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 interest—charity, religion, health, science, literature, wildlife protection, the arts, even sports—it'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, 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 Black Enterprise , there were 1.1 million nonprofit organizations in operation in the U.S. in 1998. These organizations were estimated to employ one out of every ten American workers on either a full-time or part-time basis.
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 Hopkins. "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 all—granted exclusively to organizations with bona fide nonprofit status—is exemption from taxes at federal, state, and local levels." In addition to tax exemption, Nicholas cited the following as principle advantages of forming a nonprofit corporation:
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 principle drawbacks:
"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 issues include the following:
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 organization's 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:
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 mission [of the organization]," wrote Larry W. Kennedy in Quality Management in the Nonprofit World. "In the short run, money can be raised on the organization's vision and the promises it makes to help its clients and, therefore, its community. It will not take long, though, for contributors to 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 organizations—and especially charitable ones—rely 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 fundraising 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:
Ayres-Williams, Roz. "The Changing Face of Nonprofits." Black Enterprise. May 1998.
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. John Wiley & Sons.
Hopkins, Bruce R. A Legal Guide to Starting and Managing a Nonprofit Organization. 2d ed. John Wiley & Sons, 1993.
Kennedy, Larry W. Quality Management in the Nonprofit World: Combining Compassion and Performance to Meet Client Needs and Improve Finances. Jossey-Bass, 1991.
Krit, Robert L. The Fund-Raising Handbook. Scott Foresman, 1991.
Listro, John P. Accounting & Reporting for Nonprofit Organizations. Kendall/Hunt Publishing, 1992.
Nicholas, Ted. The Complete Guide to Nonprofit Corporations. Enterprise Dearborn, 1993.
Overton, G.W., ed. Guidebook for Directors of Nonprofit Corporations. American Bar Association, 1993.
Schoenhals, G. Roger. On My Way in Planned Giving. Planned Giving Today, 1995.
Warwick, Mal. "Outsider-In Marketing: A New Way to Look at Marketing for Nonprofits." Nonprofit World. September/October 1997.