What nonprofits are for

Lucy Bernholz asks a basic but useful question on her Philanthopy 2173 blog: What are nonprofits for? (as opposed to other forms of organization). She suggests that the answer used to be more clear. And she offers some emerging examples of legal or public dispute on the subject (YMCA v. for-profit health clubs, free software initiatives, and such).

What are nonprofits for?

cc flickr rosipaw

She suggests the old, easy answer that defined nonprofits and their purpose was something like this:

…they are tax-exempt organizations that provide services, from education to art to meals; they offer a place for ideological, ethnic or other minority groups to express their ideas and serve their communities; they offer complements or alternatives to services provided by the government; and they advocate for change.

But in many of those areas, for-profit agencies and political action groups are challenging or even litigating the appropriateness of nonprofit status, and the IRS is struggling to frame a useful and resilient policy and policing standard.

Part of Bernholz’ challenge is that her definition emphasizes the content of nonprofit work (the kinds of services they provide), while many of her examples are about the context of that work (what markets they serve or work in, and whether there are commercial players in the same game). And much of the answer to her closing question of “What about the distinction matters?” lives in a discussion of nonprofit form as a tool for service rather than as a type of service.

As a particular tool for providing goods and services, nonprofit organizations have had two fairly consistent constraints for the past century (at least in the US). Under the Revenue Act of 1909, tax exemption was granted to “any corporation or association organized and operated exclusively for religious, charitable, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual.”

  • One defining element was the purpose (exclusively religious, charitable, or educational).
  • The other was the economics of ownership and control (no distribution of net income to owners, managers, or individuals).

The two constraints are deeply intertwined, of course. And intended (probably) to reinforce each other. “Exclusive” focus on the charitable purpose wouldn’t be distracted or distorted by profit motive. And volunteers, donors, supporters could contribute cash and capital with (relative) confidence it would be directed toward the purpose, and not toward the people running the show. (Yes, I know that clever and devious people have generated enormous personal gain through religion, charity, and education, and continue to do so. People can be jerks.)

So, rather than being a tool attached to specific kinds of content, the nonprofit form is attached specifically to context. It is an answer to a set of problems that can exist and evolve in many domains: how to focus governors and managers on the public trust, how to draw and sustain labor and donors, how to justify and regulate forgone revenue to the public purse, and how to provide for “public goods” where everyone benefits even if only a few pay.

To Bernholz’ point, a few dynamics have changed dramatically to reframe the problems listed above. Among them:

  • Technology has changed the cost structure of many domains, so that what were once failed markets now have some margin in them, and some profit potential;
  • Assumptions and culture around profit incentives have changed, with many wondering whether there’s a spectrum of opportunity between pure profit-motive and pure social-motive, rather than two poles;
  • Public goods in many sectors now have commercial potential, as bait. Facebook, for example, has attributes of a public good (it’s free, my consumption does not preclude your consumption, upgrades/updates benefit every user whether or not they paid). But Facebook extracts unique and exclusive value from our participation on their platform. As the saying goes, if the service is free, you’re probably the product for sale.
  • Our collective relationship with the words “charity” and “government” have evolved, and keep evolving in odd and complex ways.

So, what are nonprofits for? They are tools to aggregate effort, resources, and networks when profit-seekers or public agencies can’t or choose not to. Since profitability and public purposes are all shifting with technology and time, so is the shape and nature of the gap nonprofits fill. The tool has been remarkably consistent. Its best use is evolving like crazy.

 

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Comments

  1. Neil McGowan says

    Only in the United States could everything be brought down to the question of PROFIT, of MAKING A BUCK.

    Beethoven?? Sure ting! But only if we can make a buck out of dat Beethoven dude.

    Bruckner only ever got paid for one of his works. I suppose that would make him an abject failure in America?

    • Paul Botts says

      An interesting example actually. Ludwig von Beethoven staged concerts of his own works explicitly for the purpose of personal profit, manipulated the publication of his works for the same purpose, wrote some of his most famous works on commission, etc. He (assisted by his brother Carl) had to spend enormous amounts of time and energy being basically a business in order to get his art performed (the orchestras and orchestra halls had to be hired and paid by him or by investors in order for his symphonies to ever be heard).

      What didn’t exist in late-18th and early-19th century Europe was precisely what this blog post is about: the concept of what we now call nonprofits. Today’s young Beethovens have a path to getting their art produced which he could only have wished for.

      I would argue that the not-for-profit sector as we know it today is, like national parks and personal bankruptcy protection and some other examples, one of this country’s progressive inventions that have spread around the world. Before its invention, for example, artists could get their art known only through either commercial efforts or via direct patronage by the nobility at their whims.

  2. says

    Non profits represent an excellent example of a culture not relying only on civil government or business to accomplish things. It shows a culture that can think of creative solutions abstractly and then make those options available to its citizens if they are so motivated.

  3. says

    Excellent comments. Mine is to remind readers that a “nonprofit” is not necessarily “tax exempt.” They are not synonyms. “Nonprofit” refers to a type of corporate entity, established under state law. Merely forming such an entity does not confer tax exempt status; one must apply for and be granted such status by the IRS.

    I suppose, but have never researched, that most who establish a nonprofit corporation do so because they intend to seek tax exempt status. But in my practice I have seen organizations choose the nonprofit model for other reasons (e.g., the default rules of governance provided under state law; seeking merely to avoid the appearance of being for-profit, etc.) — and they never become tax exempt.

    This discussion, therefore, seems to be about “tax exempt” organizations rather than “nonprofits.”