Thursday, January 26, 2017

Defining Nonprofits

Defining Nonprofits

Few people realize just how much American society depends on the work of nonprofits. In 2006, there were more than 600,000 charitable organizations, 400,000 religious organizations, and 600,000 non-charitable organizations (ex: advocacy groups, think tanks, etc.) (Hall and Burke, 2006). These organizations provide a wide variety of benefits, ranging from social interaction to religious instruction to human services. Defining “nonprofit” can be difficult since it is an umbrella term covering many organizations. In this article, I will compare and contrast nonprofits with two other sectors, for-profit organizations and government agencies, to define the scope of the nonprofit sector.

The term “nonprofit” can refer to hospitals, churches, museums, labor unions, and trade associations, to name just a few examples. Their size, in terms of revenue and staff, varies widely. Nonprofits are usually led by a board and are tax-exempt (Hall, 2016). As noted above, some nonprofits focus on charitable causes (ex: Red Cross), while others serve a different purpose, such as representing an interest group (ex: The Heritage Foundation) or providing opportunities for socializing (ex: Lions Clubs). Nonprofits fall under one of two designations: operating and non-operating. Non-operating organizations, such as foundations, raise funds to distribute to operating organizations for program implementation (Berman, 2002). Operating nonprofits expend some efforts on fundraising but are primarily geared towards service delivery (Berman, 2002). Nonprofits receive revenue from program fees, government contracts, and donations from foundations and private individuals. Interestingly, many nonprofits have transitioned from local organizations to professional operations located in Washington, DC, with renowned directors, lobbyists, and communications specialists (Skocpol, 2003).

In contrast, for-profit organizations are driven by profit-seeking motives as their survival depends upon their profitability. This is not necessarily negative, but rather supplies a social good, since this supplies employment and needed goods and services to society (Berman, 2002). For-profits have sometimes dabbled in giving to charitable causes, but companies generally restrict this to programs for employees to give to desired charities. Leaving giving up to individuals can be more efficient because companies can focus their efforts exclusively on profitability (Berman, 2002). Unlike nonprofits, for-profits are rarely designed to specifically address societal ills. What efforts for-profits do expend to this end are referred to as “corporate social responsibility.” Nonprofits still have to be run efficiently and transparently like for-profits, but without the focus on profitability. This requires nonprofits to embrace many of the best practices of the business world. This is especially true for social enterprises — non-profits which compete with for-profits, such as hospitals and day-care centers.

The final sector, government, creates the regulatory framework for the other sectors as well as contracts with them for the provision of services. In the U.S., this delegation of service delivery is referred to as “third-party government.” For many nonprofits, government funding is their largest source of revenue (Salamon and Abramson, 1982). When I worked at the Wisconsin Department of Administration on a housing grant program, most grantees were nonprofits which could not exist but for government funding. As demand for social services increases, nonprofits fill in the gaps. Government encourages this through funding, tax-exempt status, and deductions for charitable giving (Hall, 2016). Some government bodies, such as libraries, depend heavily on volunteerism, which is the lifeblood of many nonprofits.

All three sectors are composed of organizations of various sizes and missions providing some sort of product or service. They each have organizations which operate globally, such as multi-national corporations, USAID, and Amnesty International. Ultimately, the three sectors serve different purposes and are driven by different factors (profitability, public opinion, charitable causes). This creates an interlocking system with each sector playing to its strengths.

Berman, Howard J. “Doing ‘Good’ vs Doing ‘Well’: The Role of Nonprofits in Society.” 2002. Inquiry (39): 5-11.

Hall, Peter Dobkin. “Historical Perspectives on Nonprofit Organizations in the United States.” In Renz, David (eds.), Jossey-Bass Handbook of Nonprofit Leadership and Management. Hoboken: John Wiley & Sons, 2016.

Hall, Peter Dobkin, and Burke, Colin B. “Voluntary, Nonprofit, and Religious Entities and Activities.” In S. Carter, et al. (eds.), Historical Statistics of the United States—Millennial Edition. New York: Cambridge University Press, 2006.

Salamon, Lester M., and Abramson, Alan J. The Federal Budget and the Nonprofit Sector. Washington, DC: Urban Institute, 1982.

Skocpol, Theda. Diminished Democracy: From Membership to Management in American Civic Life. Norman: University of Oklahoma Press, 2003.