1. © 2014 SAGE Publications, Inc. Chapter 2: Overview of the Nonprofit Sector

2. © 2014 SAGE Publications, Inc. Historical Overview Deep roots in American history and culture Greco-Roman culture emphasis on Community Citizenry Social responsibility Judeo-Christian culture of helping others

3. © 2014 SAGE Publications, Inc. The Industrial Revolution The rise of great wealth resulting from the Industrial Revolution led to the modern era John D. Rockefeller Andrew Carnegie’s Gospel of Wealth (1889)

4. © 2014 SAGE Publications, Inc. Charity versus Philanthropy Charity Giving intended to meet current individual human needs or to alleviate current human suffering that is often emotionally driven and impulsive Feed the homeless Aid victims of a natural disaster Philanthropy Giving designed as a long- term investment in the infrastructure of society Construction of hospitals Endowments for universities Charitable foundations intended to exist in perpetuity

5. © 2014 SAGE Publications, Inc. Searching for a Common Vocabulary “Nonprofit” terminology does not fully capture the purpose or diversity of organizations in the sector Possible alternatives Independent sector Third sector Charitable sector Voluntary sector Tax-exempt sector Civil society sector Social enterprise and social sector

6. © 2014 SAGE Publications, Inc. Size of the Nonprofit Sector in the U.S. 1.9 million tax-exempt organizations 1.4 million charitable nonprofits -- 501(c)(3) 138,000 501 (c) (4) 13.5 million employees (10% of U.S. workforce) $668 billion in wages and benefits to employees $1.1 trillion in spending (5% of U.S. GDP) $4.3 trillion in total combined assets of all nonprofits Source: Independent Sector Data from 2012

7. © 2014 SAGE Publications, Inc. Strategies for Categorizing Nonprofits Purposes and activities National Taxonomy of Exempt Entities (NTEE) IRS classifications Who benefits from nonprofit activities Salamon’s Anatomy Degree to which nonprofits are commercialized or use business principles and methods

8. © 2014 SAGE Publications, Inc.

9. IRS Classifications: Social Welfare Organizations IRS tax code – 501(c)(4) Vast majority are advocacy organizations: organizations "to further the common good and general welfare of the people of a community“ Small number are HMOs and other medical and dental insurance plans Key differences between 501(c)(3) and 501(c)(4) status Both groups are tax-exempt, but gifts made to 501(c)(4) organizations are not tax deductible 501(c)(4) organizations do not face the same limitations on political activity as 501(c)(3) organizations

10. © 2014 SAGE Publications, Inc. IRS Classifications: Charitable Nonprofits IRS tax code -- 501(c)(3) Requirements for receiving 501(c)(3) status Organization’s mission and work must fall under at least one of eight categories defined by the IRS Organization must meet the non-distribution test Individual owners are not receiving benefits from the organization’s assets Managers are not being personally enriched through excessive compensation Organization must limit its political activities Cannot support or oppose candidates for public office Limits on expenditures on lobbying

11. © 2014 SAGE Publications, Inc. IRS Classifications: Charitable Subsectors Religious congregations Arts, culture, and humanities Education Environment and animals Health Human service International and foreign affairs Funding intermediaries

12. © 2014 SAGE Publications, Inc. IRS Classifications: Public Charities and Private Foundations Both are 501(c)(3) organizations Definitions Public charities -- organizations that receive most of their support from a relatively diverse set of donors or from government Private foundations -- organizations with that receive most of their support from a single donor or a small group of donors Differences in treatment Taxes Limits on lobbying

13. © 2014 SAGE Publications, Inc. Salamon’s Anatomy Classifying nonprofit organizations by who receives the principal benefit of the organization’s activities Member serving versus public serving Member serving organizations exist primarily to secure benefits for the people who belong to them or who support them Public serving organizations exist primarily to promote some aspect of social welfare

14. © 2014 SAGE Publications, Inc. Social Enterprise Spectrum Derived from Enterprising Nonprofits: A Toolkit for Social Entrepreneurs (Dees et al., 2001 ) Two extremes Purely philanthropic Purely commercial Organization’s placement on the spectrum General motives, methods, and goals Relationships with key stakeholders

15. © 2014 SAGE Publications, Inc.

16. Hybrid Models and Controversy over Commercialization Sabeti (2009) Increasing use of business methods by nonprofits Growing responsiveness of business to social concerns Movement to create a new legal category that recognizes hybrid models Low-profit, limited liability company Controversy over commercialization Pro -- Reduces nonprofits’ dependence on government and charitable giving, allowing for greater independence Con -- Leads some nonprofits to focus on the financial bottom line at the expense of their social missions

17. © 2014 SAGE Publications, Inc. Commercialization and Tax Issues Common misunderstandings -- nonprofit organizations cannot earn profits and are always exempt from taxation Nonprofits are exempt from taxation on revenues related to activities that directly address their social missions Revenues from activities that are not related to the mission are subject to the unrelated business income tax (UBIT) Concern about engaging in unrelated business activities Substantial reliance would put the organization’s tax exempt status in jeopardy

18. © 2014 SAGE Publications, Inc. Implications for Nonprofit Managers Nonprofit management as a balancing act Organization’s mission against financial sustainability Nonprofit sector’s unique traditions against rapid changes in competitive markets Social and political forces against core values and independence Nonprofit management requires a unique blend of skills, distinguishing it from management in government or the for-profit sector