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Nonprofit Organizations

Nonprofit Organizations

Nonprofit organizations are institutions that conduct their affairs for the purpose of assisting other individuals, groups, or causes rather than garnering profits for themselves. Nonprofit groups have no shareholders; do not distribute profits in a way that benefits members, directors, or other individuals in their private capacity; and (often) receive exemption from various taxes in recognition of their contributions to bettering the general social fabric of the community.

Nonprofit groups "are as diverse as the National Football League, Harvard University, and Fannie Mae. A third of these organizations are churches," Roz Ayres-Williams wrote in Black Enterprise. "Because nonprofits cover so many fields of interestcharity, religion, health, science, literature, wildlife protection, the arts, even sportsit's easy to find a niche, whatever your calling."

Nonprofit organizations are far more important to the overall U.S. economy than is generally recognized. Indeed, some sources indicate that the sum total of nonprofit groups comprise a third sector of the American economy, along with the private (business) and public (government) sectors. According to a report published by the National Center for Charitable Statistics there were just shy of 1.4 million nonprofit organizations active in the U.S. in 2004, 59 percent were public charities, and 41 percent private foundations.


A wide range of charitable and other institutions are classified as nonprofit organizations under the Internal Revenue Code. Many of these qualify under the definition provided in Section 501(c)(3) of the Code, which stipulates that all of the following qualify for tax-exempt status: "Corporations, and any community chest, fund or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes, to foster certain national or international amateur sports competition, or for the prevention of cruelty to children or animals," provided that the institutions adhere to basic standards of behavior and requirements of net earnings allocation.

Charitable Organizations

Charitable institutions comprise the bulk of America's nonprofit organizations. These include a wide variety of institutions involved in the realms of poverty assistance (soup kitchens, counseling centers, homeless shelters, etc.); religion (churches and their ancillary possessions, such as cemeteries, radio stations, etc.); science (independent research institutions, universities); health (hospitals, clinics, nursing homes, treatment centers); education (libraries, museums, schools, universities, and other institutions); promotion of social welfare; preservation of natural resources; and promotion of theatre, music, and other fine arts.

Advocacy Organizations

"These groups attempt to influence the legislative process and/or the political process, or otherwise champion particular positions," explained Bruce R. Hopkins in The Law of Tax-Exempt Organizations. "They may call themselves 'social welfare organizations' or perhaps 'political action committees.' Not all advocacy is lobbying and not all political activity is political campaign activity. Some of this type of program can be accomplished through a charitable organization, but that outcome is rare where advocacy is the organization's primary undertaking."

Membership Groups

This kind of nonprofit organization includes business associations, veterans' groups, and fraternal organizations.

Social/Recreational Organizations

Country clubs, hobby and garden clubs, college and university fraternity and sorority organizations, and sports tournament organizations all can qualify as nonprofit organizations, provided that they adhere to basic guidelines of net earnings distribution, etc. Unlike other tax-exempt organizations, however, their investment income is taxable.

"Satellite" Organizations

Hopkins pointed out that "some nonprofit organizations are deliberately organized as auxiliaries or subsidiaries of other organizations." Such organizations include cooperatives, retirement and other employee benefit funds, and title-holding companies.

Employee Benefit Funds

Some profit-sharing and retirement programs can qualify for tax-exempt status.


All nonprofit organizations are faced with the decision of whether or not to incorporate. As Ted Nicholas noted in The Complete Guide to Nonprofit Corporations, there are many benefits associated with incorporating: "Some are the same as those commonly enjoyed by for-profit business corporations. Others are unique to the nonprofit corporation. Perhaps the greatest advantages of allgranted exclusively to organizations with bona fide nonprofit statusis exemption from taxes at federal, state, and local levels." In addition to tax exemption, Nicholas cited the following as principal advantages of forming a nonprofit corporation:

  • Permission to solicit fundsMany nonprofit organizations depend on their ability to solicit funds (in the form of gifts, donations, bequests, etc.) for their very existence. Nicholas noted that whereas some states bestow a fund-raising privilege on nonprofit corporations as soon as their articles of incorporation are filed, other states require groups to fulfill additional obligations before granting permission to solicit funds.
  • Low postage ratesMany nonprofit corporations are able to use the U.S. mail system at considerably lower rates than private individuals or for-profit businesses. To secure these lower rates, nonprofits must apply to the Postal Service for a permit, but this is generally not a major hurdle, provided that the nonprofit group has its affairs in order. "The importance of the mailing rate advantage is directly proportional to the volume of mail the nonprofit corporation generates in the course of its business," said Nicholas. "Membership solicitations are usually mailed third class. Nonprofit corporations that rely on membership income can use the mail even more extensively to service their members. So potential savings from a special mailing permit are considerable."
  • Exemption from labor rulesNonprofit organizations enjoy exemption from the various rules and guidelines of union collective bargaining, even if their work force is represented by a union.
  • Immunity from tort liabilityThis advantage is not available in all states, but Nicholas observed that some states still provide nonprofit charitable organizations with immunity to tort liability. "It is important to recognize, however, that where it exists, the immunity protects only the nonprofit corporationnot the agent or employee where negligence injures someone."

In addition, nonprofit corporations enjoy certain advantages that are also bestowed on for-profit corporations. These include legal life (nonprofit corporations are guaranteed the same rights and powers of individuals), limited personal liability, continued existence beyond the involvement of original founders, increased public recognition, readily available information on operations, ability to establish employee benefits programs, and flexibility in financial recordkeeping.

But there are also certain disadvantages associated with incorporating. Nicholas cited the following as principal drawbacks:

  • Costs associated with incorporationAlthough these costs are usually not too excessive, especially for organizations of any size, incorporation does generally involve some extra costs.
  • Additional bureaucracy"An unincorporated nonprofit organization can be structured so informally that its operators could keep whatever records they chose on the backs of envelopes or as scribbled notes on paper napkins," said Nicholas. "Not so in a nonprofit corporation. As a legal entity, the corporation is subject to some specific recordkeeping obligations set down by the state in which it is incorporated." In addition, there are certain activity guidelines to which incorporated organizations must adhere.
  • Sacrifice of personal controlDepending on where incorporation takes place, the organization may have to appoint a board of directors to oversee operations (although founders of nonprofit groups can often exercise considerable control in influencing the composition of the board and the flavor of corporate bylaws and articles of incorporation). Founders and directors of unincorporated groups are under no such obligation.

"Generally, the advantages far outweigh the disadvantages," summarized Hopkins. "The disadvantages stem from the fact that incorporation entails an affirmative act of the state government: It 'charters' the entity. In exchange for the grant of corporate status, the state usually expects certain forms of compliance by the organization, such as adherence to rules of operation, an initial filing fee, annual reports, and annual fees. However, these costs are frequently nominal and the reporting requirements are usually not extensive."


"Being enthusiastic, imaginative, and creative about establishing a nonprofit organization is one thing," observed Hopkins. "Actually forming the entity and making it operational is another. For better or worse, the exercise is much like establishing one's own business. It is a big and important undertaking, and it should be done carefully and properly. The label 'nonprofit' does not mean 'no planning.' Forming a nonprofit organization is as serious as starting up a new company." He recommended that individuals interested in forming a nonprofit organization begin by determining the organization's main purpose and functions. The next step involves choosing a category of tax-exempt status to match its functions. From there, would-be founders need to study a wide range of issues, many of which are also basic considerations for small business owners and other individuals involved in for-profit endeavors. Often, the counsel of a good attorney and/or accountant can be valuable at this stage. Primary actions include the following:

  • Decide what legal form the organization will take (public charity or private foundation, incorporated or unincorporated, etc.)
  • If incorporating, take necessary legal steps to make that decision a reality (devise bylaws, submit articles of incorporation, etc.)
  • Investigate options and decide on principal organization programs and emphases
  • Determine the leadership of the organization (directors, officers, primary staff positions)
  • Define compensation for such positions
  • Find a physical location for the organization (factors here can range from variations in state law to availability of reasonable office space)
  • Put together a strategic plan for achieving organization goals at both community and larger levels
  • Decide how to go about funding those goals (gifts, grants, unrelated income, etc.?)
  • Determine which media avenues will be best for publicizing the organization's goals and securing volunteers
  • Devise an ongoing business plan that 1) serves as a blueprint for institution goals and development, and 2) can be periodically reviewed and adjusted as appropriate.


Nonprofit institutions can turn to several different methodologies to raise funds designed to support their mission. This is especially true for nonprofits that have tax-exempt status, because it permits donors to deduct their gifts from their own personal income tax liability. Major avenues of fundraising used by nonprofit organizations include the following: fundraising events (dinners, dances, charity auctions, etc.); direct mail solicitation; foundation grant solicitation; in-person solicitation (door-to-door canvassing, etc.); telemarketing; and planned giving (this includes bequests, which are given to the organization after the donor's death, and gifts made during the donor's lifetime through trusts or other agreements).

Effective Solicitation and Revenue Management

In order to prosper, nonprofit institutions not only need to know where the sources of funding are, they also need to know how to solicit those funds and how to effectively manage that revenue when it comes into their possession.

Certainly, solicitation of donors (whether they take the form of individuals, corporations, or foundations) is a vital component of many organizations' operations. After all, most activities can only be executed with funding. But many nonprofit institutions are not accomplished in this area, either because they do not allocate adequate resources or because of problems with execution. Writing in Fund Raising Management, Robert Hartsook listed the following as common solicitation errors that nonprofit groups make:

  • Not listening to donor expectations
  • Unwarranted assumption of a donor's willingness to contribute
  • Lack of follow-up after initial contact
  • Inadequate research on potential donors and their ability to contribute
  • Inability to close presentation with donor commitment
  • Neglecting to establish rapport with potential donors prior to solicitation
  • Framing solicitation as "begging" rather than as a reasonable request for help with a worthy cause
  • Neglecting to tailor solicitation to individual donors
  • Approaching potential donors without knowledge of how donations impact them in the realms of tax deductions, etc.

Of course, even the most effective solicitation campaigns will wither if the organization proves unable to allocate its financial and other resources wisely. Fundraising begins by determining exactly what financial and human resources are needed to accomplish the organization's mission. In the short run, fundraising may be successful based on the organization's vision and the promises it makes to help its clients and community. In the longer run, contributors will want to see results. Performance is what counts. Indeed, an organization may be devoted to addressing a perfectly worthwhile cause, and its membership may be enthusiastic and dedicated, but most nonprofit organizationsand especially charitable onesrely on funds from outside sources. And poorly run nonprofits will find that their revenue streams will dry up quickly if they do not leverage their funds wisely.


Observers have pointed to several trends in the nonprofit community that are expected to continue or develop in the next few years. These range from changes in fund-raising targets to expanded competition between nonprofit organizations to regulatory developments. The following is a listing of some issues that nonprofit organizations will be tracking in the coming years:

  1. Increased emphasis on retaining donorsAccording to Robert F. Hartsook of Fund Raising Management, "Non-profit organizations will focus on the renewal of donors rather than on the acquisition of new ones. As our country's population growth begins to plateau, it will be necessary for non-profits to more keenly target their marketing efforts."
  2. Corporate givingCorporate giving to philanthropic causes has emerged as a major marketing tool for corporations in recent years, and this source of funds is expected to assume even greater importance as federal and state governments pare back their spending on various social programs.
  3. Increased reliance on volunteerismReduced government expenditures on social programs is also expected to spur increased demand for volunteers who can meet the expected growth in organization activity. This need will be especially acute for nonprofit organizations primarily involved in charitable activities.
  4. Competition with for-profit enterprisesMany analysts believe that this issue could have tremendous implications for nonprofit organizations in the future. Spurred by representatives of the for-profit small business community, regulatory agencies have undertaken more extensive reviews of ways in which some activities of tax-exempt groups allegedly damage the fortunes of for-profit businesses (who, of course, are subject to local, state, and federal taxes). Much of the controversy in this area centers around the definition and treatment of unrelated business income (income generated by tax-exempt organizations from ventures that are unrelated to their primary mission). "There is a potential that all of this will lead to nothing," wrote Hopkins, "or it could bring an in-depth inquiry into the federal and state law distinctions between for-profit and non-profit organizations, the rationale for the tax exemption of certain types of nonprofit organizations, and whether some existing tax exemptions are outmoded and some new forms of tax exemption are required."
  5. Continued emphasis on planned giving"Nonprofit organizations will enjoy a significant increase in realized bequests," said Hartsook. "This will happen as a result of planned giving programs put in place 10 to 15 years ago. With the evidence at hand of how successful planned giving can be, many institutions will increase their dependence on this methodology."
  6. Continued dominance of women in the nonprofit communityAccording to Fund Raising Management, women occupied approximately two-thirds of all staff positions in nonprofit organizations in the mid-1990s, a percentage that may increase in the coming years.
  7. Increase in government regulation among nonprofitsGovernment oversight of fundraising activities may continue to increase at both the state and federal levels, at least in part because of the solicitation practices of some "fringe philanthropic groups," said Hartsook. "Unfortunately, telemarketing for nonprofit organizations has received a bad name because of fringe philanthropic organizations that solicit and collect large sums of moneywhile dedicating most of those funds to the costs of fund raising and salaries." According to Hopkins, this increase in government regulation may be especially evident at the state level: "States that have formerly foregone the desire for a fund-raising law have suddenly decided that their citizens now need one. States with fund-raising regulation laws are making them tougher. Those who administer these lawsthe state regulatorsare applying them with new vigor."
  8. Growth in self-regulation within the nonprofit communitySelf-regulation within various sectors of nonprofit operation underwent a noticeable increase in the late 1980s and early 1990s, and this trend is expected to continue with the introduction of new certification systems, codes of ethics, and watchdog groups.
  9. Major donors will maximize benefits from contributionsAccording to Hartsook, major donors will increasingly incorporate aspects of planned giving into their philanthropic efforts in order to maximize their tax deductions. "Significant gift giving will incorporate an aspect of planned gifts in order to afford the donor maximum tax deductions," he stated. "As the level of tax recognition diminishes, major donors will turn to this methodology in order to maximize tax advantages."


Ayres-Williams, Roz. "The Changing Face of Nonprofits." Black Enterprise. May 1998.

Bray, Ilona M. Effective Fundraising For Nonprofits: Real World Strategies That Work. Nolo, March 2005.

Drucker, Peter F. Managing the Non-profit Organization: Principles and Practices. Harper Business, 1990.

Hartsook, Robert F. "Predictions for 1997." Fund Raising Management. January 1997.

Hartsook, Robert F. "Top Ten Solicitation Mistakes." Fund Raising Management. March 1997.

Hopkins, Bruce R. The Law of Tax-Exempt Organizations. Eighth Edition. John Wiley & Sons, 2003

Hopkins, Bruce R. A Legal Guide to Starting and Managing a Nonprofit Organization. Second Edition. John Wiley & Sons, 1993.

Mancuso, Anthony. How to Form a Nonprofit Corporation. Seventh Edition. Nolo, July 2005.

Nicholas, Ted. The Complete Guide to Nonprofit Corporations. Enterprise Dearborn, 1993.

Schoenhals, G. Roger. On My Way in Planned Giving. Planned Giving Today, 1995.

"U.S. and State Profiles." National Center For Charitable Statistics. Available from Retrieved on 2 May 2006.

Warwick, Mal. "Outsider-In Marketing: A New Way to Look at Marketing for Nonprofits." Nonprofit World. 1997.

                              Hillstrom, Northern Lights

                               updated by Magee, ECDI

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Nonprofit Organizations

Nonprofit Organizations

In the United States, nonprofit organizations (NPOs) are organizations that qualify for tax-exempt status under the U.S. Internal Revenue Code. About half are public charities, to which donors can deduct contributions from their taxes. Private foundations also are charitable organizations, but they are not public charities. They exist primarily to fund charities or individuals. Other types of tax-exempt organizations include social welfare, labor, or agricultural organizations, business leagues, and fraternal beneficiary societies. Nonprofit organizations are not prohibited from earning a profit or paying salaries and wages, but they must devote any surplus to the organization.

Nonprofit organizations also are known as not-for-profit organizations, or as the independent sector, as opposed to business or government. Nonprofits constitute about 10 percent of U.S. employees. These organizations play a unique role in society, falling between the concepts of public and private entities. Public agencies provide goods and services that are considered to be universally desirable (such as national security or infrastructure). Private enterprises serve individual tastes and preferences

and depend on market-based competition to prosper. By contrast, nonprofit organizations supply services that are considered good for the community as a whole or for specific community members, but which do not elicit widespread taxpayer support for direct provision. The distinction may be characterized as the difference between it is right that these services should exist, and the idea that all members of society have a right to such services.

While the nonprofit organization exists in many countries, the focus here is on the American NPO. The primary factors unique to this American sector are volunteers, contributions, and tax-exempt status.


Nonprofit organizations play a large role in the American economy. It is difficult to get an accurate count of nonprofits, because only organizations with more than $5,000 in annual gross receipts must register with the IRS and only those with receipts in excess of $25,000 must file with the IRS. According to the National Center for Charitable Statistics (NCCS), in 2006 there were 1.47 million total nonprofit organizations in the United States. This figure includes those registered and filing with the IRS. Of these, 904,313 were registered public charities, and 109,852 were private foundations. According to The United States Nonprofit Sector 2003, human services organizations make up 34 percent of the charitable nonprofits; education is the second largest field with 18 percent, and healthcare/mental health is the third with 13 percent. The remaining nonprofit categories include community improvement and social benefit groups; arts, culture, and humanities groups; environmental and animal groups; religious institutions; and various research organizations, which make up only 1 percent of all nonprofit organizations.

Though nonprofit organizations can be very large, most are small. The United States Nonprofit Sector 2003 notes that 44 percent of such organizations have less than $100,000 in assets. Only 5 percent have more than $10 million.

It is estimated that there are twice as many organizations not required to file with the IRS because they did not take in $5,000 annually. This would include such familiar organizations as PTAs and Little Leagues. No statistics are available regarding these organizations.

The NCCS collects and disseminates statistics on the U.S. nonprofit sector. This data is gathered from the IRS and other government agencies, private sector service organizations, and the scholarly community. The NCCS builds compatible national, state, and regional databases and develops uniform standards for reporting on the activities of charitable organizations. Excellent charts representing this data are presented in The United States Nonprofit Sector 2003, which is available from The National Council of Nonprofit Associations.

In 2004 nonprofit organizations contributed about 5 percent of the gross domestic product. In 2006 more than 12.9 million people were employed by nonprofit organizations. This means that employment in the nonprofit sector is significant. According to the Council of Foundations, the average annual turnover rate for associations is 24 percent, but there appears to be wide variation among nonprofit subsectors. For example, employee turnover in child welfare agencies can show rates between 100 and 300 percent.

The nonprofit sector relies heavily on volunteers. This can be a problem for nonprofit managers who must provide creative incentives in psychic income, such as recognition to volunteers who are motivated to support a particular cause despite the lack of pay and benefits. In addition, attendance may be sporadic, leading to variable levels of capacity at any given time. Some organizations in this sector exist primarily to supply employment to those who have traditionally been considered unemployable, with the goal of boosting both morale and self-sufficiency.


To generate revenue, NPOs rely on direct appeal to those individuals, corporations, and other entities that value the underlying cause represented by the organization. Fund-raising events, including door-to-door appeals and mass mailings, are highly visible means of garnering funds. According to The United States Nonprofit Sector 2003, charitable nonprofits had about $945 billion in expenditures in 2003. This revenue came primarily from fees, government grants and contracts, as well as investments. About 14 percent came from private contributions, while 72 percent came from what is termed Program Service Revenue. Competition for funds is more complex than in the corporate world, as there is no financial reward for the contributor. Each year, the American Association of Fundraising Counsel (AAFRC) publishes national giving estimates in its Giving USA report. For 2006, Giving USA reported the following national totals:

  • Individuals: $222.89 billion (75%)
  • Foundations: $36.5 billion (13%)
  • Bequests: $22.91 billion (8%)
  • Corporations: $12.72 billion (4%)

Some organizations rely heavily on competitive grants from governmental or philanthropic institutions. Nationally generated funds may be redistributed to local communities on the basis of need, as is done by the United Way and the Red Cross. Increasingly, nonprofits have

Figure 1

National Taxonomy of Exempt Entities Summary

A - Arts, Culture & Humanities

B - Education

C - Environment

D - Animal-Related

E - Health Care

F - Mental Health & Crisis Intervention

G - Diseases, Disorders & Medical Disciplines

H - Medical Research

I - Crime & Legal-Related

J - Employment

K - Food, Agriculture & Nutrition

L - Housing & Shelter

M - Public Safety, Disaster Preparedness & Relief

N - Recreation & Sports

O - Youth Development

P - Human Services

Q - International, Foreign Affairs & National Security

R - Civil Rights, Social Action & Advocacy

S - Community Improvement & Capacity Building

T - Philanthropy, Voluntarism & Grantmaking Foundations

U - Science & Technology

V - Social Science

W - Public & Societal Benefit

X - Religion-Related

Y - Mutual & Membership Benefit

Z - Unknown

relied on participant dues, fees, or charges. Such charges can range from the minimal suggested contribution for a senior center lunch to the bill for costly medical procedures at a major hospital.

The United States Nonprofit Sector 2003 states that in 2003, hospitals had the greatest percentage of total sector assets (about 30 percent), followed by higher education with approximately 20 percent. Human services, health-care (excluding hospitals), and lower education, each had about 10 percent. Interestingly, lobbying accounts for a sizeable portion of nonprofit expenditures. According to the report, large nonprofit organizations spend the most on lobbying.

The accuracy of financial information regarding this sector of the economy is limited. First, the ongoing initiative to collect and computerize data in standardized form began in the late 1980s to early 1990s. While the Bureau of Labor Statistics tabulates employment figures, the financial information lags due to attempts to standardize and code the data. Second, while all tax-exempt organizations must apply for such status, only those with total annual revenues of at least $25,000 are required to file a Form 990 with the Internal Revenue Service. These non-filers represent about two-thirds of all registered nonprofit organizations. Third, churches are not required to file a Form 990, leaving this data estimation to private sources. Fourth, pass-through contributions (for example, revenues to both the United Way and the local charities it supports) may be double-counted. Therefore, financial figures are at best an estimate.

There is no single agency with oversight for nonprofit organizations. The IRS serves as one control, but some states have instituted more rigorous guidelines than those at the federal level. The Financial Accounting Standards Board, a private self-regulatory body for the accounting profession, developed Financial Accounting Standards 116 and 117 covering nonprofits, but these prescriptions allow a different form of generally accepted accounting practices (GAAP) from private organizations with similar functions.

The BBB Wise Giving Alliance collects and distributes information on national nonprofit organizations. It routinely asks such organizations for information about their programs, governance, fund-raising practices, and finances. Although The BBB Wise Giving Alliance does not recommend charities, it does select charities for evaluation based on the volume of donor inquiries about individual organizations. The BBB Wise Giving Alliance was formed in 2001 with the merger of the National Charities Information Bureau and the Council of Better Business Bureaus Foundation and its Philanthropic Advisory Service. The BBB Wise Giving Alliance is a nonprofit charitable organization, affiliated with the Council of Better Business Bureaus.


In exchange for the supply of quasi-public goods and services, nonprofit organizations are exempt from federal taxation on the excess of revenues over costs within the

Figure 2

10 Broad Categories of the National Taxonomy of Exempt Entities

  1. Arts, Culture, and Humanities A
  2. Education B
  3. Environment and Animals C, D
  4. Health E, F, G, H
  5. Human Services I, J, K, L, M, N, O, P
  6. International, Foreign Affairs Q
  7. Public, Societal Benefit R, S, T, U, V, W
  8. Religion Related X
  9. Mutual/Membership Benefit Y
  10. Unknown, Unclassified Z
Table 1
Alliance for Nonprofit Management Association of providers of support services to nonprofits
ARNOVA International membership organization fostering research. Aimed at the academics, provides publications and organizes an annual meeting
BoardSource (formerly the National Center for Nonprofit Boards) Practical information for board members
Foundation Center Information for grant makers, criteria for awarding grants and lists of grants Provides access to IRS filings by nonprofits
Internet Nonprofit Center Disseminates information, advice and statistics
National Center for Charitable Statistics Collects and disseminates data on nonprofits. Publishes New Nonprofit Almanac & Desk Reference
National Council of Nonprofit Associations An association of state and regional associations of non profits that has the goal of making resources available
Society for Nonprofit Organizations National association of nonprofit member organizations providing education and training. Publishes Nonprofit World, a bi-monthly magazine

fiscal year. This practice was established in 1913 with the passage of the first federal income tax law. In addition, they also may be forgiven state and local property taxes, and may receive discount postal privileges. Thus, these organizations are publicly subsidized while not directly supported by all taxpayers.

To qualify for tax-exempt status, the nonprofit organization must satisfy a variety of prerequisites. Among these is the declaration of a primary purpose or cause that qualifies under the Internal Revenue Service code. There is no ownership of assets or income other than that of the organization itself. Externally, this implies that there is no income distribution in the form of dividends or other such payments. Internally, there is the further requirement that the organization does not exist for the benefit of individual employees or board members; the IRS scrutinizes payment to such individuals in the form of salary, rent, or contractual arrangement. However, the only available penalty is the withdrawal of tax-exempt status, a punishment that the IRS has historically rarely delivered.

Examples of nonprofit organizations include such well-known giants as the United Way, the Red Cross, and the Boy Scouts and Girl Scouts. At the other end of the spectrum are local volunteer fire departments, churches, crisis intervention centers, and civic centers. Many hospitals and universities function as nonprofit institutions as well.

Figure 1 lists the full range of categories of American NPOs as defined by the National Taxonomy of Exempt Entities. This classification system offers a definitive classification system for nonprofit organizations recognized as tax-exempt under the Internal Revenue Code. Figure 2 lists the major categories by which summaries relating to this sector are frequently reported.

From 1940 to the early 1990s, human services and health accounted for approximately half of the NPOs in the United States. In some NPOs, benefits are limited to a select group, such as senior citizens (local agencies on aging) or those suffering from a specific disease (the American Cancer Society). Other groups have relatively open membership for those willing to pay the fee; an example is the YMCA, which provides recreational facilities.


Management must contend with the unique aspects of nonprofit organizations: volunteer labor, solicited contributions, and maintaining tax-exempt status. In addition, Herzlinger suggests that NPOs are highly antithetical to business in other important ways: they lack ownership,

competition, and the profit motive. Without these incentives it may be difficult to maintain effectiveness and efficiency. Even measurement of customer satisfaction may prove elusive, as customers may have no alternatives against which to compare the services received. Some controversy exists over several aspects of nonprofit organizations:

  1. For example, some question the rationale of the tax-exempt status of open-membership facilities, such as the YMCA. For-profit providers of similar services submit that the subsidy of NPOs diminishes the for-profit organization's ability to compete. This situation has led to as yet unsuccessful legislative attempts to level the playing field.
  2. Some people question how much nonprofits spend on programs. The BBB Wise Giving Alliance (a nonprofit organization itself) recommends that nonprofits spend at least 50 percent on program activity. Other organizations set this level as high as 80 percent. The remainder is to be spent on non-program expenses, such as administrative and fund-raising costs. The amount spent on fundraising can vary widely based upon whether the nonprofit is new or established with many donors. However, no regulation exists to ensure that the majority of revenues are spent on the cause for which the funds were collected.
  3. Others question how nonprofits are regulated and who regulates them. State agencies are increasingly requiring reports from active NPOs to monitor fundraising activity; the agency in turn responds to individual inquiries about the NPO's self-reported record. As in the corporate and governmental groups, administrative salaries occasionally make the news, encouraging contributors to reconsider how their contributions are being used.

Nonprofit organizations are a valuable part of the economy in America and many other countries, providing a broad range of services that might not otherwise be affordable or available without the subsidy of tax exemption. As NPOs grow in number and scope, there is increasing pressure to report on financial activity and performance fulfillment in this sector. The future of nonprofits may rely on disclosure and accountability.

SEE ALSO Balance Sheets; Financial Issues for Managers; Income Statements


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A corporation or an association that conducts business for the benefit of the general public without shareholders and without a profit motive.

Nonprofits are also called not-for-profit corporations. Nonprofit corporations are created according to state law. Like for-profit corporations, nonprofit corporations must file a statement of corporate purpose with the secretary of state and pay a fee, create articles of incorporation, conduct regular meetings, and fulfill other obligations to achieve and maintain corporate status.

Nonprofit corporations differ from profit-driven corporations in several respects. The most basic difference is that nonprofit corporations cannot operate for profit. That is, they cannot distribute corporate income to shareholders. The funds acquired by nonprofit corporations must stay within the corporate accounts to pay for reasonable salaries, expenses, and the activities of the corporation. If the income of a corporation inures to the personal benefit of any individual, the corporation is considered to be profit driven. Salaries are not considered personal benefits because they are necessary for the operation of the corporation. An excessive salary, however, may cause a corporation to lose its nonprofit status.

Nonprofit corporations are exempt from the income taxes that affect other corporations but only if they conduct business exclusively for the benefit of the general public. State laws on

corporations vary from state to state, but generally states give tax breaks and exemptions to nonprofit corporations that are organized and operated exclusively for either a religious, charitable, scientific, public safety, literary, or educational purpose, or for the purpose of fostering international sports or preventing cruelty to children or animals. Nonprofit organizations may charge money for their services, and contributions to tax-exempt nonprofit organizations are tax deductible. The internal revenue service must approve the tax-exempt status of all nonprofit organizations except churches.

A vast number of organizations qualify for nonprofit status under the various definitions. Nonprofit organizations include churches, soup kitchens, charities, political associations, business leagues, fraternities, sororities, sports leagues, colleges and universities, hospitals, museums, television stations, symphonies, and public interest law firms.

A nonprofit corporation with a public purpose is just one organization that qualifies for tax-exempt status. Under Section 501 of the internal revenue code (26 U.S.C.A. § 501), more than two dozen different categories of income-producing but not-for-profit organizations are exempt from federal income taxes. These other tax-exempt organizations include credit unions, civic leagues, recreational clubs, fraternal orders and societies, labor, agricultural, and horticultural organizations, small insurance companies, and organizations of past or present members of the armed forces of the United States.

The number of nonprofit corporations in the United States continued to increase into the twenty-first century. Although nonprofit corporations cannot produce dividends for investors, they provide income for the employees, and they foster work that benefits the public.

The activities of nonprofit corporations are regulated more strictly than the activities of other corporations. Nonprofit corporations cannot contribute to political campaigns, and they cannot engage in a substantial amount of legislative lobbying.

further readings

Barrett, David W. 1996. "A Call for More Lenient Director Liability Standards for Small, Charitable Nonprofit Corporations." Indiana Law Journal 71 (fall).

Hammack, David C., ed. 1998. Making the Nonprofit Sector in the United States. Bloomington: Indiana Univ. Press.

Ott, J. Steven, ed. 2001. Understanding Nonprofit Organizations: Governance, Leadership, and Management. Boulder, Colo.: Westview Press.

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non·prof·it / ˈnänˈpräfit/ • adj. not making or conducted primarily to make a profit: charities and other nonprofit organizations.

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