Tuesday, January 27, 2015

What is a Sector Anyway?

The term “nonprofit sector” has become something of a buzzword in our modern society, but what does it mean? How is a nonprofit different than any other business? To begin with the most superficial definition, nonprofits are a varied group of corporations that straddle the divide between the government and for-profit sectors. Nonprofits, by definition, perform work in the interest of societal good (like government) but are privately operated (like for-profit businesses), but they are distinct from each sector in important ways too.

Let’s consider first how they are distinct from for-profit businesses. Two important characteristics distinguish these groups: ownership or governance and the goal of the corporation’s activities. For-profit corporations are owned by a group of individuals who purchased shares in the company. Their goal as an organization is to make as much money as possible for those shareholders or owners. Nonprofits, in contrast, are prohibited by law from generating profit for individuals that are associated with the organization. Instead of owners, nonprofits are governed by a board of directors that are often dedicated to the cause that the nonprofit serves and are not compensated for their leadership in the organization (Renz 42-3). None of this is to say that nonprofits and for-profits can’t hold the same values, indeed, businesses are becoming more vocal advocates of social issues and nonprofit and for-profit partnerships sometimes provide advantageous vessels for problem solving in the name of public good.

While nonprofits and for-profits tend to be as different as night and day in their core missions, nonprofits and public sector entities have more in common there. Both public and nonprofit actors work towards the betterment of society. Again, ownership or governance is the key difference between public and nonprofit sectors. Because government entities are funded by tax-payer money they are subject to the desires of their owners – voters. The activities of the bureau or office are dependent upon the prevailing direction of the political winds and how public opinion favors government involvement in societal affairs (Berman 6).

Nonprofit funding, on the other hand, comes from a myriad of sources: grants from private foundations, grants from government, donations from individuals, donations from companies, membership dues, the sale of goods and services, the list goes on. The distinction between the public and nonprofit sector here is that nonprofit donors are not compelled to give money as a nation’s citizens are compelled to pay taxes. While it may be wise for a nonprofit to please its donors in order to continue to secure funds from those sources, they are not legally obliged to do so.

Government and nonprofits often work together to provide public goods for society to an even greater extent than nonprofits and for-profits. A classic case for government intervention in economic and societal affairs is the market failure or situations where it’s impossible to make money by providing a good so the government steps in to do so. Likewise, nonprofits address market failures by providing goods or services of public benefit that others cannot provide for economic or political reasons (Renz 186). Due to this, partnership between government and nonprofits often arises naturally because they seek to address the same societal problems.

Nonprofits today take a multitude of forms in terms of funding sources, services they provide, labor structure, and organizational culture, but they all seek to fill important gaps in public service that elude government and for-profit actors. In a world with increasing social consciousness, nonprofits have more opportunities to work collaboratively with all sorts of other groups and organizations and reinvent what it means to work in the nonprofit sector.

Renz, David O, ed. 2010. The Jossey-Bass Handbook of Nonprofit Leadership and Management. Jossey-Bass. San Francisco, CA. 
Berman, Howard J. 2002. Doing "Good" vs. Doing "Well": The Role of Nonprofits in Society. Inquiry 39: 5-11.