A non-profit organisation is not “without rules” – even if its aim is not to distribute profits, it is subject to strict legal, accounting and grant-making obligations. We distinguish between non-state non-profit organisations (e.g. associations, foundations, institutes) registered in public registers and state non-profit organisations established by the state or municipalities. Registration in a register or registry is crucial for the very existence and use of subsidies. Non-profit organisations must keep separate accounts according to the type of activity and respect the purpose of the use of subsidies, otherwise they risk sanctions or the return of funds.
If you are unsure whether you have your bylaws, registry or accounting set up correctly, have your nonprofit checked by an attorney before problems arise.
What are nonprofit organizations
Nonprofit organizations are entities whose primary purpose is not to make a profit for the owners or shareholders, but to fulfill a public benefit or mutually beneficial purpose. However, this does not mean that they cannot generate revenue or even show a positive economic result. The fundamental difference with business entities lies in how any profits are handled – they must be re-used for the organisation’s activities, not distributed to the founders.
The non-profit sector is therefore made up of organisations that:
- pursue a public or community interest,
- operate on the principle of self-government,
- are legally separate from the state (at least for non-state non-profit organisations),
- operate according to specific rules.
In the Czech legal environment, it is important to distinguish between the term “non-profit organisation” as a general designation and a specific legal form. The Czech legal order does not explicitly define the term “non-profit organisation” – instead, it works with specific types of legal entities that fall under the non-profit sector.
It is the vagueness of the term that often leads to mistakes when establishing a non-profit organisation, poorly set internal rules or the mistaken belief that non-profit organisations are not subject to tax and accounting obligations. The opposite is true – in many respects the rules are stricter than for a regular business.
In practice, we often encounter that founders of a non-profit organisation count on the fact that “since we are not a company, almost no rules apply to us”. However, it is this misconception that leads to problems when auditing accounts, applying for grants or changing statutes. The sooner an organisation has the right rules in place, the fewer risks it faces in the future.
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Non-governmental non-profit organisations
Non-governmental non-profit organisations (often abbreviated as NGOs) form the largest part of the non-profit sector. They are founded by private individuals – both natural and legal – and are not directly controlled by the state, region or municipality. A typical feature is the high degree of autonomy and voluntariness.
Non-state non-profit organisations include, for example:
- associations,
- institutes,
- foundations and endowments,
- public benefit corporations established under older legislation.
These organisations can operate in a wide range of fields – from sport and culture to social services and environmental protection. It is their flexibility to respond quickly to societal needs that makes them important partners of the state and local governments.
NGOs have a relatively wide contractual freedom, but at the same time they are fully responsible for their management. They must keep accounts for non-profit organisations, comply with the purpose defined in the statutes and fulfil legal obligations towards registers and authorities. If they receive subsidies, they are subject to strict controls.
A common problem is the wrong legal form. For example, an association is ideal for membership activities but less suitable for large-scale social services. This is where it pays to consult a lawyer before setting up.
A typical example is an association that gradually begins to provide social services on a scale comparable to a professional organisation. If it stays with the original legal form, it may encounter limits on the use of subsidies and the higher personal liability of the members of the statutory body.
State non-profit organisations and their specific status
State NGOs are a special category that is often neglected or confused with ordinary authorities. They are entities which, although not established for profit, are set up by the state, region or municipality and carry out public tasks.
Typical examples of state non-profit organizations are:
Unlike non-state non-profit organisations, state non-profit organisations have limited autonomy. They manage public funds, their budgets are subject to the approval of the founder and their activities are heavily regulated by public law.
Their position in registers and records is also specific. Non-governmental non-profit organisations (e.g. associations, foundations or institutes) are entered in public registers kept by the courts, in particular the register of associations, the register of foundations or the register of institutes. These registers are publicly accessible and serve to verify basic information about the organisation.
Public institutions established by the State, a region or a municipality are registered in different ways depending on their type. Some are also entered in public registers (e.g. municipal and regional contribution organisations in the commercial register), others have separate public registers maintained by administrative bodies (e.g. the register of public research institutions maintained by the Ministry of Education and Science).
From a legal point of view, it is important that state non-profit organisations are subject to different rules of liability, procurement and management control. It is the lack of knowledge of these differences that can lead to serious misconduct, especially when an organisation combines public and private sources of funding.
It is the combination of public funds and private sources that is one of the riskiest areas where it is very easy to fall foul of the law without knowing the rules.
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Register and registry of non-profit organisations
The terms register of non-profit organisations and register of non-profit organisations are often used interchangeably, although they are not the same. The Register of Non-Profit Organisations is a general term for the public registers kept by the courts in which, for example, associations, foundations or institutes are registered. The registration has a constitutive meaning – without it the organisation does not legally exist.
The register of non-profit organisations is, on the other hand, a broader term that includes various registration systems maintained by the State, for example for statistical purposes, the use of subsidies or the control of management. Some registers are not publicly accessible, while others serve only specific bodies.
Entry in the correct register is particularly important if an organisation wants to:
- apply for subsidies,
- enter into contracts with public administrations,
- act as a trusted partner.
Errors in entries, outdated data or discrepancies between the actual situation and the records can lead to rejection of a grant application or even to sanctions. A regular check of the data in the register of non-profit organisations should therefore be a matter of course.
If you want to trace a non-governmental non-profit organisation, you can do so in the online public register at justice.cz, where you can search by name or registration number. In the case of state-owned non-profit organisations, it is necessary to use the records kept by their founder or public databases used for subsidies and management.
If you are not sure whether your organisation’s entry in the register is up-to-date and complete, it is worth checking it – formal errors are often the cause of problems when dealing with the authorities.
Accounting for non-profit organisations and management rules
Accounting for non-profit organisations has its own specificities, which differ significantly from accounting for business entities. The basic principle is the separation of the main (non-profit) activity from any ancillary economic activity. This is where most errors arise, which can have tax and subsidy implications.
Non-profit organisations are obliged to keep accounts:
- transparent,
- transparent,
- in accordance with the purpose for which they were established.
Special attention is paid to earmarked funds, typically grants or donations. These funds cannot be used arbitrarily and their use must be accurately documented. Incorrect accounting for non-profit organisations is one of the most common reasons for the return of grants.
Another specificity is the obligation to publish financial statements for certain types of non-profit organisations. Transparency is a key element of credibility in the non-profit sector – not only with the state, but also with donors and the public.
In practice, this is often not a deliberate violation of the rules, but rather poorly set internal processes or a failure to separate individual sources of funding in the accounts.
The specific accounting regime varies according to the legal form and size of the organisation, but typically a distinction needs to be made between core and economic activities and earmarked funds need to be tracked
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Grants for non-profit organisations: opportunity and risk
Grants are often seen by NPOs as a major source of funding, but they also represent a significant legal risk. Each grant is linked to specific conditions, the breach of which may lead to an obligation to repay the funds or to further sanctions.
The process of obtaining a grant usually involves:
- meeting the formal conditions (registration in the register),
- a properly prepared project,
- interim and final accounts.
Non-profit organisations often underestimate the legal aspect of grant relations, even though grant agreements are both public and private law obligations. Any change to the project, budget or deadline should be consulted.
It is in these situations that it becomes clear that legal issues of NPOs cannot be dealt with “retrospectively” but need to be addressed in advance. Our experience confirms that pre-application legal assistance is significantly cheaper than dealing with problems after the audit. It is in these cases that the role of an attorney in the nonprofit sector is absolutely crucial.
Consultations with an attorney are particularly worthwhile when choosing a legal form, amending bylaws or founding documents, entering grant programs, and dealing with the liability of statutory bodies.
We can also help you set up the rules so that you can develop your activities without unnecessary risks and penalties.
Non-profit organisations are of great social importance, but their functioning is based on solid legal foundations. The better the rules are set up from the start, the more energy the organisation can devote to what is truly its mission.
Summary
Not-for-profit organisations are entities whose aim is not to distribute profits but to fulfil a public or mutually beneficial purpose, and they too are subject to fairly strict legal and financial rules. The non-profit sector includes both non-state non-profit organisations, such as associations, foundations, endowments or institutes, which are established by private individuals and entered in public registers maintained by the courts, and state non-profit organisations established by the state, regions or municipalities, which are registered in registers maintained by public authorities. Entry in a register or registry of non-profit organisations is crucial not only for the very existence of the organisation, but also for the possibility of concluding contracts, drawing subsidies and acting as a trustworthy partner. Non-profit organisations must keep their accounts for NPOs transparently and in accordance with their purpose, especially when managing earmarked funds such as NPO grants or donations, the misuse of which may lead to sanctions or repayment obligations. Precisely because of the differences between the different types of organisations, the specific obligations in the field of accounting, registers and grants, as well as the potential personal liability of the members of the management, it pays in practice to have the legal issues of a non-profit organisation dealt with in a timely and professional manner.
Frequently Asked Questions
Can a non-profit organization employ workers and pay wages?
Yes, employment is a normal part of the functioning of the non-profit sector. It is crucial that wages are in line with normal conditions and are not abused to circumvent the prohibition on profit sharing.
What is the difference between a non-profit organization and a public service?
Public service is an activity, not a legal form. It can be provided by both a non-profit organisation and a business entity if it meets the legal conditions.
Can a non-profit organization do business in the long term?
It depends on the legal form. For example, an association may carry out an ancillary economic activity (business) in addition to its main activity if it supports its main activity or makes economic use of its assets. In the case of foundations, on the other hand, the possibilities of entrepreneurship are significantly limited.
Who is liable for damage caused by a non-profit organization?
Primarily the organisation as a legal entity, but in some cases members of the statutory body may also be liable.
Can multiple sources of funding be combined at the same time?
Yes, but it is necessary to keep their use strictly separate, especially when it comes to subsidies and earmarked donations.
