Question

What is the key difference from a financial/governance perspective between a not-for-profit organization and a “public” company?

Answer 1

Not-for-Profit Organisations are organisations which are set up for the welfare of the society or for the promotion of art and culture in the society. These are usually set up as a charitable institution with the service motive. The trustees manage these organisations. The members of the organisation elect the trustees. The Not-for-Profit Organisations raise funds from its members as well as from the general public for meeting their objectives.

The main motive of these organisations is to provide service. However, they may earn profits in the due course. Generally, these organisations do not manufacture, purchase or sell goods or provide services. Thus, they do not need to prepare Trading and Profit and Loss A/c. They credit the funds received to the Capital Fund or General Fund A/c.

Usually, every business undertakes economic activities with a motive to earn a profit. But, there are some organizations which work with a motive to provide service to its members as well as to the general public. The trustees of these organizations are fully accountable to the members and the public. Hence, Accounting for Non-Profit Organizations become necessary. Examples of such organisations are charitable institutions, religious organisations, clubs, educational institutions, trade unions, etc.

Not-for-Profit Organisations are organisations which are set up for the welfare of the society or for the promotion of art and culture in the society. These are usually set up as a charitable institution with the service motive. The trustees manage these organisations. The members of the organisation elect the trustees. The Not-for-Profit Organisations raise funds from its members as well as from the general public for meeting their objectives.

The main motive of these organisations is to provide service. However, they may earn profits in the due course. Generally, these organisations do not manufacture, purchase or sell goods or provide services. Thus, they do not need to prepare Trading and Profit and Loss A/c. They credit the funds received to the Capital Fund or General Fund A/c.

Characteristics of Not-for-Profit Organizations

1. Service Motive: These organisations have a motive to provide service to its members or a specific group or to the general public. They provide services free of cost or at a bare minimum price as their aim is not to earn the profit. They do not discriminate among people on the basis of their caste, creed or colour. Examples of services provided by them are education, food, health care, recreation, sports facility, clothing, shelter, etc.
2. Members: These organisations are formed as charitable trusts or societies. The subscribers to these organisations are their members.
3. Management: The managing committee or the executive committee manages these organisations. The members elect the committee.
4. Source of Income: The major sources of income of not-for-profit organisations are subscriptions, donations, government grants, legacies, income from investments, etc.
5. Surplus: The surplus generated in the due course is distributed among its members.
6. Reputation: These organisations earn their reputation or goodwill on the basis of the good work done for the welfare of the public.
7. Users of accounting information: The users of the accounting information of these organisations are present and potential contributors as well as the statutory bodies.

A public company is a business whose shares can be freely traded on a stock exchange or over-the-counter. Also known as a publicly traded company, publicly held company, or public corporation. The stocks of this type of company belong to members of the general public, as well as pension funds, and other large investing organizations.

• Ownership: The ownership of a PLC lies with two or more shareholders who own the shares of the company.
• Index of Members: A public limited company needs to keep an index of its members with their names.
• Paid Up Capital: The company needs to have a minimum paid-up capital as decided by the corporate law of that country. According to the Companies Act, 2013, a PLC in India needs to keep rupees five lacs as a minimum paid-up capital.
• Perpetual Succession: The company’s existence is independent of the death, bankruptcy or insolvency of any of the member.
• Formation: A PLC can be formed with the appointment of at least two directors and one qualified company secretary.
• Directors: A public company needs to have three or more directors for its existence.
• Name: The company has to end its registered name with the word ‘limited’ for making it a PLC.
• Limited Liability: The liability of the shareholders of a public limited company in case of loss or debts is only limited to the amount of investment they have made in the company. Their assets cannot be charged liable for any such damages.
• Prospectus: It is mandatory for a public limited company to issue a prospectus which is the statement of present and plans of the company.
• Abided by Law: A public limited company has to abide by the corporate laws of the country. Indian PLCs have to follow the regulations of the Companies Act, 2013.
• Minimum Subscription: A PLC needs to acquire at least 90% amount of the shares issued by the company within a particular period.