Nonprofit Organization

What It Means

A nonprofit organization is an institution that conducts business for reasons other than the desire to make a profit. Schools, churches, homeless shelters, museums, conservation groups, sports leagues, arts foundations, research institutes, private universities, social clubs, political groups, and some hospitals function as nonprofit organizations in the United States today, among many other groups.

Nonprofits combine the diversity of the business world with the public-service mission of the government, but they are distinct from both of these other main sectors of the economy. There are endless varieties of nonprofit organizations, and they collectively play a larger role in American life than they do in the lives of those who live in other wealthy countries. This is partly a result of the extreme wealth in the United States, which results in greater sources of funds that can be used to do good works, but it is also a result of the U.S. government’s general reluctance to spend taxpayers’ money on social programs. The U.S. government encourages nonprofit groups to fulfill society’s needs by exempting qualifying organizations from paying taxes and by allowing people who donate money to many of these organizations to reduce their own tax payments in proportion to their donations.

When Did It Begin

Many different kinds of institutions are classified as nonprofit organizations in the United States today, and some of these, such as churches, hospitals, and museums, have roots stretching back hundreds or thousands of years. Major world religions have been particularly instrumental throughout history in encouraging works done on behalf of the public, rather than for financial gain.

The large and varied nonprofit sector of today’s economy also owes a great deal to the attitudes brought to the United States by settlers and immigrants. Whereas works of charity were typically carried out by churches and the nobility in the old world countries of Europe, those who first settled the United States had no choice but to band together to create the public services that they needed. For example, an early American settlement would have gone without such institutions as churches, hospitals, and schools if not for volunteer activity, since there were no nobles or religious institutions to pay for them. The U.S. government has also traditionally been less willing to take on the burden of caring for the unfortunate or for promoting social well-being than have similarly developed European governments. While European countries are more active in using tax revenues to provide public services to their citizens, the United States has historically been more reliant on private nonprofit groups.

The ideas and actions of wealthy industrialists such as Andrew Carnegie and John D. Rockefeller were instrumental in shaping today’s nonprofit sector. After making his fortune in the steel industry, Carnegie in 1889 wrote an essay called “Wealth” (also called the “Gospel of Wealth”), in which he put forward the idea that the rich should use their money to benefit the public rather than leaving it to their families. Carnegie put his ideas into practice, giving away most of his riches to establish libraries and educational institutions in the United States, Scotland (where he was born), and elsewhere around the world. Similarly, John D. Rockefeller (whose company, Standard Oil, dominated the American oil industry) gave away an estimated $500 million in the late nineteenth and early twentieth centuries, focusing his gifts on universities and medical institutions. Changes to the U.S. tax code in 1921 created further incentives for individuals to make donations to nonprofit groups, and additional changes in 1935 made it more attractive for corporations to give away money. Donating to nonprofit organizations has become ingrained among people of moderate as well as great wealth, and the number of nonprofit organizations in the United States has grown steadily and rapidly since that time.

More Detailed Information

Nonprofit organizations play an important role in everyday life across the United States. They attempt to improve communities and the world at large by tackling issues important to the public. This may involve taking direct action to cause changes, providing services to people, or pushing for government involvement in their area of concern. Nonprofits are not limited to any particular portion of the political spectrum; some are overtly political while others have little or no involvement in politics. There are nonprofits focused on virtually all areas of human activity. Because their operations differ from both the public sector (government) and the private sector (business), nonprofits are said to constitute a third sector of the economy.

Nonprofits differ from businesses in that their goal is not to produce wealth. Many nonprofits do, however, sell products or charge fees for services, and they often bring in more money through sales or donations than they spend on their operating costs. This excess income is not profit, however, because it is used to further the group’s social or other goals, rather than being distributed to owners or investors. Nonprofits differ from the government in that they do not accomplish their goals by making or enforcing laws. They promote the public welfare, instead, by mobilizing the money of donors and the effort of paid or volunteer workers to address the issues that they seek to change.

Nonprofit organizations in the United States can be broken down into various segments. First and most numerous, there are churches and religious organizations, which account for roughly a third of all nonprofits. Because they occupy such a distinct position in society, churches are often considered as a separate segment of the nonprofit sector, not sharing many of the common traits of other nonprofits.

Another prominent segment of the nonprofit sector encompasses associations that work to advance the interests of businesses, professionals, workers, and political groups. For example, the local chamber of commerce in any town does not attempt to make a profit for itself; instead, its goal is to increase the economic well-being of community businesses. The American Medical Association similarly attempts to further the interests of doctors and medical students, and labor unions such as the AFL-CIO work on behalf of a variety of workers. Political groups that raise money for candidates in local, state, and national elections fall into this category of nonprofits, as do political action committees such as Moveon.org, which attempts to advance the interests of progressive political candidates and issues across the United States.

Within the nonprofit sector there are also numerous organizations designed to promote the social and civic interests of their members. Examples of this kind of nonprofit organization are college fraternities and sororities, benevolent groups such as Elks lodges (officially known as the Benevolent and Protective Order of Elks), parent-teacher associations, organizations uniting people of a particular ethnic group in a community, and a wide range of other social clubs.

Another important class of nonprofits consists of social advocacy organizations. These are groups that are dedicated to a specific social or political goal. The goal might be one that benefits a broad range of humanity, such as voter education, the protection of human rights, or the preservation of the natural environment. Nonprofits of this type might also address issues that benefit a specific group of people, such as children, the disabled, or the elderly.

Finally, there are grant-making organizations, also known as charitable trusts. These nonprofits give money directly to people or institutions for a wide range of reasons. Grant-making organizations fight diseases, promote educational goals, alleviate poverty, and endow museums and universities, among many other activities. These nonprofit organizations fall into two subcategories: private foundations and public foundations. Private foundations are generally funded by one or a few sources, such as an individual or group of individuals, a family, or a corporation. The largest of all foundations, such as the Bill and Melinda Gates Foundation, the Ford Foundation, and the J. Paul Getty Trust, are private foundations. Public foundations receive money from a variety of sources, which may include the government, individuals, corporations, private foundations, and fees charged for goods and services. Community foundations, which are set up to benefit a specific geographic area, are the most common type of public foundation.

Because they promote social well-being and do not attempt to enrich those who work for them, nonprofits are not required to pay taxes on the money they bring in through donations or through their business operations. Depending on the legal classification of a particular nonprofit organization, the people and businesses that donate money to them are often allowed to deduct money from their own government tax bills in proportion to their donations. In general, donations made to groups that attempt to influence political elections or the legislative process are not tax deductible.

Recent Trends

During the late twentieth and early twenty-first centuries, the nonprofit sector of the U.S. economy expanded dramatically. This was primarily a result of growth in the U.S. economy, which outpaced economic growth in the rest of the world, creating unprecedented wealth for individuals and companies and, therefore, more potential donations to nonprofits. Whereas other wealthy countries channeled their wealth through the government, which in turn provided many social services, the U.S. government during the 1980s and 1990s was moving away from large public-spending programs, leaving nonprofit organizations to fill the gap.

The nonprofit sector employed around 6 million Americans in 1977; by 2004 that number had climbed to 12 million, not counting volunteer service. Nonprofit spending amounted to $1.4 trillion, or about half of what the U.S. government spends each year on non-defense goods and services. These numbers were, moreover, conservative estimates of the nonprofit sector’s size, since they do not account for the size and spending of churches and religious organizations, which are not required to report extensively on their activities.

Perhaps the most visible evidence of the growing influence of nonprofits was the increasing size of the private and public foundations that used donations to advance charitable causes. In 2005 these grant-making organizations were in possession of assets amounting to $525 billion, up from $30 billion in 1975 (this figure is stated in 2005 dollars, adjusted to account for inflation, which causes a consistent decline in the value of a dollar over time). U.S. foundations gave away $33.6 billion to charitable causes in 2005, more than double the amount given by foundations a decade earlier (again, the comparison is adjusted to account for inflation).

This time was also noteworthy for the emergence of a foundation of unprecedented size and scope: the Bill and Melinda Gates Foundation. Established in 1994 by Microsoft founder Bill Gates and his wife Melinda, the foundation had $29 billion in assets in 2006 when another of the world’s richest people, Warren Buffett (founder of the investment company Berkshire Hathaway), pledged the bulk of his own wealth to the foundation over time, an amount that was eventually predicted to exceed $30 billion. The foundation, which focused on reducing inequality in the United States and around the world, was thus capable of helping the world’s poor people on a scale rivaled only by national governments.