Getting to Know the Nonprofit World

Excerpt from The Generosity Plan, by Kathy LeMay

What is a Nonprofit Organization?

A nonprofit organization is any corporation, trust, association, cooperative, or other organization that:

1. is operated primarily for scientific, educational, service, charitable, or similar purposes in the public interest;
2. is not organized primarily for profit;
3. uses its net proceeds to maintain, improve, or expand its operations.

Does this mean that nonprofits can’t make a profit?

No. In fact, most nonprofits that end each calendar or fiscal year with a deficit (expenses exceed revenue raised) can experience greater difficulties in meeting program goals and their overall mission. Ending a calendar or fiscal year with net revenue increases an organization’s capacity to make a difference. “What distinguishes nonprofits is not whether they can make a profit but what happens to profits. Nonprofits are prohibited from distributing profits in the same way for-profit corporations can. All revenue must be earmarked for the organization’s mission,” which includes reasonable expenses like programs, office space, and staff salaries. In short, a legal nonprofit corporation cannot distribute its profits to individuals who have control over the overall operation, like members of the board of directors or the advisory board.

How many nonprofits are there in the United States?

According to the National Center for Charitable Statistics, as of 2008, there were 1.5 million nonprofits in the United States. If nonprofits were evenly distributed among the fifty states, this would translate to thirty thousand nonprofits per state.

Of the total nonprofits, 974,337 are 501(c)(3) public charities (defined above) whose missions and programs relate but are not limited to: arts, culture, and humanities; education; environmental quality, protection, and beautification; animal rights and welfare; diseases, disorders, medical disciplines; civil rights, social action, advocacy; science and technology research institutes; religion-related spiritual development; community improvement; philanthropy, volunteerism, grant-making foundations; and international, foreign affairs, and national security organizations.

Another 115,340 are 501 private foundations, each of which is defined as “[receiving] most of its income from investments and endowments. This income is used to make grants to other organizations rather than being disbursed directly for charitable activities.”

And 446,457 are other 501(c) nonprofit organizations, including civic leagues, social welfare organizations; business leagues, chambers of commerce; labor, agricultural or horticultural organizations; social and recreational clubs; and veterans organizations.

Don’t nonprofits get most of their funding from governments or foundations?

Nonprofits rely primarily on individuals to fund their work. In fact, of the $283 billion contributed to nonprofit organizations in 2007, 81 percent came from individuals.

As of the writing of this book, with the election of President Obama and the resulting stimulus package, more government funding may again become available to social service and social change organizations. However, the best model for nonprofits is a healthy balance of government, foundation, individual, and corporate support.

Aren’t nonprofits small, charity-based groups? How much impact can they really have?

The nonprofit sector is a vital component of the U.S. economy. Nonprofits employ eleven million people, or 7 percent of the U.S. workforce.

In fact “83.9 million adults volunteer 15.5 billion hours each year towards community and public benefit, the equivalent of 7.7 million full time staff.” For comparison purposes “the total active military personnel in all services (Army, Navy, Marines, Air Force) total 1.4 million.”

How are nonprofits held accountable for their spending?

In recent years, nonprofit organizations have received more media attention than in years prior. At one time, the work of nonprofit organizations could be found in the “special interest” section of the newspaper or during an end-of-the year giving drive. Attention was usually favorable, as it spotlighted groups helping members of a community. These days, the media attention can be less than favorable.

The public has expressed concerns over issues like inflated overhead costs, overpaid executive directors, and too many nonprofits in one arena, resulting in duplication of services and financial irregularities. I address these briefly on page 82, but for now, take a look at this list of the bodies responsible, according to Independent Sectors, for the governance and accountability of nonprofit organizations:

• Boards: All nonprofits are governed by a board of directors or trustees (there’s no real difference), which is a group of volunteers that is legally responsible for making sure the organization remains true to its mission, safeguards its assets, and operates in the public interest. Private watchdog groups: Several private groups (who are themselves nonprofits) monitor the behavior and performance of other nonprofits on a local, national, and international level.
• State charity regulators: The attorney general’s office or some other part of the state government maintains a list of registered nonprofits and investigates complaints of fraud and abuse.
• Internal Revenue Service: A division of the IRS (the Tax Exempt/Government Entities division) is charged with ensuring that nonprofits are complying with the requirements for eligibility for tax-exempt status. [If an organization is audited and found to be in violation, it could have its tax-exempt status revoked or be charged fines and taxes.]
• Donors and members: Some of the most powerful safeguards of nonprofit integrity are individual donors and members. By withholding their financial support, donors can strongly encourage nonprofits to reappraise their operations.
• Media: Many nonprofit leaders may feel misunderstood or even maligned by negative media coverage. However, this media watchdog role has resulted in increased awareness and accountability throughout the sector.

Note from the author: The media plays an important role in making great nonprofits visible and exposing nonprofits that are unethical. At the same time, the media aims to get headlines. Sometimes complexities within the nonprofit world can’t be captured in a print story, so read between the lines when you read a story about a nonprofit in the media.

To this list, I add you! By asking good questions and requiring transparency, you can help ensure that nonprofits live up their promises and maintain their integrity.

It should be noted that these bodies don’t always guarantee against improprieties. As in the for-profit sector, some individuals do not operate within the true spirit of the company’s vision and mission. However, nonprofit corruption and fraud is minimal, especially compared to the size of the sector.

Learn more about The Generosity Plan.