or without compensation (occasionally nominal).

Terms
 fiduciary

Related to trusts and trustees.

 jurisdiction

The limits or territory within which authority may be exercised.

 dividend

A pro rata payment of money by a company to its shareholders, usually made

periodically (e.g., quarterly or annually).

Nonprofits Defined
A nonprofit organization (NPO) does not distribute profits or dividends. Instead it
retains any earnings or surplus revenues to achieve its goals. An organization is
deemed eligible for nonprofit status under US Internal Revenue Code Section 501(c).

While nonprofit organizations are permitted to generate surplus revenues, these

revenues must be retained by the organization for its self-preservation, expansion, or
plans. NPOs have controlling members or boards. Many have paid staff, including
management, while others employ unpaid volunteers and even executives who work
with or without compensation . Designation as a nonprofit and an intent to
make money are not related in the United States. However, the extent to which an
NPO can generate surplus revenues may be constrained, or the use of surplus
revenues may be restricted.

Nonprofit Organizations
U.S. Navy Sailors, assigned to the aircraft carrier USS Ronald Reagan, position a
frame of a wall while helping the nonprofit group Habitat for Humanity build homes.

Some NPOs may also be charitable or service organizations; they may be organized
as a corporation, a trust, a cooperative, or they may exist informally. A very similar
type of organization, called a supporting organization, operates like a foundation, but
is more complicated to administer, holds more favorable tax status, and is restricted
in the public charities it can support. For legal classification, elements of importance
include:

 Economic activity
 Supervision and management provisions
 Representation
 Accountability and auditing provisions
 Provisions for the amendment of the statutes or articles of incorporation
 Provisions for the dissolution of the entity
 Tax status of corporate and private donors
 Tax status of the foundation

In the United States, nonprofit organizations are formed by filing bylaws and articles
of incorporation in the state in which they expect to operate. In most jurisdictions,
some of the above elements must be expressed in the charter of establishment. The
act of incorporating creates a legal entity, which enables the organization to be
treated as a corporation by law and to enter into business dealings, form contracts,
and own property as any other individual or for-profit corporation may do. Most
countries have laws that regulate the establishment and management of NPOs, and
that require compliance with corporate governance regimes. Most larger
organizations are required to publish financial reports detailing their income
and expenditures publicly.
The two major types of nonprofit organization are membership and board-only. A
membership organization elects the board, meets regularly, and has the power to
amend the bylaws. A board-only organization typically has a self-selected board and
a membership whose powers are limited to those delegated to it by the board. A
board-only organization's bylaws may even state that the organization does not have
any membership, although the organization's literature may refer to its donors as
"members. "

In many countries, nonprofits may apply for tax exempt status, so the organization
itself can be exempt from income tax and other taxes. In the United States, to be
exempt from federal income taxes, the organization must meet the requirements set
forth by the Internal Revenue Service. After reviewing the application to ensure the
organization meets the conditions (such as the purpose, limitations on spending, and
internal safeguards for a charity), the IRS may issue an authorization letter to the
nonprofit granting it tax exempt status for income tax payment, filing, and deductibility
purposes. The exemption does not apply to other federal taxes such
as employment taxes. Federal tax-exempt status does not guarantee exemption from
state and local taxes, and vice versa.

The Role of Nonprofits in Society

Nonprofit organizations play a vital role in society by focusing resources and
providing services to community needs without regard to profit. Nonprofits aid in the
development and upkeep of such sectors of society as the arts, economic
development, cultural awareness, spirituality, veterans affairs, and health and
wellness. In general, nonprofit organizations have strong ties to their local
communities. Through these ties, nonprofits are able to accomplish local
development and outreach.
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