What do nonprofits actually do? If you’ve lived in the U.S. any significant amount of time you’ve likely heard of the term nonprofit. You also probably know you can claim a tax deduction by donating to your local Goodwill (if you made a donation last year and this is news to you I hope you kept those donation receipts for tax season!) and you may have even heard of the term 501(c)3, but why do you get that tax deduction and what role do nonprofits play here in the U.S.? Well, the answers to these questions are related.
In the U.S. we can think of the current political economy as consisting of three sectors: government, for-profit, and nonprofit.1 Although each of these sectors are distinct in many respects, they are inherently tied to one another and mutually influence eachother.1 The government creates and enforces laws, adjudicates disputes, and ensures the maintenance of the state as an entity. For-profit firms can be extremely diverse but have as their unifying feature a primary goal of generating earnings as income for owners or shareholders. Nonprofit organizations can be extremely diverse themselves, but can be seen as similar to one another in that they have as their end goal the provision of some type of social service to a particular group of people and/or to society at large,2 and any excess earnings they generate cannot be paid out as a form of income.3
It is really through the scope of social services provided to people, communities, and the nation that we can gain an appreciation for the role of the nonprofit sector in today’s society here in the U.S. Although the U.S. government has many social programs, over the course of U.S. history the government has played a variable role in ensuring the general wellbeing of its citizenry, at times utilizing government resources to sponsor huge initiatives related to social welfare and at other times limiting or cutting governmental programming designed to assist those in need.4 Although some for-profit entities may believe in corporate social responsibility and the need to support the wellbeing of the peoples and communities with which they interact, the for-profit sector’s motivation to increase earnings lends itself to wealth generation more so than work specifically targeted at curing social ills.1 It is the role of the nonprofit sector to fill the social needs gap created by variable government support of social welfare programs and the profit generation focus of for profit entities.1
In supporting the role of nonprofits in addressing social needs the government has granted nonprofits a tax-exempt status,4 which can mean different things depending on the specific tax laws applicable to a specific nonprofit but for the purposes of illustration I’ll use 501(c)3s as an example. Remember the Goodwill example from earlier? Well Goodwill is a nonprofit organization and, more specifically, a 501(c)3. This status allows Goodwill to not only avoid having to pay certain taxes it also allows individuals or business to donate to Goodwill and use their donations as tax deductions. While a small donation may not mean much in terms of tax deductions, on the larger scale of individuals accumulating great deals of wealth through the for-profit sector, nonprofits provide a legal and socially constructive way to avoid taxation through donation to an organization working to do good for the public.
While the roles of all sectors may overlap from time to time, the role of nonprofits in today’s U.S. society is to focus on consistent social service provision in a way the government and for-profits cannot.
1. Berman, Howard J. "Doing “Good” vs. Doing “Well”: The Role of Nonprofits in Society." INQUIRY: The Journal of Health Care Organization, Provision, and Financing 39.1, (2002): 5-11.
2. Jeavons, Thomas H. "Ethical nonprofit management." Robert D. Herman & Associates. The Jossey-Bass Handbook of Nonprofit Leadership and Management 3. Ed. David Renz. San Francisco: Jossey-Bass, 2010. 178-205. Print.
3. Hopkins, Bruce R., and Virginia C. Gross. "The legal framework of the nonprofit sector in the United States." The Jossey-Bass Handbook of Nonprofit Leadership and Management 3. Ed. David Renz. San Francisco: Jossey-Bass, 2010. 42-76. Print.
4. Hall, Peter Dobkin. "Historical perspectives on nonprofit organizations in the United States." The Jossey-Bass Handbook of Nonprofit Leadership and Management 3. Ed. David Renz. San Francisco: Jossey-Bass, 2010. 3-41. Print.