Nonprofit organizations are organized for a public or mutual benefit other than generating profit for owners or investors (Salamon 1999). 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 may be different in size and form, nonprofit organizations share five common characteristics: 1. they are organized, 2. private (separate from the government) 3. self-governing, 4. non-profit-distributing and 5. voluntary. The non-profit distributing characteristic means that – contrary to the common belief – nonprofits can generate profit but they cannot distribute it to owners or directors. The profit must all be used to support the operation of the organization (Anheier 2014).

The legal form of nonprofits can vary too, 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.

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).

Historical Roots

Volunteers have formed groups to help people in need or to promote cultural, social or educational causes since the early history of the United States. In colonial times, Americans already liked to think of themselves as a “self-governing nation” who did not trust governmental involvement and preferred to address social problems locally (Ott and Dicke 2016, 59). Charity was seen as a religious duty and people in need could rely on their neighbors or the community to help them. Churches collected money for the needy while the wealthy founded schools such as Harvard and Yale Colleges.

To solve the problem of poverty and strengthen civic virtues in citizens, Benjamin Franklin advocated for mutual aid and educational groups. His ideas proved to be popular and by the time the famous Frenchmen, Alexis de Tocqueville traveled the US in the early 19th century, he could observe an immense number of associations (Ott and Dicke 2016). One of the most important movements of the century was the abolition movement which was also fueled by churches and nonprofit organizations fighting for the end of slavery. After the Civil War, newly freed slaves received help from the Freedman’s Bureau established by the federal government and from the numerous self-help groups former slaves themselves formed. In the next decades, people in northern states started to establish national associations to address a wide-range of social issues. These organizations had paid staff and critics considered them as bureaucracies who substitute “traditional links of personal charity” to impersonal services (Ott and Dicke 2016, 62).

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). The roles of the public, nonprofit and the for-profit sector were also clarified. 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.

Bibliography

• Anheier, Helmut K. Nonprofit Organizations. New York, Oxon: Routledge, 2014.
• Bio. Benjamin Franklin. https://www.biography.com/scholar/benjamin-franklin
• Franklin Institute. FAQ. https://www.fi.edu/benjamin-franklin-faq
• Lilly Family School of Philanthropy. Giving USA 2016. Highlights. Indianapolis: Indiana University, 2016.
• Leroux, Kelly, Mary K. Feeney. Nonprofit Organizations and Civil Society in the United States. New York, Oxon: Routledge, 2015.
• National Center for Charitable Statistics. https://nccs.urban.org/
• Ott, Seven J., Lisa A. Dicke. The Nature of the Nonprofit Sector. Boulder: Westview Press, 2016.
• Payton, Robert L., Michael P. Moody. Understanding Philanthropy. Bloomington: Indiana University Press, 2008.
• Salamon, Lester. America’s Nonprofit Sector: A Primer. New York: The Foundation Center, 1999.

Source: Nonprofit Organizations (definition), written by Krisztina Tury (Lilly Family School of Philanthropy) for Learning to Give. Used with permission from Learning to Give.