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Chapter 1
The Nonprofit Entity and Business PR
DEFINING NONPROFIT
Defining “nonprofit” is a difficult task, because it is not part of the public nor the private domain. It is a separate entity that operates somewhere between the two. If analyzing the not-for-profit sector on an informal basis, many similarities are found between it and for-profit corporations. A well-run nonprofit engages in planning, budgeting, accounting, and marketing. It must deal with personnel, information management, and governance issues. However, long-range planning, financial reporting, and organizational accountability, unlike in private business, are not based on the economic advancement of those who provide its capital. Although nonprofits must be financially soluble and even entrepreneurial in spirit, their primary objective is not to make money for their owners or shareholders. Profits are used to meet the organization's public service objectives.1
There are a few truisms about nonprofits. First, it is important to remember that a nonprofit organization is a nongovernmental entity, legally constituted and incorporated under state law as a charity or not-for-profit corporation. The governance structure of the nonprofit precludes self-interest and private gain but must serve some public purpose.
Federal income tax is not paid because the nonprofit possesses tax-exempt status. According to the IRS,2 to be tax-exempt under federal law, an organization must satisfy organizational and operational tests. The organizational test examines the group's two governing documents: one that creates the nonprofit and one that specifies the rules of operation. This information categorizes the tax-exempt entity into one of three types: the not-for-profit corporation, the trust, and the unincorporated association.
The operational test checks to ensure that the organization's operations conform to the requirements of the particular tax-exempt classification. This check assesses if too much lobbying is occurring, if political campaign activities are taking place, or if net earnings are going to individuals in a private capacity. In short, the operational test relates to the ongoing operations of the nonprofit. The agency also possesses a special legal status stipulating that donations made to the charity are tax deductible.3
It should be noted that the Internal Revenue Service has twenty-five separate categories of tax-exempt organizations. Included in this universe are the 501(c)(3) and 501(c)(4). The IRS code defines the 501(c)(3) classification as religious, educational, charitable, scientific, and literary organizations, and those testing for public safety, fostering certain national or international sports competitions, or working to prevent cruelty to children or animals. It also includes private foundations as part of the independent sector universe.
The 501(c)(4) category includes civic leagues, social welfare organizations, and local associations of employees. These nonprofits promote community welfare or charitable, educational, or recreational activities and are part of the independent sector.4 Although this book targets 501(c)(3) and 501(c)(4) entities, it stresses the importance for all nonprofits to adopt a business-like public relations approach.
THE GROWTH FACTOR
The declining confidence in government's ability to address social ills places an even greater demand on nonprofits. The result? An ever-growing number of social service agencies, hospitals, educational institutions, environmental groups, health organizations, and religious entities are founded within not-for-profit parameters.5 The growth is clearly evident in annual reference materials such as Giving and Volunteering in the United States, Giving USA, and the Nonprofit Almanac. These publications provide statistical updates and trend information on the nonprofit sector.
Giving and Volunteering in the United States (1996) also summarizes the significant change in public attitude regarding government's role in caring for those who cannot care for themselves. In 1988, eight often survey respondents agreed this was a government responsibility. Yet in 1996, only six out of ten agreed. These numbers demonstrate a 25 percent decline in the percentage of respondents agreeing with this statement. A declining majority of Americans also hold the same attitude about money the government spent to help the poor.6 If the public believes it is not the role of government to help those unable to help themselves, this task inevitably falls on the private domain.
Likewise, the percentage of the individuals disagreeing with the statement, “Most charitable organizations are wasteful in their use of funds,” is up from 1990 to 1996. However, the 1996 percentage reflects a slight decline over 1994 figures. This demonstrates that, overall, public perception is returning to favor nonprofit performance, but reservations remain.7
To better understand this fluctuation in trust, it is necessary to assume a historical perspective. In the early 1990s, a few noteworthy instances caused the public to question the reputation of nonprofits. For example, in 1990 the media reported an accusation that Father Bruce Ritter, the Franciscan priest who founded Covenant House in New York, misused the agency's funds and also called his personal conduct into question. Although an investigation determined that funds were not misused, the organization had to work hard to regain the public's trust.8 In 1992, the United Way of America scandal rocked the nonprofit world, causing many to scrutinize all nonprofits. The agency's president, William Aramony, resigned after allegations of inappropriately spending United Way funds. Aramony was convicted of embezzlement.9 Even the Girl Scouts of America weathers a periodic accusation that too large a share of cookie sale profits are earmarked for administrative support.
Instances such as these grab media attention and produce a cascading effect on both large and small organizations. To continue the growth curve, nonprofits must be conscious of their individual reputation as well as the image of this sector on a nationwide basis. By taking proactive measures to establish an impeccable reputation and circumvent the possibility of a negative association, a control factor is introduced to help ensure the success of the individual organization and the sector as a whole.
HUMBLE BEGINNINGS TO BIG BUSINESS
Prior to 1900, twelve national organizations solicited funds. They were:
- Young Men's Christian Association
- National Women's Christian Temperance Union
- International Sunshine Society
- The Salvation Army
- American Red Cross
- Needlework Guild
- Young Women's Christian Association
- American Humane Association
- Council of Jewish Women
- National Children's Home Society
- National Florence Crittendon Mission
- National Consumers' League
Between 1900 and 1916, twenty more national agencies were born, including the National Tuberculosis Association, Boy Scouts of America, Camp Fire Girls, Girl Scouts, and National Committee for the Prevention of Blindness.10 Since then, the number of local and national nonprofits has skyrocketed. In 1996, 1,530,000 nonprofits existed, up from 1,123,000 in 1977. Further examination of these numbers indicates extensive growth in the 501(c)(3) category.
Placement of trust in the nonprofit sector to accomplish what the public thinks government cannot or should not encourages a trend of continued growth in the number of organizations, financial contributions, and volunteerism.
| Independent Sector Organizations11 |
| 1996 | 1992 |
| Total number, including religious institutions, 501 (c)(3), 501 (c)(4), and other tax-exempt organizations | 1,135,000 | 1,030,000 |
| 501(c)(3) | 654,000 | 546,000 |
| 501(c)(4) | 140,000 | 143,000 |
Today, nonprofit organizations are big business. In 1997, more than 692,500 charities were registered with the Internal Revenue Service as a 501(c)(3) corporation.12 That same year, approximately 93 million United States adults supported these entities through 20.3 billion hours of volunteer time, with a value of $201 billion.13In 1997, Americans financially supported these same nonprofits with an estimated $143.6 billion,14 a figure that represents 1.8 percent of the gross domestic product.15
When reviewing these statistics, it is also worthy to note that all financial gifts originate from four sources that have varied little over time. Foundations and corporations have supported nonprofits, with foundations providing slightly more support than companies. However, individuals, through a lifetime of support and willed contributions, have provided approximately 85 percent of the charitable support over the past three decades. Consequently, routine individual donations and bequests play a critical role in the finances of nonprofits.16
Demands placed on nonprofits are linked directly to the changing social and economic realities with which we are faced, not only in the United States, but on a worldwide basis. For that reason, the nonprofit sector even competes internationally with business in regard to size. Johns Hopkins Comparative Nonprofit Sector launched a project in 1990 that collected and analyzed data from twelve countries: the United States, the United Kingdom, France, Germany, Italy, Hungary, Japan, Brazil, Ghana, Egypt, Thailand, and India. The findings revealed the nonprofit sector to be a major economic force, employing 11.8 million workers in seven countries. This accounted for one of every twenty jobs and one out of every eight service positions. Nonprofit employment in these countries exceeded the combined employment of the largest private company in each individual country by a factor of six to one. The United States also claims the largest segment of the nonprofit employment category, listing 6.9 percent of the total opportunities.17
Recognizing the scope of the nonprofit sector, it is easy to understand why Philip Kotler and Alan Andreasen, in Strategic Marketing for Nonprofit Organizations, describe the plight of the small nonprofit: “Small charities and other nonprofit organizations have great difficulty getting the world to pay attention to them. They compete with hundreds of other organizations clamoring for newspaper space and air time for their equally important stories and events. Small organizations all too often get lost in the deluge of public relations material that reach media gatekeepers every day."18
EVALUATIONS ARE IN PLACE
With the proliferation of charities, some of which are not legitimate and some of which have fiscal and management problems, contributors and volunteers are tempted to assume a “donor beware” attitude. In fact, a level of frustration in this area was voiced by law enforcement and charity officials.19 Because of their frustration in dealing with shady and fly-by-night fund raisers and charities, the National Association of Attorneys General spearheaded legislation for a state act concerning the solicitation of funds for charitable purposes in 1986. On June 29, 1988, the efforts became unimportant because of a U.S. Supreme Court opinion by Justice Brennan in Riley v. National Federation of the Blind of North Carolina, Inc. This case clarified and expanded the First Amendment protection for solicitation by nonprofit organizations and their right to utilize professional fund-raisers. With the ruling, the Court removed any lingering doubts about whether government could limit the fund-raising expense of charities, prohibit point-of-solicitation disclosure of fund-raising costs, and require that the licensing of any professional fund-raisers must be expedient (with provision f...
