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The study of legal foundation of the non-profit sector functioning

Department: Centre for Financial and Economic Decisions in Education

The non-profit sector is an integral part of the modern market economy. Its specifics are a conceptual focus on the implementation of a certain mission of the organization rather than profit making.

In Russia, by the mid-1990s, a large sector of non-profit organizations had emerged (about 665 623 organizations in total as of October 1, 2006). Among them, about half were non-governmental organizations of the third sector of the economy. 

Third sector organizations play a crucial constructive role in the formation of a modern civil society, ensuring democracy, protecting citizens’ rights and freedoms. We also note their contribution to solving nationwide and regional tasks related to the development of the economy and the social sphere.

The activity of non-profit organizations is regulated by Russian laws (first and foremost, the Civil Code of the Russian Federation (CC of RF) and the Federal Law on “Non-Profit Organizations”) passed in the 1990s.

At the same time, the current laws on non-profit organizations (NPOs) have serious flaws. The main problem is the legal form of non-profit organizations. Thus there is a need to improve and develop these laws. At the same time, direct adoption of foreign experience and theoretical developments on this topic in other countries is impossible due to material differences in the structure of Russian legislation.

The objective of this research is to consider proposals to create a favorable legal and regulatory environment for the implementation of socially-important initiatives by citizens and legal entities.

As part of this, we have analyzed the need to establish an institutional framework adequate for organizations whose creation and activity is not aimed at making a profit. In terms of the theory of firms, i. e. in the context of contracts, we have discussed the issue of identifying cases when non-profit organizations are more appropriate than profit-making ones.

We have analyzed the legal framework of Russia’s third sector, considered the forms of non-profit organizations envisaged by the Civil Code of the Russian Federation, Federal Law on Non-Profit Organizations, the laws regulating activity of some organizations of this type, and provided characteristics of these forms.

As part of the project, we have conducted a survey among experts on the problems and development areas of developing a legal framework for the functioning of the non-profit sector. These experts included those representing functioning non-profit organizations and state-run institutions related to the activity of the non-profit sector.

An analysis of the legal framework of the Russian third sector has resulted in several conclusions. The most important ones are: 

- gaps in determining the range of non-profit organizations;

- insufficient legal regulation of the relationship between founders, members of non-profit organizations and their supporters;

- immature legal regulation of the entrepreneurial activity of non-profit organizations;

- absence of difference between non-profit organizations that pursue different objectives;

- inefficiency of mechanisms of state control over the activity of  non-profit organizations.

Based on the results of this research, we have determined recommendations to solve the problems of NPO legal regulation:

1. Supporting flexibility of NPO forms in terms of the interests of their founders/members.

2. Specification of requirements for acceptable entrepreneurial activity of NPOs.

3. Legal groundwork for strengthening control over NPO activity on the part of their members and founders.

4. Development of legal regulation of NPO activity pursuing socially important objectives and claiming support from other people and the state.

5. Development of regulation in the area of providing benefits to NPO.

We have developed the conceptual foundations of the Federal Law on Non-Profit Organizations and a rough draft of it. The draft defines a non-profit organization, its place in the structure of non-profit organizations, including norms regulating membership in NPOs, its activity, raising and using income, closing major deals as well as issues of NPO management, control over the use of its property, reporting and disclosing information, establishment, and the reorganization and liquidation of NPOs.