Nonprofit Management: Chapter 2

In order for a charitable nonprofit to be recognized as tax-exempt, it must be organized and operated for one or more 8 purpose:

Charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competitions, and prevention of cruelty to children and animals.

Member-serving Organizations

Exist primarily to secure benefits for the people who belong to them or who support them through dues, membership fees, or other contributions.

Institutionally Related Foundations

Fundraising arms or their host or parent organizations. They are public charities because they solicit and receive gifts from the public to direct its support to just one organization.

Impact Investors

Hybrid organizations face the challenge of needing to obtain financing. Impact investors may meet that need. This group includes individuals and organizations willing to accept lower rates of financial return in exchange for social benefits.

Tax-Exempt Sector (alternative to nonprofit term)

Identifies organizations entirely in terms of their status under U.S. tax law. This speaks to the legal status of nonprofits but does not explain what they actually do.

Public-serving Organizations

Include churches, the charitable and scoail welfare organizations discussed, as well as foundations and other funding intermediaries.

Voluntary Sector (alternative to nonprofit term)

Many organizations do indeed rely on volunteers, but ther term does not reflec that many nonprofits have more paid staff members than volunteers.

Social Enterprise (alternative to nonprofit term)

Nonprofits that have a social objective but employ commercial principles in their generation of revenues (nonprofits managed like businesses).

Nondistribution Constraint (nonprofit distribution requirement)

One defining characteristic of nonprofits but not THE defining characteristic. Profits must be retained within the organization and be used to further its programs rather than enrich individuals personally.

Hybrid Organizations

Organizations that operate under both nonprofit and for-profit legal forms.

Public Charities

Organizations that receive support from a relatively large number of donors or from government, that is, from the public.

Third Sector (alternative to nonprofit term)

Placing nonprofits alongside the commercial economy and government. This seems to imply a rank order of importance, which many people would disagree with.

Benefit Corporation

Social responsibility is included in the corporation's charter, granted by the state, and the benefit corporation is thus a new legal form. A benefit corporation is different from a certified B Corp.

Collective Impact

The commitment of a group of important actors from different sectors to a common agenda for solving a specific social problem. Multisector approach.

Voluntarism

The principle of relying on voluntary action (used especially with reference to the involvement of voluntary organizations in social welfare).

Civil Society Sector (alternative to nonprofit term)

The sum of institutions, organizations, and individuals located between the family, the state, and the market, in which people associate voluntarily to advance common interests.

Advocacy Organizations

To further the common good and general welfare of the people of a community. Tax-exempt under Section 501(c)(4). Cannot receive tax-deductible gifts.

One thing nonprofits do not do is:

distribute profits to individual owners in the form of dividends or use those profits to enhance the wealth of owners through the increasing value of the enterprise.

One common misunderstanding is that nonprofits cannot:

earn profits. They can and do earn profits but the profits must be retained within the organization and be used to further its programs rather than enrich individuals personally.

Flexible Purpose Corporations

Requires that the board and management agree on social purposes and provides the boards and managers with protection against liability if they do not exclusively pursue profits for the benefit of shareholders.

Unrelated Business Income Tax (UBIT)

Revenues from activities that are not related to the mission are subject to UBIT. An activity is unrelated and subject to tax if it meets three requirements: (1) It is a trade or business, as defined by the IRS; (2) It is regularly carried on; (3) It is not substantially related to the exempt purpose of the organization.

B Corps

A certified B Corp is not truly a new corporate legal form, but rather a for-profit business that has been certified as following socially responsible practices and having a positve social impact while engaging in commerce.

Philanthropy

A more rational form of long-term investment in the infrastructure of society, seen, for example, in gifts made to construct new hospitals, endow universities, or create new charitable foundations intended to exist in perpetuity. (p.22)

Independent Sector (alternative to nonprofit term)

Raises the question "Independent from what?" Nonprofits are financially dependent on resources from donors and subject to an increasing array of state and federal law.

Why are advocacy organizations different from charitable nonprofits in the eyes of the tax code?

Advocacy organizations do not face the same limitations on political activity. They can spend money on lobbying without limitation.

Charitable Sector (alternative to nonprofit term)

Charitable gifts, while important, are not the largest source of nonprofit revenues. Some organizations are nonprofit but neither seek nor receive any form of charitable support.

What is the largest group of tax-exempt organizations?

Charitable nonprofits, classified under 501(c)(3). Approximately 1.1 million. Includes hospitals, museums, schools, colleges, orchestras, and nonprofits that provide human and social services.

Low-profit, limited liability company (L3C)

Defines an organization that spans the for-profit and nonprofit sectors. This new form of legal entity is intended to pursue social purposes, like a nonprofit, but is also able to accept investments that provide a financial return at a rate below what would be expected from a purely commercial entity.

National Taxonomy of Exempt Entities (NTEE)

Divides the universe of nonprofit organizations into 26 major groups under 10 broad categories. The categories are based on organizations' purposes, activities, and programs.

Operating Foundations

Foundations that do not make any, or many, grants to other nonprofits and that may not even have the term foundation in their names. All their funds are used to support their own programs and operations. They are not sources of financial support for other nonprofits.

Charity

Giving intended to meet current individual human needs or to alleviate current human suffering - for example, to feed the homeless or aid the victims of a natural disaster. Emotionally driven and impulsive. (p.22)

Faith-based Organizations

Provide social services, which can receive government funds to support their secular programs.

Charitable Choice

Provisions to allow faith-based organizations to receive grants under federally funded programs.

Charitable nonprofits

Public charities and private foundations, classified under 501(c)(3). Approximately 1.1 million. Includes hospitals, museums, schools, colleges, orchestras, and nonprofits that provide human and social services. Eligible to receive tax-deductible contributions.

Social Welfare Organizations

Purpose is to advance a cause or work for social change. Encompass advocacy organizations. Gifts made to these organizations (Section 501 (c)(4)) are not tax deductible for the donor because they are not classified as charitable organizations.

Nonprofit Organization

This term really refers to one thing nonprofit organizations do not do, rather than capturing much about what ther are or the diverse programs and services they offer to society.

Nongovernmental Organizations

Those nonprofits that work internationally. It originated with the United Nations. It reflects organizations that perform governmentlike functions in the countries they serve, and that most receive a substantial of their revenue from government sources.

Private Foundations

Usually have only one or perhaps a few donors - often one person, one company, or the members of a family.