Learning to Give, Philanthropy education resources that teach giving and civic engagement


Nonprofit Organizations (Definition and Examples)

By Kate Luckert

Graduate Student, Case Western Reserve University


Definition

A nonprofit organization is formed for

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the purpose of serving a public or mutual benefit other than the pursuit or accumulation of profits for owners or investors. "The nonprofit sector is a collection of entities that are organizations; private as opposed to governmental; non-profit distributing; self-governing; voluntary; and of public benefit" (Solamon 10). The nonprofit sector is often referred to as the third sector, independent sector, voluntary sector, philanthropic sector, social sector, tax-exempt sector, or the charitable sector.


Historic Roots

Approximately 1.2 million organizations are registered with the IRS as nonprofit organizations. It is estimated that millions more small formal and informal associations exist that do not register with the IRS because they have revenues of less than $5,000 per year. Nonprofit organizations in America have combined revenues of approximately $621.4 billion, which represents 6.2% of the nation's economy. An estimated 10.2 million people are employed in the sector.

Nonprofit organizations are usually classified as either member serving (addressing the needs of only a select number of individuals) or public. They take many forms:

Charities - e.g. American Red Cross, Salvation Army, YMCA

Foundations - e.g., W.K. Kellogg Foundation, Ford Foundation, community foundations

Social Welfare or Advocacy Organizations - e.g., National Association for the Advancement of Colored People (NAACP), American Civil Liberties Union (ACLU), National Rifle Association (NRA)

Professional/Trade Associations - e.g., Chamber of Commerce, American Medical Association (AMA)

Religious Organizations - e.g., churches

The definition of charitable organization in American law can be traced back to the Statute of Charitable Uses (43 Eliz. I c4) enacted by the English Parliament in 1601, which has been described as "the starting point of the modern law of charities" (Douglas, 43). When the United States Congress met to develop the first federal income tax laws, they determined that nonprofit organizations should be free from the burden of having to pay income taxes and also called upon society to support these organizations. Almost all nonprofits are exempt from federal corporate income taxes. Most are also exempt from state and local property and sales taxes. Nonprofits have received this status because they relieve the government of its burden, benefit society, or fall under the provision of separation of church and state. It is important to point out that nonprofit organizations are not prohibited from making a profit. The IRS does however restrict what organizations can do with its "profits." All money must go back into the operation of the organization. Profits cannot be disseminated among owners or investors.

The National Taxonomy of Exempt Entities classify nonprofit organizations into nine major groups:

  • Arts, culture, humanities
     
  • Education
     
  • Environment and animals
     
  • Health
     
  • Human services
     
  • International, foreign affairs
     
  • Public societal benefit
     
  • Religion related
     
  • Mutual/membership benefit

There are economic, historical, and political theories regarding the reason why nonprofit organizations exist in today's society.

Economic Theories:

Market failure - This theory is based on the premise that not enough people desire a service or program to attract for-profit corporations to provide such services. Also, the fact that an organization exists without a profit-motive instills trust in the constituent.

Government failure - The government will not provide a service because of high cost or limited interest by the public. If there is not a large presence of constituents demanding a response from government, then the government is not likely to act. A small group of individuals can create a nonprofit organization to provide mutually desired services rather then trying to convince a majority of citizens to support such efforts. There is also a cultural resistance to "big" government. Citizens are skeptical about the government being involved in all aspects of community life.

Historical Theory - Communities in America were formed well before formal government. Citizens were forced to come together to address issues within their communities and work together to form a solution. Even when government developed a presence within a community, citizens were afraid of the bureaucracy and often sought out solutions through voluntary association. Religion also provides a strong foundation for charity and altruism through scripture and a sense of duty taught within the church.

Political Science Theory - Nonprofit organizations provide an avenue for civic participation. People are able to assemble and work toward a common goal with an intent to benefit the public. Nonprofit organizations provide an outlet for pluralism and solidarity.


Importance

In a book by Lester Salamon called America's Nonprofit Sector, the author concludes that the nonprofit sector exists to serve four critical functions:

Service Provision: Nonprofit organizations provide programs and services to the community. Often times, nonprofits are formed or expanded to react to a community need not being met by the government. Nonprofits also tend to have the ability to act faster than government in response to an issue. Nonprofits do not have to wait for a majority of citizens to agree upon a proposed solution. Rather, they have the ability to react to a specialized need or a request by a small group of citizens.

Value Guardian: Nonprofit organizations provide a mechanism for promoting individual initiatives for the public good (16). Nonprofit organizations provide a means by which members of a community can take action in an attempt to change the community they live in. These actions may take the form of developing a local neighborhood watch program or, on a larger scale, developing an organization that responds to world relief efforts.

Advocacy and Problem Identification : Nonprofit organizations provide a means for drawing public attention to societal issues. Nonprofit organizations make it "possible to identify significant social and political concerns, to give voice to under-represented people and points of view, and to integrate these perspectives into social and political life" (16).

Social Capital: In America, the nonprofit sector can be seen as a bridge between capitalism and democracy. Nonprofit organizations develop a sense of community among the citizens by providing a means to engage in social welfare.


Ties to the Philanthropic Sector

Nonprofit organizations receive approximately ten percent of their income from donations. There is a common belief by the general public that this percentage is much higher. In fact, many believe nonprofit organizations receive the bulk of their income from donations. In reality, most of the income received by nonprofits is generated from fees for services, sale of products, or earned interest on investments. The second highest source of income is government grants or contracts. Private giving is merely the third highest source of income for nonprofit organizations. However, a large number of American citizens contribute to nonprofit organizations. In 1998, a reported 70% of households contributed to charity.

Volunteerism is a key component for nonprofit organizations. Volunteers serve a variety of roles within organizations. Most notably, nonprofit organizations are each governed by a volunteer board of directors. Volunteers are also utilized as fundraisers, service delivery staff, staff management, and in numerous other capacities. Volunteers bring personal experiences and professional expertise to enhance the nonprofit organization. In 1998, it is estimated that 109 million Americans volunteered an average of 3.5 hours per week in nonprofit organizations. This is equivalent to nine million full-time employees at a value of $225 billion (Gallop Organization).


Key Related Ideas

  • Advocacy

  • Arts & Humanities

  • Charities

  • Civil Society

  • Education

  • Health Care

  • Public Policy

  • Public Service

  • Religion

  • Social Services

  • Tax Law

  • Welfare System


Important Related Nonprofit Organizations

In the United States, nonprofit organizations are defined under the federal tax code as followed:

Section # Type of Organization
501 (c)(1) Corporations organized under an act of Congress
501 (c)(2) Title-holding companies
501 (c)(3) Religious, charitable, educational, etc.
501 (c)(4) Social Welfare
501 (c)(5) Labor, agriculture organization
501 (c)(6) Business leagues
501 (c)(7) Social and recreational clubs
501 (c)(8) Fraternal beneficiary societies
501 (c)(9) Voluntary employees' beneficiary societies
501 (c)(10) Domestic fraternal beneficiary societies
501 (c)(11) Teachers' retirement fund
501 (c)(12) Benevolent life insurance associations
501 (c)(13) Cemetery companies
501 (c)(14) Credit unions
501 (c)(15) Mutual insurance companies
501 (c)(16) Corporations to finance crop operation
501 (c)(17) Supplemental unemployment benefit trusts
501 (c)(18) Employee-funded pension trusts
501 (c)(19) War veterans' organizations
501 (c)(20) Legal services organizations
501 (c)(21) Black lung trusts
501 (c)(25) Holding companies for pensions
501 (d) Religious and apostolic organizations
501 (e) Cooperative hospital service organizations
501 (f) Cooperative service org. or operating educational organizations
521 Farmers' cooperatives
527 Political organizations


Important Related Web Sites

GuideStar: www.guidestar.org
Independent Sector: www.independentsector.org
Internet Nonprofit Center: www.nonprofits.org
Michigan Nonprofit Association: www.mnaonline.org/
National Council of Nonprofit Associations: www.ncna.org
The Nonprofit Resource Center: www.nprcenter.org/


Bibliography

Boris, Elizabeth T. and C. Eugene Steurele. Nonprofits and Government: Collaboration and Conflict. Washington D.C.: Urban Institute Press, 1999.

Douglas, James. "Political Theories of Nonprofit Organizations." In The Nonprofit Sector, edited by Walter W. Powell. New Haven and London: Yale University Press, 1987.

Gallop Organization. Giving and Volunteering in the United States, Survey report, May, 1999.

Hall, Peter D. "A Historical Overview of the Private Nonprofit Sector." In The Nonprofit Sector, edited by Walter W. Powell. New Haven and London: Yale University Press, 1987.

National Center for Nonprofit Boards. Ask NCNB: What You Should Know About Nonprofits: What is the Nonprofit Sector? [online]. Available: http://www.ncnb.org/QnA.asp?Category=8. (31 March 2001).

The Nonprofit Resource Center. What is a Nonprofit Organization? [online]. Available: www.not-for-profit.org. (31 March 2001).

Salamon, Lester M. America's Nonprofit Sector: A Primer. New York: The Foundation Center, 1999.