Nonprofit organizations were originally created for a public or mutual benefit other than generating profit for owners or investors. They can take a variety of forms from informal neighborhood associations, soup kitchens, local churches or traditional charities serving the poor to labor unions, self- help groups or museums, hospitals and large universities.
Though they may be different in size and form, all nonprofit organizations share five common characteristics:
- They must be organized
- They must be private (separate from the government)
- They must be self-governing
- They must be distributing which means they can generate profit, but they cannot distribute to the owns or directors of the organization.
- They must be voluntary.
All legal forms of nonprofits vary in one way or the other, however, the Internal Revenue Code differentiates two major types: the 501 (c) (3) and the 501 (c) (4) organizations. Although both types are exempt from taxation, only the 501 (c) (3)s or the so-called public benefit organizations are eligible for tax-deductible donations from individuals or corporations.
501 (c) (4)s are called social welfare organizations, many civic leagues and advocacy organizations which represent social and political causes belong to this group (Anheier 2014). Some nonprofits – like Planned Parenthood – have both types of 501 (c) organizations incorporated.
Its also important to note that nonprofit organizations make up the nonprofit sector which is often referred to as the philanthropic sector, the third sector, the independent or the voluntary sector. The sector fulfills crucial functions for modern societies. According to Payton and Moody (2008), the philanthropic sector’s five roles are:
- Service role: “providing services (especially when the other sectors fail to provide them) and meeting needs” (Payton and Moody 2008, 34).
- Advocacy role: representing and advocating for the interests of populations, for differing views of the public good and for reform.
- Cultural role: expressing and preserving values, traditions and other aspects of culture.
- Civic role: building community, fostering civic engagement.
- Vanguard role: providing opportunities for innovation, experimentation.
It’s also important to note that Nonprofits can be grouped based on their field of interest as well. The National Taxonomy of Exempt Entities Core Codes classifies 10 groups: 1. arts, culture and humanities 2. education 3. environment and animals 4. health 5. human services 6. international, foreign affairs 7. public, societal benefit 8. religion related 8. mutual/membership benefit 10. unknown, unclassified (Ott and Dicke 2016).
Until the 1930s, wealthy individuals and foundations provided most of the revenue for nonprofit organizations. After the Great Depression, the vast number of impoverished citizens made the federal government provide a wider range of social services such as public programs for the unemployed or benefits for the elderly and dependent children (Ott and Dicke 2016).
By the mid-twentieth century the growing endowments of private foundations – which are founded by individuals or corporations and not by the government – created a public need for greater regulation of foundations. The Tax Reform Act in 1969 created two new regulations: 1. foundations had to distribute at least 5 percent of their assets yearly (called payout) 2. and they had to report their income and expenses on the 990-tax form.
The twentieth century saw two more shifts regarding the role of federal government in providing social services. During Lyndon Johnson’s presidency in the 1960s, the “Great Society” legislation created a wide range of support for community projects helping people in need (Ott and Dicke 2016). The Reagan administration in the 1980’s greatly cut federal support for such services and moved the responsibility to provide funding to these programs to state and local governments. Therefore, nonprofit organizations had to compete for a reduced pool of resources. This led to increased fundraising efforts and a growing public demand for accountability regarding nonprofit’s finances and operations.
According to the National Center for Charitable Statistics, in 2016, more than 1.5 million organizations were registered with the IRS. It is estimated that many smaller formal and informal associations exist that do not register because religious organizations and organizations with revenues of less than $5,000 per year are not required to do so (Payton and Moody, 2008). The nonprofit sector is a significant economic force, in 2013, it contributed to 5.4% of the country’s GDP and it accounted for 9.2% of all salaries and wages.
In 2013, more than a quarter of the adult population volunteered an estimated total of 8.1 billion hours (Giving USA 2016). Total charitable giving in 2015 reached $373.25 billion, making it America’s most generous year – although giving is steady as a percentage of GDP, at around 2%. Most of the giving came from individuals, who account for 71% of all donations. Giving by foundations followed by 16%, bequests contributed 9% and corporations by 5%. The most popular recipients are religious organizations, they received 32% of all charitable giving. Educational organizations are second by 15% while human service organizations were donated 12%.
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