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

1.1 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).

1.2 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.

1.3 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).

1.4 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.