A Look at Nonprofit Organizations
Nonprofit organizations were officially born in the 1969 Tax Reform Act, which was signed into law by President Richard Nixon. While the Tax Reform Act may be more well-known for its personal income tax overhaul, it also provided legal tax exemption on donations made to charitable organizations meeting the newly defined ‘nonprofit’ 501(c)(3) status. Charitable organizations had been around long before 1969, but the new law allowed the Internal Revenue Service (IRS) to federally define and authorize them as private foundations. Today, the IRS requires that a 501(c)(3) organization is “operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational, or other specified purposes and that meet certain other requirements are tax exempt under Internal Revenue Code Section 501(c)(3).” Getting to the heart of the name, nonprofits must not distribute earnings to private shareholders or individuals. Further, they also cannot partake in political campaigns. This article looks at the three core aspects of nonprofit organizations: the finances, the people, and the mission.
The Financial Side
Given the IRS's role in designating the organizations, the financial structure of nonprofits is a natural place to start examining. As noted above, charitable organizations are only 1 of the 6 stated categories which can be considered a nonprofit. Some examples of nonprofits and their mostly recently reported annual revenues are listed below. The donation revenue figures demonstrate how a nonprofit does not exclusively or solely need charitable contributions to be considered a nonprofit. However, some organizations such as Feeding America, one of the largest nonprofits in the United States, is nearly 100% dependent on charitable contributions.
Feeding America ($2.81 billion, $2.76 billion from donations)
Metropolitan Museum of Art ($575 million, $279 million from donations)
National Geographic Society ($130 million, $31 million from donations)
The National Council of Examiners for Engineering and Surveying ($34 million, $0 from donations)
Harvard University ($5.7 billion, $1.9 billion from donations)
National Public Radio ($252 million, $57 million from donations)
Habitat for Humanity ($288 million, $252 million from donations)
The People Side
With the balance sheet taken care of, who’s responsible for running the nonprofits? The nonprofit organizational structure and hiring process is not unlike common businesses in the blue-collar or white-collar sector. Nonprofits maintain a Board of Directors or Trustees, a CEO and other top-level executives, managers, and full-time staff. The size of the board and number of salaried staff is up to the nonprofit.
One common assumption of nonprofits is that their staff are underpaid. Although there is no legal upper cap on salary, the 2016 Nonprofit Employment Practices Survey found that 33% of the 435 surveyed nonprofits report their biggest challenge as “hiring qualified staff within limited budget constraints”. The second biggest challenge was “finding qualified staff”. This suggests that talent is being pulled to the higher paying private sector. The Survey also reports that the annual nonprofit sector turnover rate was at 19%. This figure is well below the annual rate seen in other industries across the United States such as Leisure and Hospitality (75% turnover rate), Professional and Business Services (65% turnover rate), and Education Services (31% turnover rate).
These Survey statistics lead to the conclusion that people electing to work at nonprofits are highly committed to the organization’s mission. With one of the lowest turnover rates among any industry in combination with monetary competition from the private sector, the existing nonprofit staff are finding ways to stay afloat – there are approximately 1.8 million nonprofit organizations today. However, approximately 882,000 nonprofit organizations have lost their tax exemption status since 2010 for failing to file IRS forms (unfortunately it’s difficult to know whether this is due to intentional dissolution or unintentional failure to file with the IRS).
Volunteers are a group whose impact on a nonprofit cannot be overlooked. Many nonprofits engage volunteers to help further their mission. Using the same nonprofits listed earlier in the article, below are the number of volunteers each organization boasts. The full-time employee numbers show the relative reliance on volunteers.
Feeding America (207 volunteers & 326 employees)
Metropolitan Museum of Art (1,328 volunteers & 2,564 employees)
National Geographic Society (874 volunteers & 601 employees)
The National Council of Examiners for Engineering and Surveying (800 volunteers & 82 employees)
Harvard University (10,000 volunteers & 36,442 employees)
National Public Radio (35 volunteers & 1,283 employees)
Habitat for Humanity (1,400,000 volunteers & 1,365 employees)
The Mission Side
Perhaps the most important discussion around this look into nonprofits, the reason for their existence, is the mission statements of the organization. The mission statement guides the organization, the people execute the mission statement, and the financials fund the organization. The IRS requires a mission statement or brief explanation of the organization be included on the nonprofit application form. The statement must only consist of current or planned activities, not potential future activities. Below are the mission statements of the aforementioned nonprofits. Each mission is unique, but together, they are a collection of contribution to society.
Feeding America – “Our mission is to feed America's hungry through a nationwide network of member food banks and engage our country in the fight to end hunger.”
Metropolitan Museum of Art – “The Metropolitan Museum of Art collects, studies, conserves, and presents significant works of art across all times and cultures in order to connect people to creativity, knowledge, and ideas.”
National Geographic Society – “The National Geographic Society uses the power of science, exploration, education and storytelling to illuminate and protect the wonder of our world.”
The National Council of Examiners for Engineering and Surveying – “The mission of NCEES is to advance licensure for engineers and surveyors in order to safeguard the health, safety, and welfare of the public.”
Harvard University – “The mission of Harvard College is to educate the citizens and citizen-leaders for our society. We do this through our commitment to the transformative power of a liberal arts and sciences education.”
National Public Radio – “The mission of NPR, in partnership with its member stations, is to create a more informed public, one challenged and invigorated by a deeper understanding and appreciation of events, ideas, and culture within the United States and across the globe. To this end, NPR reports, produces, acquires and distributes news, information and other content that meet the highest standards of public service in journalism and cultural expression.”
Habitat for Humanity – “Seeking to put God’s love into action, Habitat for Humanity brings people together to build homes, communities and hope.”
Nonprofit organizations represent a huge sector of present-day society. Some are highly visible icons, like Habitat for Humanity, and some are quiet engines, like the National Council of Examiners for Engineering and Surveying. Regardless of identity, the nonprofit space has been evolving and growing since 1969. In 1976, Congress passed a bill allowing nonprofits to contribute up to one million dollars toward lobbying. The tax-free benefit of nonprofit organizations, coupled with the lack of explicit employee salary cap, may leave room for exploitation in the space (see note 1). However, the potential for exploitation is a reality in any system (think the occasional squirrel invading a bird feeder). The massive financial contributions, volunteer efforts, and philanthropic dedication in nonprofits make their benefit hard to deny. Could we imagine a world without the MET, National Geographic, or Harvard?
1 For a critical perspective on nonprofit oversight, see the article from Slate here. For a glimpse into the mind of the 1969 Congress, see the arguments for and against the 1969 Tax Reform Act in the archived summary here.