Matthew Richter is fed up with the nonprofit corporate model, and isn’t going to take it any more (in an excerpt from a longer work on the subject). He suggests that the time has come for a more market-forces-friendly structure that will bring back profit motive and equity ownership to social-sector challenges. Says he:
What’s needed in this country is a new hybrid model for organizations that want to do traditionally “charitable” work–a new type of socially responsible corporation that takes the best that the for-profit world and the nonprofit world can offer. A new structure that allows its owners equity in what they’ve built while maintaining the charitable rating that allows it to fund charitable-purpose programs.
He suggests a line-item nonprofit model, where a for-profit company can request a charitable tax status for specific activities that serve the public good (a nightclub could run a performance art program; Amazon.com could run a literacy and free book initiative). The primary drive of these organizations would remain profit and ownership and self-interest…but the social and public interests of the owners would have a new way to sustain themselves.
Richter does a great job outlining the internal and external pressures now facing the nonprofit world. But he’s among many that seem to be over-playing the corporate structure as the culprit in our current woes. Fact is, any current nonprofit or for-profit entity can already rethink its structure, and create a hybrid in a dozen different ways. We don’t need a new exemption for commercial enterprise, we need a more nuanced and sophisticated interpretation of the tools already available. (To be fair, Richter is aware of these experiments, and describes them in his longer essay. But he believes them to be insufficient for long-term change.)
Such nuance and sophistication comes only from focused and open discussion. Thanks to Mr. Richter for framing such a productive argument to push against.
Thanks to Alexis for the link!
In reading Richter’s full text, I had to wonder to what extent that line of thinking was reactionary? Is it the nonprofit model that’s tough or the work nonprofits do?
What’s undeniable is that his writing is fuel for dialogue. And why not allow corporation’s to get in on the game of social improvement if we spend some time figuring out how to prevent corruption? Of course, would we just be re-creating nonprofits?
The question is, can we get the IRS to commit to a “more nuanced and sophisticated interpretation of the tools already available”?
As Richter points out, a number of non-profits already test the bounds of their tax status with how they are reporting income.
The IRS may not pursue these activities with any great vigor now. Given the increased scrutiny non-profits are starting to receive due to the financial mismanagement and embezzlement, it might be prudent to have the IRS make a determination about activities that might strain the boundaries of the code. Though good luck getting anyone there to commit to any view.
You pointed out less than a month ago that non-profit arts and cultural organizations were already operating under the aegis of a section of the tax code in which they were not mentioned. I was honestly flabbergasted.
In that context especially, I can see how people who are already struggling to stay afloat might not want to do anything new with the potential to attract the gaze of the IRS.
I do agree with you that a shift in the way non-profit corporations operate within that classification is necessary.
Thanks for posting the link to the column. I see it ran last Spring. I probably would have never seen it had you not caught it. Much in it to ponder.
Good points, Joe,
The one (major) flaw in my position on exploring hybrid organizations using the forms we have now is this: LOTS of attorneys and accountants are required.
The biggest challenge to the line-item idea is that it would make oversight even more difficult. The IRS is not equipped (nor are state attorneys general) to provide real oversight under today’s laws.
I propose that the IRS ruling on nonprofit status should be for a limited time (10 years?), and that when renewal is considered, the organization should examine its market and its ability and then apply for renewal (or merger, or dissolution, or adoption by a larger organization). If there were a Federal mechanism that made it necessary for organizations to consider their continuing operation, we could provide resources that helped organizations to make wise choices.
Do not prevent a thousand flowers from blooming, but remember to thin the plants and prune the weeds to make the garden thrive.
I’m missing something – or two things.
First, isn’t it true that for-profits can already address their owners’ giving natures — well, kind of — through sponsorships (well, perhaps not completely altrustically) or the initiation of a charitable “arm” or “wing” (or some such appendage)?
Second, while I could see that this idea could have legs (another apendage, sorry) for a sole-proprietorship or parternship, for example, I can’t imagine how it might work at the other end of the spectrum – the publicly-traded company. If current mission-based non-profits cannot always get their boards and staff to play nice together, how would for-profits get every single shareholder to agree to part with a portion of his/her potential earnings? I can see it might work on paper, but I can’t begin to imagine the shareholder meetings…
Consider micro-loans, for which the principal proponent got a Nobel prize just recently. A cynical friend remarked, “20% interest is called loan-sharking in my book.” And yet–very few social reforms have occurred in the absence of economic reinforcement. Consider slavery. Perhaps this dialog will help social reforms along.
Consider also Rockefeller, Carnegie, etc. who became socially active after making their millions. Maybe Bill Gates is hybridizing this concept, splicing the responsible corporation/nonprofit concepts.
In response to the previous commenter who suggested a 10 year re-evaluation of nonprofits:
Actually, the IRS does this after 5 years, at least in theory. New non-profits apply for a preliminary ruling of tax-exempt status, then are required to report on their income and activities after 5 years of operations to receive their definitive ruling.
Whether the IRS does much to examine these is unknown.
Andrew,
The not-for-profit laws need a complete re-write. How can non-profits have millions of dollars in assets while their stated (or implied) missions are not being fulfilled? My favorite example is the ASPCA and the Humane Society of the United States. Their literature and fund raising material suggest that they save animals and need our donations to help the poor things. Neither organization saves animals or funds shelters. The ASPCA had over $73,000,000 in assets in 2003 (they haven’t released their IRS 990 since then) and I would wager they raised another $30,000,000 off of hurricane Katrina.
Non-profits like these are a disgrace. The laws need to be changed – to protect the kind people who donate.