Effective Nonprofit Management

Context and Environment

Joan E. Pynes

• Publisher: Routledge
• Year: 2014
• Print ISBN:
  9780765630292
• eBook ISBN:
  9781317472308
• Topic: Business
• Subtopic: Business General
• Index: Business

Employees with valuable skills and a sense of their own worth can make their jobs, pay, perks, and career opportunities different from those of their coworkers in subtle and not-so-subtle ways. This book shows how such individual arrangements can be made fair and acceptable to coworkers, and beneficial to both the employee and the employer.

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The Independent Nonprofit Sector

More than 1.5 million nonprofits registered with the Internal Revenue Service in 2008 (National Center for Charitable Statistics (NCCS) 2010). However, that figure is believed to be understated, because nonprofits with less than $5,000 in annual revenues and religious congregations are not required to register with the IRS. The Internal Revenue Code defines more than thirty kinds of tax-exempt organizations. Thirty of them fall under the Section 501(c) designation, while the rest have a different numerical designation, such as Section 527 Political Organizations or Section 494(a)(2) Split Interest Trust designation. Table 1.1 lists the different types of associations, corporations, and trusts that can qualify for federal tax exemption.

Typically when we think of nonprofit organizations, we think of those we are familiar with or that are written about in the local newspapers or featured on TV; the United Way of America, the Society for the Prevention of the Cruelty to Animals (SPCA), the Boys & Girls Clubs, Big Brothers and Big Sisters, St. Jude’s Hospital in Memphis, the Metropolitan Museum of Art (MOMA), the Catholic Church, as well as smaller tax-exempt organizations that operate in our communities and provide community and social support such as Meals on Wheels, community arts groups, community service clubs, sport leagues, and parent-teacher associations (PTAs). These organizations fall under Section 501(c)(3) and are public charity nonprofit organizations. The largest category of tax-exempt nonprofit organizations is public charity. Human service, education, health-care, cultural, and recreation nonprofits fall in this category.

The Sierra Club, the American Civil Liberties Union (ACLU), and the League of Women Voters are 501(c)(4) social welfare nonprofit organizations. As defined by the IRS, social welfare organizations “further the common good and general welfare of the people of a community (such as bringing about civic betterment and social improvements” (IRS 2008).

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Table 1.1

IRS Organization Reference Chart

There are other kinds of tax-exempt organizations as well. Labor unions and organizations such as the AFL-CIO, Teamsters, Fraternal Order of Police, and Service Employees International Union (SEIU) are 501(c)(5) tax-exempt organizations, and chambers of commerce and some professional organizations are referred to as business leagues and fall under 501(c)(6). IRS Publication 557 provides an explanation of the different kinds of 501(c) organizations (IRS 2010).

The nonprofit sector is the collective name used to describe organizations that are not government or private for-profit organizations. They are created by private interests, are privately owned, and do not seek profits. Any surplus revenues are invested back into the nonprofit instead of being paid out to shareholders or private owners. Nonprofit organizations are chartered by each state and are conferred special tax-exempt status on their federal income taxes by the Internal Revenue Code (IRC). Nonprofits exempt from federal income tax are typically granted exemptions from states and local income taxes as well. State and local governments may also grant nonprofits exemptions from property and sales taxes. The reason that nonprofits are tax-exempt is that they mitigate many of the responsibilities of government. Day-care centers, recreation, cultural and educational programs, and social and health-care facilities provide services that government might be required to supply. By offering tax exemptions, government supports the work of nonprofits. Sometimes professional associations and social welfare organizations do not meet local and state exemptions. Nonprofits are not exempt from paying payroll taxes for employees, and they are also required to pay taxes on income from activities that are unrelated to their mission.

To be recognized as a nonprofit, an organization must possess the following general characteristics:

1. It is specifically designated as a nonprofit when organized.

2. Profits or assets may not be divided among corporate members, officers, or directors in the manner of corporate dividends.

3. It may lawfully pursue only such purposes as are permitted for such organizations by statutes (Oleck 1988).

Internal Revenue Code 501(c) lists the different types of associations, corporations, and trusts that can qualify for federal tax exemption.

The focus of this book is on the independent nonprofit sector, nonprofit organizations that are incorporated to provide a public benefit. This chapter will provide a brief overview of the nonprofit sector in general and will answer the following questions:

• What is the nonprofit sector?

• What are some differences between 501(c)(3) and 501(c)(4) nonprofit organizations?

• How are economic challenges affecting nonprofit management?

• How are technology changes affecting nonprofit management?

• How are social changes affecting nonprofit management?

• How will the changes in the legal environments affect nonprofit management?

The largest nonprofit classification is 501(c)(3). These organizations are referred to as public charities. Charitable nonprofits are private organizations that serve a public purpose. They operate under a nondistribution component, which prohibits the distribution of profits or residual earnings to individuals who control the entity—excess revenues are invested back into the nonprofit and are not paid as dividends to individual shareholders. Because of this restriction, it is believed that they possess a greater moral authority and concern for the public interest than private for-profit organizations do. Nonprofits often perform public tasks that have been delegated to them by the state or perform tasks for which there is a demand that neither government nor for-profit organizations provide. They offer a variety of services, such as providing occupational training or counseling services to the disadvantaged, providing medical services, developing recreational programs, providing cultural and educational activities, preserving the environment, and funding medical research. Donations to 501(c)(3) public charity nonprofits are deductible from the taxes that individuals and corporations owe on their personal and business income taxes because nonprofits provide a public benefit, and the tax deductions encourage donations.

Nonprofits are thought to be more flexible than government agencies. They can experiment with new programs, responding more quickly to new social needs. Instead of getting involved in new or controversial programs, government often gives money to nonprofit agencies to provide services. Nonprofits get financial support, and clients receive services. Government, through the conditions it places on agencies that receive public funds, still has some influence but can quickly disassociate itself from programs when things go wrong. There are often certain societal needs that may be too expensive to be provided on a private for-profit basis. Therefore, in the United States, both government and the nonprofit sector provide certain services whose costs exceed their market value (Douglas 1983; O’Neil 1989; Salamon 1999; Weisbrod 1997).

The IRS defines a public charity as an organization that normally receives a substantial portion of its total income directly or indirectly from the general public or government. In other words, it can demonstrate that it has broad support, rather than funding from an individual source. Other 501(c) classifications derive most of their money from their members and primarily serve the interests of their members. Because of their public serving nature, individual and corporate donations to 501(c)(3) public charity nonprofits are deductible from taxable federal income tax.

Private foundations are also 501(c)(3) nonprofits but are not considered to be public charities. Foundations receive the majority of their money from a few donors. One company, one family, or one person can start a foundation. Tax treatment of private foundations is different from that of public charities. The tax deductions permitted to individual donors for gifts to private foundations are more limited. The investment earnings of private foundations are subject to a tax on their net investment earnings, and the foundations are required to spend at least 5 percent of their investment assets each year. Foundations are usually funding intermediaries that do not operate their own programs but make gifts or grants to other nonprofits that do. However, a few foundations like the Carnegie Endowment for International Peace and the Getty Trust are operating foundations, which means that they use their resources to implement their own programs rather than make grants to other nonprofits. Table 1.2 indicates the growth in the number of nonprofit organizations in the United States between 1998 and 2008. Included in Table 1.2 are 501(c) (3) nonprofits, public charities and private foundations, and other 501(c) nonprofit organizations.

The National Taxonomy of Exempt Organizations, developed by the National Center for Charitable Statistics, provides a classification system for public charity nonprofit organizations. There are ten major groups, twenty-six categories, and over four hundred subcategories. Table 1.3 illustrates the major groups and how many of them existed in each major group for 2007.

Social welfare nonprofits, often referred to as advocacy organizations, are another classification of nonprofits that are public serving. The American Civil Liberties...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Preface
• 1. The Independent Nonprofit Sector
• 2. Increased Accountability in the Nonprofit Sector
• 3. Nonprofit Governance
• 4. Understanding Intergovernmental Relations and Public Policy
• 5. Where Revenues Come From and the Importance of Financial Management
• 6. Organizational Effectiveness and Program Measurement: Documenting Successes and Improving Performance
• 7. Human Resources Management: What Makes Nonprofits Different?
• 8. Advocacy and Lobbying: Making Your Voices Heard
• Epilogue: Expectations for the Future
• Name Index
• Subject Index
• About the Author