What is a nonprofit?

Nonprofit organizations operate for the social good.  They are sometimes called charities, humanitarian aid organizations, nongovernmental organizations (NGOs), or foundations. Hospitals, museums, universities and religious entities can also be nonprofits. 

A nonprofit can generate income greater than its expenses (aka profit), but it differs from for-profit or private sector companies because those earnings must be used to further its purpose by reinvesting in the organization versus paid out to individuals for private financial gain (think: bonuses or shareholder dividends).

Many nonprofits in the U.S. are registered as a 501(c)(3). That means that they have been determined by the IRS to be serving a social good and, as a result, they don’t have to pay federal income taxes or certain state and local taxes.  They still pay taxes such as federal payroll, sales taxes, etc.

When you donate to a qualified nonprofit, it’s tax deductible. Save your receipts to claim the deduction on your taxes at the end of the year.

Examples of nonprofits

The nonprofit sector is a diverse ecosystem of organizations that range in size, activities, and reach.  They operate at the local, state, national, regional, and global levels. Examples include:

Grassroots

Focus on bottom-up approaches that engage everyday people in their community to jointly define their goals and work together to achieve them. 

Direct services

Deliver (often essential) services to specific populations, particularly low-resource individuals.  This includes education, housing, employment, health, immigration services, and much, much more.

Policy and advocacy

Focus on top-down approaches to influence laws, public policy, government, and society-at-large.  They often engage in research, public education, lobbying, media, campaigning, and coalition building.

Movement building

Help to activate and organize the will and capacity of people and organizations to work collectively toward a shared vision.  They help to strengthen connections across people, organizations, and movements, provide resources to organizers, and amplify their messages.

Intermediary and capacity building

Help to strengthen the nonprofit sector by providing resources, training, and technical assistance.

Humanitarian aid

Provide immediate emergency assistance to victims and survivors of conflict, famine, and natural disasters throughout the world.

Most nonprofit staff are full-time, paid professionals

It is a misconception that nonprofits are run by volunteers.  In fact, the U.S. nonprofit sector employs the third largest workforce behind retail and manufacturing.

Many program staff require professional qualifications and higher education such as a masters in social work, international development, public policy, or nonprofit management. Nonprofits also employ a range of other fields including finance and accounting, legal, marketing and communications, IT, and human resources.

Beware of the overhead myth!

Nonprofits are just as financially rigorous and business savvy as the private sector.  In fact, many nonprofits have to be even more savvy because they are often required to do more with less.

Overhead - things like staff compensation, utilities, and IT - is vital to the health and operations of a nonprofit. How can nonprofits solve the world’s complex problems if they aren’t able to invest in their staff and infrastructure?  Just because nonprofit professionals’ motivation to work may include a bit of altruism, they still deserve decent salaries, updated technology, and pleasant workspaces!

Some people, and nonprofit rating systems, believe the ratio of overhead to program costs can help determine the effectiveness or impact of an organization.  They want to see a small fraction spent on overhead.  This is harmful because it prevents nonprofits from investing in their staff and infrastructure which can actually make them less effective. When making a donation, don’t use the overhead to program costs ratio as a factor in your decision.  Instead, focus on transparency, leadership, governance, and results.

Read this open letter to the donors of America from the leaders of the top nonprofit rating systems, and listen to this TED Talk by activist and fundraiser Dan Pallotta.

Critiques

Although nonprofits are committed to the social good, they don’t always get it right, and must constantly examine their motivations and practices, just like the rest of us.

The nonprofit industrial complex

As the nonprofit sector has grown, some have criticized that it tries to perpetuate its own existence instead of work itself out of a job.  Others have called out that the “professionalization” of nonprofits has taken organizers off the streets and into offices, weakening social movements.  Some argue that nonprofits’ reliance on corporate, foundation, and government funding serves as a means to control dissent, to allow corporations to mask their exploitation and rights abuses under philanthropic activity, and to reinforce a system of white supremacy.  Read The Revolution Will Not Be Funded for more.

White saviorism

The idea that white people, or white culture, can rescue BIPOC and/or people in lower-income countries from poverty and oppression. Despite well-intentions, it centers the white person as the one who knows best and portrays those they help as passive recipients of charity, incapable of meeting their own needs.  It reinforces shame-based identities that turn recipients into helpless victims, robbing them of their dignity and autonomy. Look for organizations that center people with lived experience and support them to develop and carry out their own solutions.

Poverty porn

Any type of media that promotes stereotypes by portraying people as victims in poverty-stricken or oppressive conditions in order to elicit an emotional response – often to increase donations.  Visual images are usually captured without the subject’s consent.  It’s time to counter these portrayals with narratives and images that convey thriving, positive and capable communities. Watch this TED Talk by Chimamanda Ngozi Adichie on the danger of a single story.

Despite critiques, nonprofits fill an important gap

Because the U.S. has one of the weakest social safety nets compared to other rich countries, we have one of the largest nonprofit industries in the world.  For example, democratic socialist countries do not need a large nonprofit industry because their governments ensure their citizens’ basic human needs are met. 

In the U.S., nonprofits often pick up where the government has failed by providing essential needs such as health care, housing, job training, education, food, and so much more to the most vulnerable.

Nonprofits are also leaders in the fight for social justice and human rights by addressing root causes and advancing structural and systems change. 

Structures other than 501(c)(3)s

Organizations that engage in substantial lobbying activities

Are not eligible for 501(c)(3) status. Basically, the government wanted to ensure that groups could not use government funding or tax benefits to lobby against it. Nonprofits can still engage in a broad range of advocacy activities, but it is confusing to determine what is allowable and what is not.  It requires extensive tracking and paperwork to make sure that activities fall within the limits of allowable activity.  As a result, many organizations that do extensive advocacy and lobbying may decide to register as a 501(c)(4) in order to avoid restrictions or onerous reporting obligations.     

501(c)(4)s or social welfare organizations

Encompass a range of groups that are not organized for profit and are operated to promote the social good.  They can register to receive some tax exemptions from the IRS but, unlike 501(c)(3) nonprofits, they cannot accept tax deductible donations. They include lobbying originations, labor organizations, business leagues, civic leagues, local associations, volunteer fire companies, homeowners’ associations, and some Super PACs, etc. 

Political Action Committees (PACs)

Privately raise and pool money to donate to political campaigns including for or against candidates, ballot initiatives, or legislation. 

Super PACs

Not only raise money to donate to political campaigns, but they can also engage in lobbying and advocacy.  They cannot, however, contribute directly to a particular candidate or coordinate activities with a candidate’s campaign.

Sports, hobby or special interest clubs and associations

They are not qualified by the IRS to be tax exempt or receive tax deductible donations even though they do not operate for profit.  They usually don’t have any paid staff.

Social enterprises

For-profit businesses that are driven by a social mission and commit to maximizing the social good ahead of shareholder gain.  Many social enterprises become Certified B Corporations.  B Corps are legally required to consider the impact of their decisions on their workers, customers, suppliers, community, and the environment.

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Originally published May 11, 2021.

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