overview of the nonprofit sector

© 2014 SAGE Publications, Inc.

Chapter 2: Overview of the Chapter 2: Overview of the Nonprofit SectorNonprofit Sector


Historical OverviewHistorical Overview

Deep roots in American history and culture

•Greco-Roman culture emphasis on• Community• Citizenry• Social responsibility

•Judeo-Christian culture of helping others


The Industrial RevolutionThe Industrial Revolution

The rise of great wealth resulting from the Industrial Revolution led to the modern era• John D. Rockefeller• Andrew Carnegie’s Gospel of Wealth (1889)


Charity versus PhilanthropyCharity versus Philanthropy

Charity

Giving intended to meet current individual human needs or to alleviate current human suffering that is often emotionally driven and impulsive•Feed the homeless•Aid victims of a natural disaster

Philanthropy

Giving designed as a long-term investment in the infrastructure of society•Construction of hospitals•Endowments for universities•Charitable foundations intended to exist in perpetuity


Searching for a Common Searching for a Common VocabularyVocabulary

• “Nonprofit” terminology does not fully capture the purpose or diversity of organizations in the sector

• Possible alternatives• Independent sector• Third sector• Charitable sector• Voluntary sector• Tax-exempt sector• Civil society sector• Social enterprise and social sector


Size of the Nonprofit Sector in the Size of the Nonprofit Sector in the U.S.U.S.

• 1.9 million tax-exempt organizations• 1.4 million charitable nonprofits -- 501(c)(3)• 138,000 501 (c) (4)

• 13.5 million employees (10% of U.S. workforce)• $668 billion in wages and benefits to employees• $1.1 trillion in spending (5% of U.S. GDP)• $4.3 trillion in total combined assets of all

nonprofitsSource: Independent SectorData from 2012


Strategies for Categorizing Strategies for Categorizing NonprofitsNonprofits

• Purposes and activities• National Taxonomy of Exempt Entities (NTEE)• IRS classifications

• Who benefits from nonprofit activities• Salamon’s Anatomy

• Degree to which nonprofits are commercialized or use business principles and methods


IRS Classifications: Social Welfare IRS Classifications: Social Welfare OrganizationsOrganizations

• IRS tax code – 501(c)(4)• Vast majority are advocacy organizations:

organizations "to further the common good and general welfare of the people of a community“

• Small number are HMOs and other medical and dental insurance plans

• Key differences between 501(c)(3) and 501(c)(4) status• Both groups are tax-exempt, but gifts made to

501(c)(4) organizations are not tax deductible• 501(c)(4) organizations do not face the same

limitations on political activity as 501(c)(3) organizations


IRS Classifications: Charitable IRS Classifications: Charitable NonprofitsNonprofits

• IRS tax code -- 501(c)(3)• Requirements for receiving 501(c)(3) status• Organization’s mission and work must fall under

at least one of eight categories defined by the IRS• Organization must meet the non-distribution test• Individual owners are not receiving benefits

from the organization’s assets• Managers are not being personally enriched

through excessive compensation• Organization must limit its political activities• Cannot support or oppose candidates for public

office• Limits on expenditures on lobbying


IRS Classifications: Charitable IRS Classifications: Charitable SubsectorsSubsectors

• Religious congregations• Arts, culture, and humanities• Education• Environment and animals• Health• Human service• International and foreign affairs• Funding intermediaries


IRS Classifications: Public Charities IRS Classifications: Public Charities and Private Foundationsand Private Foundations

• Both are 501(c)(3) organizations• Definitions• Public charities -- organizations that receive

most of their support from a relatively diverse set of donors or from government

• Private foundations -- organizations with that receive most of their support from a single donor or a small group of donors

• Differences in treatment• Taxes• Limits on lobbying


Salamon’s AnatomySalamon’s Anatomy

• Classifying nonprofit organizations by who receives the principal benefit of the organization’s activities• Member serving versus public serving• Member serving organizations exist primarily

to secure benefits for the people who belong to them or who support them• Public serving organizations exist primarily to

promote some aspect of social welfare


Social Enterprise SpectrumSocial Enterprise Spectrum

• Derived from Enterprising Nonprofits: A Toolkit for Social Entrepreneurs (Dees et al., 2001 )• Two extremes• Purely philanthropic• Purely commercial

• Organization’s placement on the spectrum• General motives, methods, and goals• Relationships with key stakeholders


Hybrid Models and Controversy over Hybrid Models and Controversy over CommercializationCommercialization

• Sabeti (2009)• Increasing use of business methods by nonprofits• Growing responsiveness of business to social

concerns• Movement to create a new legal category that

recognizes hybrid models• Low-profit, limited liability company

• Controversy over commercialization• Pro -- Reduces nonprofits’ dependence on

government and charitable giving, allowing for greater independence

• Con -- Leads some nonprofits to focus on the financial bottom line at the expense of their social missions


Commercialization and Tax IssuesCommercialization and Tax Issues

• Common misunderstandings -- nonprofit organizations cannot earn profits and are always exempt from taxation• Nonprofits are exempt from taxation on

revenues related to activities that directly address their social missions

• Revenues from activities that are not related to the mission are subject to the unrelated business income tax (UBIT)

• Concern about engaging in unrelated business activities• Substantial reliance would put the organization’s

tax exempt status in jeopardy


Implications for Nonprofit Implications for Nonprofit ManagersManagers

• Nonprofit management as a balancing act• Organization’s mission against financial

sustainability• Nonprofit sector’s unique traditions against

rapid changes in competitive markets• Social and political forces against core values

and independence• Nonprofit management requires a unique blend

of skills, distinguishing it from management in government or the for-profit sector

overview of the nonprofit sector

News & Politics

sage publications

nonprofit organizations

social sector

advocacy organizations

diversity of organizations

to501c4 organizations

public serving organizations

deductible 501c4 organizations