1.1: Introduction

Learning Objectives

After reading this chapter, you should be able to:

• Define the difference between a nonprofit organization and other types of organizations.
• Understand the different terminology associated with the nonprofit sector.
• Start to understand the scope of the nonprofit sector in the United States.

_{Image: “Nonprofit” by Sharon Sinclair (EKG Technician Salary) is licensed under CC BY 2.0.}

What are nonprofit organizations?

Whether you know it or not, nonprofit organizations are ubiquitous in American society. They are part of almost everyone’s lives every day. Nonprofit organizations can be small, such as local social or activity groups like soccer clubs or homeowner’s associations covering a single neighborhood. They can also be larger, such as state advocacy organizations working in the capitol to change policy or international humanitarian organizations with thousands of members and budgets in the billions. They provide human services and offer opportunities to enjoy art and culture. They raise money for community needs and also distribute billions of dollars to other nonprofit organizations.

But the question remains – what are they? How are they defined? And how might they be different from other organizations, including for-profit businesses or public sector agencies?

The nonprofit sector includes private, voluntary, “not-for-profit” organizations, along with other voluntary associations.^[1] They can be either formally registered with the IRS as a tax-exempt corporation or informal gatherings of individuals. In fact, in 2019 there were approximately 1.5 million formally registered nonprofit organizations in the United States, with an estimated additional 1 million unregistered groups.

One thing that almost all nonprofits share, however, is that they are tax-exempt, meaning they are not required to pay many forms of tax, particularly taxes on contributions and grants.^[2] In addition, they have what is called a non-distribution constraint; they are not allowed to distribute profits to the managers or “owners” of the organization.^[3] This is an important distinction from for-profit businesses, especially because nonprofits don’t have “owners” in the traditional sense we may think of. While the managers and volunteer board of directors in a nonprofit organization are responsible for protecting the organization’s reputation and resources, they don’t “own” the organization. Instead, nonprofit organizations are incorporated by states and the federal government and are, in effect, owned by the taxpayers.

In exchange for a tax-exemption benefit, nonprofit organizations are expected to work towards the public good in some way. That term can be broadly applied and may include providing much needed services to offering opportunities for people with shared goals and values to come together. In this way, nonprofit organizations are mission driven, not profit-driven.

Nonprofit organizations typically have the following features:

• Not profit-seeking.
• Non-distribution constraint.
• Organized outside of government and business.
• Self-governing and independent.
• Formally constituted (legal filings, bylaws, etc.).
• Voluntary.

As mentioned earlier, many groups of individuals may look and act like a nonprofit organization but are not formally constituted as tax-exempt corporations under the law. Also, although it is true that you generally can’t be compelled to join or participate in a nonprofit organization, there are some situations in which you may be called on to join a nonprofit in order to participate in a certain profession (such as a labor union or the American Bar Association for attorneys) or to live in a specific neighborhood (homeowner’s associations).

What types of organizations are there?

There are many different types of nonprofit organizations in the United States and around the world. The National Taxonomy of Exempt Entities (NTEE) is one way that the IRS and other researchers classify nonprofit organizations. When an organization files the application to become a tax-exempt corporation, the IRS uses the organization’s stated mission statement to identify their NTEE classification. Major NTEE categories include:

• Arts, Culture, and Humanities.
• Education.
• Environment and Animals.
• Health.
• Human Services.
• International, Foreign Affairs.
• Public, Societal Benefit.
• Religion Related.
• Mutual/Membership Benefit.
• Unknown, Unclassified.

Under this primary classification, there are a series of sub-classifications to help identify a nonprofit further, such as codes for advocacy organizations, higher education, professional societies and associations and those that provide monetary support to others, just to name a few. The IRS also separates organizations under different sections of code.

There are many different names used to describe the nonprofit sector. While these names are often used interchangeably in scholarship and practice, there are subtle differences in their meanings.^[4]

• Charitable organizations are groups whose work is primarily seen as “helping the needy.” While some nonprofit organizations “help the needy,” there are also many organizations that engage in other types of activities, including social and religious organizations and political and advocacy organizations.
• Independent Sector emphasizes that the role of the nonprofit sector is outside of both government and the business sector, as it is autonomous from the other two sectors in making decisions and engaging in activities. Yet, there are many nonprofits that engage in commercial activities or are closely partnered with government through contracts and grants.
• Nongovernmental organizations (NGO) is the term used primarily outside of the United States for the nonprofit sector. There are local NGOS as well as international NGOs that work across borders (INGOs).
• Voluntary organizations are those that depend on gifts of money or time to run their programs and activities. Many smaller and community organizations can be considered voluntary organizations; however, this tends to omit larger organizations with paid staff and those that are funded largely through government.
• Social Sector describes the group of organizations that work on behalf of social aims and goals, but this term does not require an organization to be nonprofit.

Peter Frumkin^[5] describes two different types of nonprofit organizations: instrumental and expressive. Instrumental organizations work as an “instrument” to engage in an activity or to get something done, such as providing medical services, running a food bank or providing childcare. In this way, they have tangible outputs that can be measured. Expressive organizations, on the other hand, help bring people with shared values and beliefs together. These could be religious organizations or social or political groups. Instead of seeing a dichotomy of instrumental OR expressive, it’s probably better to view these categories as two ends of a long-spectrum.

The American Red Cross (ARC) was founded in 1881 by Civil War nurse Clara Barton to “prevent and alleviate human suffering in the face of emergencies by mobilizing the power of volunteers and the generosity of donors.​” Since its founding, ARC has responded to an untold number of disasters, including responding to house fires; setting up shelters and providing food to areas hit by hurricanes, earthquakes or fire; training people in first aid and CPR and helping to collect and manage blood for those who need it. Although they have about 35,000 paid staff members across the country and around the world, the activities of the Red Cross are supported by over 300,000 volunteers. Volunteers can turn their “compassion into action” by supporting people in their own communities and often volunteer for the Red Cross for decades, finding great meaning and satisfaction in their service.

• Do you think the American Red Cross is an instrumental or expressive organization? Or both? Why or why not?
• Think of other nonprofit organizations in your community. Would you consider them expressive or instrumental?

One way to think about nonprofit organizations is that they have features that are similar to, and distinct from, the for-profit business sector and government sector.^[6] The below table demonstrates where nonprofit organizations are more similar to businesses and where they are more similar to government.

	More Like Business	More Like Government
Privately Controlled	X
Non-distribution Constraint		X
Incorporated	X
Tax-Exempt		X
Lines of Accountability		X
Can’t Compel you to Pay (i.e. taxes)	X
Money Raised Elsewhere for Services/Activities		X
Ethical Obligations to Public		X

Activity 1

_{Image: “Children reading in the street at the reading outreach activity from the Trujillo Municipal Library” by BeyondAccessInitiative is licensed under CC BY-SA 2.0}

You want to start a nonprofit – called Millennium Readers – to help improve literacy in your community. The first thing you have to do is decide what role the organization will take and what activities it will pursue. As you can imagine, there are multiple ways that the organization can proceed with “improving literacy.” Here are a few options. Can you think of more?

Direct Service Role:
Direct services are when organizations work directly with the public, providing the services they need, such as housing or food, medical care or education. In the case of Millennium Readers, what might be the different types of direct services the organization could offer?

• Provide an after-school tutoring program in reading?
• Collect donated books for the city’s library?

Education Role:
Organizations engaged in an education role may help to share and spread information about a particular issue or cause to the public.

• Educate the public via the media about the challenge of literacy in your community?
• Research policy options to understand effective interventions and programs?
• Develop a program to train teachers on identifying potential learning disabilities?

Advocacy Role:
Advocacy is “speaking on behalf of a cause” and nonprofits may advocate for specific populations (such as children) or issues (such as the environment), among other causes (see Chapter 7 on advocacy).

• Lobby the local school board for more early education funds?
• Create a petition in support of your cause?
• Sue (litigation) the state’s Board of Education for not providing adequate reading supports to children with learning disabilities?

Further defining nonprofits

While there is a wide range of types of issues nonprofit organizations work on (such as education, environment or health care as discussed above), there are just as many different roles nonprofit organizations can take based on their mission and goals.

Helmut Anheier^[7] describes one way to think about these roles: categorizing organizations based on who they serve. The first group, member-serving organizations, are those organizations whose mission and purpose is to provide some sort of benefit or representation for their members. Many associations fall into this category, including professional associations and homeowner’s associations. Social, sports and religious organizations may also fall under this category.

Public-serving organizations, on the other hand, are those groups who have a public goods or public benefit focus, focusing on clients, beneficiaries or public at large. Health, education and environmental organizations may fall into this group. So too can organizations serving the unhoused or helping people overcome food insecurity.

It is also possible to describe organizations as market or non-market organizations. Market-based organizations are those that generate revenue by providing goods or services through commercial activities – sometimes called fee for service. Examples of these organizations are institutions of higher education – which charge tuition – and hospitals. There are a lot of other human-service related organizations that charge, at least marginally, for their services. Market organizations may also include social enterprises (covered in Chapter 8), which use the market to create social value.

Non-market organizations, on the other hand, are those that generally receive revenue either from private sources (individual donations, grants from private foundations) or from public sources (government contracts, government grants).

Summary and Activities

• Nonprofit organizations play a significant role in the American economy and social fabric.
• They are extremely diverse in both form and function – ranging across mission/issue areas and types of activities they do.

Activity 2

1. In small groups, look up the following two organizations working to support affordable housing opportunities in Eugene, OR. Can you tell if they are for-profit, nonprofit or public?
   • Community Lending Works
   • Homes for Good
2. Look up the U.S. Chamber of Commerce, National Public Radio and The Smithsonian Institution online and review their missions. Would you consider them member-serving or public-serving organizations? Why or why not?
3. Review the websites for Doctors Without Borders and World Vision. Do you consider them instrumental or expressive organizations? Why or why not?

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1. Helmut K. Anheier, Nonprofit Organizations: Theory, Management, Policy, 2nd ed. (New York: Routledge, 2014), http://books.google.com/books?hl=en&...fnd&pg=PP1&dq="edition published in the Taylor and Francis e-Library," "purchase your own copy of this or any of Taylor & Francis or" "2005 Helmut K." "known or hereafter invented, including photocopying and" &ots=XwI7vdB88A&sig=SK_snvwMXOI0aEPXu2Kj0Q3O73U. ↵
2. Kelly LeRoux and Mary K Feeney, Nonprofit Organizations an Civil Society in the United States (New York: Routeledge, 2015). ↵
3. Henry B. Hansmann, “Economic Theories of Nonprofit Organizations,” in The Non-Profit Sector: A Research Handbook, ed. Walter W. Powell (New Haven, CT: Yale University Press, 1987). ↵
4. LeRoux and Feeney, Nonprofit Organizations an Civil Society in the United States; Anheier, Nonprofit Organizations. ↵
5. Peter Frumkin, On Being Nonprofit: A Conceptual And Policy Primer (Cambridge, MA: Harvard University Press, 2005). ↵
6. Frumkin. ↵
7. Anheier, Nonprofit Organizations. ↵