The Handbook of Nonprofit Governance

• Publisher: Jossey-Bass
• Year: 2010
• ISBN:
  9780470602461
• Edition: 1
• Topic: Business
• Subtopic: Nonprofit Organizations & Charities
• Index: Business

THE HANDBOOK OF NONPROFIT GOVERNANCE

From BoardSource comes The Handbook of Nonprofit Governance. This comprehensive resource explores the overarching question of governance within nonprofit organizations and addresses the roles, structures, and practices of an effective nonprofit.

The Handbook of Nonprofit Governance covers the topics that are of most importance to those charged with creating and sustaining effective leadership, including building a board; succession planning; policies; financial oversight; fundraising; planning; strategic planning processes; risk management; and evaluation of the board, CEO, and organization.

Praise for The Handbook of Nonprofit Governance

"This is the first book I've found that covers the topic of governance from A to Z. I know what I'll be assigning the students in my governance class as a textbook next semester!"
—TERRIE TEMKIN, founding principal, CoreStrategies for Nonprofits, Inc.

"BoardSource has prepared an exceptional resource for nonprofit boards and leaders. This comprehensive volume offers timely and relevant information about board work and governance, including practical tools and resources that will be valuable to all types of nonprofits."
—DAVID O. RENZ, chair, department of public affairs; Beth K. Smith/Missouri Chair in Nonprofit Leadership; and director, Midwest Center for Nonprofit Leadership; University of Missouri, Kansas City

"If you are involved in nonprofit organizations, and if you ever have doubts about how they are best run, this is the book for you-and BoardSource is the place to turn."
—FISHER HOWE, consultant, Lavender/Howe & Associates, and author, The Nonprofit Leadership Team

BoardSource (formerly the National Center for Nonprofit Boards) is the premier resource for practical information, tools and best practices, training, and leadership development for board members of nonprofit organizations worldwide.

PART ONE
GOVERNANCE PRINCIPLES, ROLES, AND STRUCTURE

CHAPTER ONE
IN THE SPIRIT OF SERVICE: INTRODUCTION TO THE NONPROFIT WORLD

The only ones among you who will be really happy are those who will have sought and found how to serve.

—ALBERT SCHWEITZER

Virtually every society shows its voluntary spirit and philanthropic instinct by creating informal community groups, charitable nongovernmental organizations, or faith-based organizations and places of worship. In countries around the world, nonprofits are a vibrant, essential element of national life. They struggle to reduce poverty and bring an end to homelessness. They strive to build safe places to learn and play, create inspiring art and music, and protect natural resources.

Nonprofit organizations span a wide spectrum of mission areas, resources, values, history, and stakeholders—from small, local homeless shelters to large, international trade associations; from community foundations operating within a geographic region to educational institutions that attract students from around the country. Their funding may come from just a handful of sources or from an array of charitable contributions, membership dues, grants, fees from programs and services, and more. According to the Internal Revenue Service, the United States alone has more than 1.8 million voluntary, nonprofit, and nongovernmental organizations, with more recognized every month by the federal government as tax-exempt entities.

Economic life in the United States and many other countries consists of three sectors:

• Public-sector organizations exist to serve the public good. They are part of governmental structures and are financed largely by tax revenues.
• Private-sector organizations exist to produce a profit for their owners. To do so they must meet the needs of a constituency who will pay for their goods or services.
• Nonprofit-sector organizations exist to serve a social purpose, a constituency, or a cause. To do so successfully, they must earn or raise sufficient funds to cover expenses and safeguard the organization’s future. They are not prohibited from creating excess revenue over expenses, but such surplus must be used to support the organization’s mission, not to be distributed as private gain. In nonprofit organizations there are no individual owners who can claim organizational assets for their own benefit.

An Overview of the Nonprofit Sector

The nonprofit sector sometimes is called the not-for-profit sector, the third sector, the independent sector, the philanthropic sector, the voluntary sector, or the social sector. Outside the United States, nonprofits are often called nongovernmental organizations (NGOs) or civil society organizations.

These other names emphasize the characteristics that distinguish nonprofits—voluntary sector to acknowledge the importance of volunteers and voluntary action, independent sector to distinguish nonprofits from business and government, and social sector to underscore how the activities of nonprofits enhance the social fabric of our country.

The nonprofit sector in the United States is vast and diverse and touches all our lives. The nonprofit organizations in this country in 2008 employed 10.5 percent of the country’s work force—close to ten million paid workers.

Almost all nonprofits are exempt from federal, state, and local income taxes; state and local property taxes; and state and local sales taxes. They are, however, required to pay taxes on income derived from activities that are unrelated to their mission. Nonprofits are not exempt from withholding payroll taxes for employees. Section 501(c) of the Internal Revenue Code, which outlines the types of organizations eligible for tax exemption, lists more than twenty-five classifications of nonprofits, which include the major subcategories described in the following section.

Public Charities

Nonprofits that are exempt under Section 501(c)(3) of the tax code are often called charities, but these organizations do far more than provide free care and services to the needy. Hospitals, museums, orchestras, independent schools, public television and radio stations, and many other organizations are 501(c)(3) nonprofits. Most U.S. nonprofits are classified as public charities, and in 2008 nearly 1.2 million were registered with the Internal Revenue Service.

To be recognized as a public charity, a nonprofit must be organized and operated for purposes that are beneficial to the public interest. These purposes include

• Relief of the poor, distressed, or underprivileged
• Advancement of religion
• Advancement of education and science
• Creation or maintenance of public buildings or monuments
• Lessening of the burden of government
• Elimination of prejudice and discrimination
• Defense of human and civil rights
• Combating of community deterioration and juvenile delinquency

A public charity must be able to show broad public support, rather than funding from an individual source. Upon dissolution, its assets must be distributed to another 501(c)(3) charity. It is not allowed to engage in any partisan political activity. Lobbying is accepted but cannot be a substantial part of its activities. Individuals and corporations that give money to these organizations can deduct the value of gifts from their taxable income, provided they file itemized tax returns.

Foundations

Many individuals, families, businesses, and communities establish foundations as a way to support causes and programs that benefit society. Foundations, which are also 501(c)(3) charitable nonprofits, are one of the most complex components of the nonprofit sector. As a result of federal legislation passed in 1969, private foundations are subject to more stringent regulation and reporting requirements than other types of nonprofits. They are required to make grants equal to at least 5 percent of their net investment assets each year, and they generally pay a 2-percent excise tax on net investment earnings. There are more than seventy thousand foundations in the United States:

• Private foundations usually have a single source of funding (an individual, a family, or a business), and use income from investments to make grants to charitable nonprofit organizations. The Ford Foundation, the Carnegie Corporation of New York, and the W. K. Kellogg Foundation are well-known examples. Corporate foundations are private foundations that receive funding from—and make grants on behalf of—a corporation. The MetLife Foundation and the American Express Foundation are examples. Many corporations have in-house corporate giving programs instead of or in addition to corporate foundations.
• Operating foundations are “hybrid” foundations that use the bulk of their resources to carry out their own charitable programs, while also making grants to other charities. The Carnegie Endowment for International Peace and the J. Paul Getty Trust are examples of operating foundations.
• Community foundations pool the resources of many donors and focus their grantmaking on a particular city or region. The Cleveland Foundation and the New York Community Trust are examples of community foundations. The IRS classifies community foundations as publicly supported charities, not private foundations. These groups are not subject to excise taxes or distribution requirements like private foundations, and donations made to them by individuals are tax deductible.

Some nonprofits, such as hospitals and public colleges, create related or supporting 501(c)(3) organizations that may be called foundations; these groups are fundraising (rather than grantmaking) organizations, and they typically raise money from a broad range of donors and then distribute the proceeds to the parent organization. In addition, some other charities include the word foundation in their names even though they are not considered foundations according to legal definitions.

Social Welfare Organizations

To be tax-exempt as a 501(c)(4) organization, a nonprofit must not be organized for profit and must be operated exclusively for the promotion of social welfare. This means that the organization must operate primarily to further, in some way, the common good and general welfare of the people of the community (such as by bringing about civic betterment and social improvements). Nonprofits such as the NAACP, the National Rifle Association, and the National Organization for Women are examples of social welfare or advocacy organizations. Contributions to 501(c)(4) organizations are not tax deductible, and 501(c)(4) nonprofits have greater latitude to parti...