Thursday, January 29, 2015

4 Things You Need to Know about the Nonprofit Sector

Philanthropy is commendable, but it must not cause the philanthropist to overlook the circumstances of economic injustice which make philanthropy necessary.
Martin Luther King, Jr. 

Nonprofit organizations today operate in an increasingly complex and interconnected environment. In order to understand the role of nonprofit organizations today, it is helpful to look at the nonprofit sector as it relates to the public sector (government) and the private sector (business).

1. Nonprofits step in where Government and Business left off

Government offers basic services to address social needs such as the Food Share program, subsidized healthcare and public transportation. However, in a political climate of demands for tax cuts and a smaller government, the role of government in addressing social needs is shrinking. In his article, “Doing ‘Good’ vs. Doing ‘Well’: The Role of Nonprofits in Society”, Berman notes that although the role of government may decrease, the needs of society do not decrease correspondingly (Berman, 2002).

Businesses vary greatly in their social impact, but businesses simply cannot exist in the long run if they don’t make a profit. Making a positive societal impact must take the back seat to profit in a business.  Social welfare cannot be realized by the public nor private sector in these circumstances. There is a real and pressing need for nonprofit work. 

2. Nonprofits Make a Profit
Nonprofit organizations are not legally prevented from making a profit. The key difference is what they are legally permitted to do with that profit. Nonprofit organizations, unlike government and business, are subject to the doctrine of private inurement. Basically, this ensures nonprofits are operated for the benefit of those they serve, by preventing nonprofits from passing their profits on to employees and the board.

This makes nonprofits unique. Successful businesses make a profit and pass it on those with an interest in the business such as shareholders/owners and employees (though not usually in equal proportion). Moreover, we’ve surely all heard by now condemnation of the government deficit. The government ought to make a profit, too, though it is not always distributed in the same manner as in businesses (Renz, 2010).

3. Businesses have stockholders, Nonprofits have stakeholders
Businesses are ultimately accountable to their owners. The government is (supposed to be) ultimately accountable to its citizens. The nonprofit accountability arrangement varies greatly. Nonprofits based on membership (such as the American Association of University Women or the National Association for the Advancement of Colored People) are accountable to their members. Organizations that provide a service are accountable to those they serve, although this may be ineffective. Policy advocacy networks such as the Sierra Club and Amnesty International have some accountability to their members, who pay dues, and their volunteers. Other nonprofits seem to only be accountable to whichever members of society they claim as their stakeholders. The relationship is much less defined (Renz, 2010).

4. There’s no such thing as “one size fits all” in the Nonprofit Sector 
There is an incredible amount of nonprofit organizations today. These include charitable, educational, religious, scientific, social and political organizations, among many others. (Did you know the NFL is a nonprofit?) Moreover, there are many nonprofits that resemble businesses (such as microfinance organizations, like KIVA) and nonprofits that maintain a close relationship with government. Keep in mind, when considering the nonprofit sector, that nonprofit interests, goals and activities constitute a very wide range (Renz, 2010).

Berman, Howard J. 2002. Doing "Good" vs. Doing "Well": The Role of Nonprofits in Society. Inquiry 39: 5-11.

Renz, David O, ed. 2010. The Jossey-Bass Handbook of Nonprofit Leadership and Management. Jossey-Bass. San Francisco, CA.