According to the U.S. Internal Revenue Service (IRS), the term "nonprofit" (also known as NPO, not-for-profit, service organization, or "nonstock") describes organizations that do not make a profit and usually do not issue stock. Nonprofits do not pay federal income taxes. Legal experts also describe a nonprofit as an organization dedicated to the public good that has a primary focus on social, cultural, educational, religious, or political issues.
A nonprofit organization may sell goods and services and collect money from members or donors, but it does not have a profit-making objective. In addition, any profit (or surplus) earned by the organization must be used to further the group's goals, without providing excessive monetary benefit to any specific individual or stakeholders. Stakeholders in nonprofit organizations are typically the people who are most important to the group. Examples include those who make use of the organization's services, public officials and government agencies, volunteers, donors and other contributors.
Around 2000 B.C.E., Chinese and Egyptian cultures set aside accumulated wealth as a charitable way to provide for religious and educational groups. While charitable acts were recognized as necessary for the public good, they were also important for religious reasons. For example, ancient Greeks were upset by beggars on the streets, but gave to them freely in case the beggar was discovered to be a god in human form.
In the mid 300s, St. Basil the Great (in the current vicinity of Turkey) created a shelter that served the homeless, as well as needy travelers. Money was also distributed to the needy. In Medieval times, groups who gave to the needy were considered to be special and received tax exemptions.
In the United States in 1894, Congress created the first federal income tax for corporations. This law offered tax exemptions to nonprofits and charitable groups.
In 1950, the IRS added an unrelated business income tax (UBIT) to its federal tax code. This tax was specifically aimed at organizations that took advantage of their tax-exempt status to compete against similar for-profit companies.
Under the UBIT, tax-exempt corporations could continue to carry on assorted business activities, but would have related business revenues taxed if those activities weren't a substantial part of the group's founding purpose. For example, Harvard University is a tax-exempt educational and research organization. Profits that come from rental properties owned by the University are considered to be unrelated business income and are taxed accordingly, at the rate of 34%.
In 1964 (and revised again in 1987), the American Bar Association drafted the Model Nonstock Corporation Statute. This allowed nonprofits to be created for any legal purpose, in addition to the original categories of charitable, educational and religious purposes. An example of a legal purpose outside of the original nonprofit bounds would be a politically motivated nonprofit that creates voter education material for distribution in advance of elections.
The oldest operating nonprofit environmental and conservation groups are American Forests, founded in 1875, and The Sierra Club, founded in California in 1892 by John Muir.
The growth in U.S. nonprofit organizations has been explosive. According to the IRS commissioner, there were only 50,000 tax-exempt organizations in 1950. By 1965, there were 250,000 registered nonprofits; this number increased to one million by the mid-1980s.
The fastest-growing segment of the nonprofit world during this time was religious charities. A 1999 study by Corbin suggests that rapid nonprofit growth occurred as a result of the growing cohesiveness of neighborhoods in metropolitan areas, combined with the helping, altruistic nature of many religious congregations and the desire to obtain services beyond those available through limited federal programs.
The growth of the environmental movement (and subsequent environmental nonprofits) was partly spurred by the 1962 publication of Rachel Carson's book, Silent Spring. This book discussed the environmental impact of pesticide poisoning.
In 1965, the top-10 environmental nonprofits in the United States operated on less than $10 million. That amount increased to $218 million by 1985 and $514 million by 1990. Most early environmental and conservation groups were concerned with the proper handling of land, water, and wildlife.
According to the National Center for Charitable Statistics, from 1995-2005, the registered number of environmental and conservation nonprofits has increased by 4.6% per year; this amount is greater than the total 2.8% per year growth of all other nonprofits. As of 2005, there were 26,548 environmental and conservation nonprofits registered with the IRS.
As of December 2008, the top five states with the highest number of registered nonprofits were: California (around 156,000 groups), Texas (99,000), New York (98,000), Florida (70,000), and Illinois (66,000).
In 2006, nonprofit organizations of all kinds were responsible for eight percent of employee wages and salaries paid in the United States. In a 1998 survey of wages paid to chief executives of nonprofit organizations, however, environmental administrators were among the lowest-paid.
In 2007, individual donors were responsible for $229 billion in contributions to U.S. nonprofits.
The two largest individual nonprofit donations came in the form of bequests: The estate of the late Leona Helmsley left about $5 billion to a charitable trust fund, and the late James LeVoy Sorenson left $4.5 billion to a foundation supporting the arts, education, and healthcare. The total amount of donations to environmental and conservation nonprofits in 2005 amounted to $8.2 billion. The largest individual donation to an environmental group in 2007 was $13 million, given by Richard Weiland to the Nature Conservancy.
The majority of 2007 charitable contributions were concentrated in three areas: religious organizations (33% of total donations), educational institutions (14% of total donations), and human service organizations (about 10% of total contributions). A human service organization tries to improve the lives of its clients. It offers or recommends basic housing assistance to its clients, along with social service support, and mental health and physical health services.
In 2007, public charities had total revenues of almost $1.4 trillion, with almost $1.3 trillion in expenses.
According to the U.S. National Center for Charitable Statistics (NCCS), as of December 2008 there were about 1.5 million nonprofits in the United States: 956,000 public charities, 113,000 private foundations, and 443,000 "other" nonprofits, such as private non-operating foundations, chambers of commerce, fraternal organizations, and civic leagues.
Well-run nonprofit organizations spend at least 80% of their revenue on their organization's cause. They also use very little of their raised funds on operating expenses. Organizations that are run well do not necessarily have to be the top fundraisers in their field.
According to FundraiserInsight.org, the top-12, best-run environmental nonprofits are: the World Wildlife Fund, Greenpeace International, National Geographic Society, Friends of the Earth, National Wildlife Federation, EcologyFund.com, National Audubon Society, Royal Society for the Protection of Birds, Center for a New American Dream, David Suzuki Foundation, Ducks Unlimited, and Nature Canada. The top environmental nonprofit (the World Wildlife Fund) puts 83 cents of every donated dollar towards their conservation programs.
General: There are several reasons for U.S. organizations to seek nonprofit status: (1) Nonprofit status is required in order to obtain grant money from governmental agencies and non-governmental foundations. (2) A nonprofit organization is exempt from paying federal or state income taxes on any profits that accrue from its group-related activities; it also is exempt from paying Social Security taxes, sales taxes, and property taxes. The U.S. Internal Revenue Service (IRS) grants these exemptions because it feels that the public receives benefits from the activities of nonprofit organizations. (3) Board members and others connected to the nonprofit are shielded from personal liability if the organization incurs debts and obligations that it is unable to repay. This protection is called limited liability; it guarantees that people who work for the organization, or manage it, will not lose their personal property or financial assets in order to repay the group's debts.
Types of non-profits: There are 26 types of organizations and corporations eligible for tax-exempt status under Section 501 of the IRS Tax Code, including environmentally related labor, agricultural, and horticultural organizations. About 50% of all nonprofit organizations are classified as 501(c) (3). These organizations have the following purposes: religious, charitable, scientific, testing for public safety, literary/educational, fostering national or international amateur sports competitions, and the prevention of cruelty to children or animals. Besides being tax-exempt, a 501(c)(3) organization has the added advantage that its supporters may legally deduct donations to the organization from their individual federal income taxes.
IRS classification: All incorporated and unincorporated tax-exempt nonprofit organizations fall under one of three main IRS classifications: public charities, private operating foundations, and private non-operating foundations.
Public charity: A public charity
gets most of its income directly or indirectly from the public or the U.S. government. Donations that it receives from the public must have a broad base and not be limited to the actions of a few individuals or families. The United Way is an example of a public charity.
Private foundation: A private operating foundation is not widely-recognized (or funded) by the general public, but still uses its assets to further the stated purposes of the organization. A private operating foundation may receive its funding from individual (private) contributors; it may also receive qualifying distributions from private foundations, as long as the donating foundations are operated separately from the receiving foundation. The Whole Planet Foundation is an example of a private operating foundation. One hundred percent of any donations to the foundation go to microlending programs in Latin America, Africa, or Asia.
A private non-operating foundation gives grants to tax-exempt organizations, with most of its financial base concentrated in endowments and investments. The Bill & Melinda Gates Foundation is an example of a private non-operating foundation.
Donations: To receive a public charity designation, an organization must show that it receives its donations from a wide cross-section of the public. Private foundations, however, receive most of their monetary support from individuals, or from the organizations' founding (wealthy) families or individuals. Eighty percent of all nonprofit organizations had total revenues of less than $100,000. Seventy-eight percent of all nonprofits also had total assets of less than $100,000.
For-profit: A for-profit organization may focus on issues that are similar to those of a nonprofit, with the exception that it has the goal of making money for its owners. Ben & Jerry's Ice Cream, for example, has a corporate mission of social responsibility: finding ways to improve the quality of life of others through donations of corporate profits, and making use of manufacturing methods that have a low environmental impact. A public for-profit company may also have shareholders who receive a portion of distributed earnings.
Interested parties: Organizations that are interested in the activities of all nonprofit organizations and corporations include: the United States Internal Revenue Service (IRS), the Center for Public and Nonprofit Leadership, the National Philanthropic Trust, the Nonprofit Leadership Institute, the Nonprofit Open Source Initiative (NOSI), the Bill and Melinda Gates Foundation, the National Center for Charitable Statistics (NCCS), and the National Center for Nonprofit Boards.
Some organizations that are especially interested in the activities of environmental groups include: the World Resources Institute (an environmental think tank), the U.S. Environmental Protection Agency (EPA), the United Nations Environment Programme (UNEP), Environment America (the new home of the United States Public Information Research Group's (PIRG) state and federal environmental work), the Natural Resources Defense Council (NRDC), and the Society of Environmental Journalists (SEJ).
People who are interested in starting a nonprofit organization may find information through the IRS web page on "Tax Information for Charitable Organizations." In addition, the online Free Management Library and the Foundation Center offer articles and online tutorials on establishing a nonprofit organization.
Starting a nonprofit: The primary steps involved in starting a nonprofit organization are: choose the purpose of the organization; decide whether a new incorporated nonprofit is needed or if the group could partner with a nonprofit already in existence; if a new nonprofit, will be created, produce a mission statement; recruit interested parties for the board of directors, as well as legal and financial advisors; learn requirements for incorporation in the state of origin, and create articles of incorporation and organizational bylaws; obtain paperwork required to file for tax-exempt status; hold the first meeting of board of directors, approve articles and bylaws, elect officers, and appoint committees; file articles of incorporation with the state, and file an application for tax-exempt status with the IRS; develop a fund-raising plan; bring paid staff and/or organizational volunteers on board.
Nonprofit status: An organization qualifies for nonprofit status if: it serves the common good; its primary purpose is not
a profit-making venture; net earnings do not directly benefit the nonprofit's members or administrators; it does not issue stock.
Regulation: The IRS is the primary regulator of nonprofit organizations in the United States, with the power to grant and remove tax-exempt status. The IRS has its own watchdog group for nonprofit activities: the Tax Exempt and Government Entities Division (TE/GE). The TE/GE verifies that tax-exempt groups are contributing to the general good in ways that justify their continued existence.
Laws: In each state, the laws that govern nonprofit organizations are typically grouped under the heading of General Corporation Law. A nonprofit is considered to be a subcategory or classification of a corporation, and the difference between for-profit corporations and nonprofits are clearly outlined within this law.
General Corporation Law: General Corporation Law places all corporations into one of three separate categories: public corporations: groups and agencies created by city, state or federal governments for administrative reasons; an example is a municipal port or district; stock corporations: for-profit businesses where stock is issued to investors, and dividends may be paid to stock owners; non-stock corporations: charitable, fraternal, social, educational and religious organizations may fall within this category if they do not issue stock certificates or pay dividends to members.
The New Jersey Business Corporation Act of 1898 was the first instance of General Corporation Law in the United States.
Challenges and limitations: The recent recession has limited the capabilities of many nonprofit groups. For example, California found it necessary to freeze bond money spending; this action devastated the efforts of environmental groups, who were planning on using the money to build and maintain trails and clear area waterways.
Many nonprofits face challenges related to personnel issues. For example, small nonprofits traditionally offer low (or no) pay, which may make it difficult to attract and keep trained and qualified personnel. When organizations are comprised of people who know each other well, there is also a greater tendency to overlook possible fiscal mismanagement or illegal transactions.
Environmental nonprofit organizations have been (and continue to be) important to society. Nonprofits such as Greenpeace and the National Geographic Society, for example, were important to the establishment of the environmental movement of the 1960s, and continue to shape our view of environmental issues today. Their financial assistance also helps to sustain smaller environmental grassroots organizations.
Funding sources: Nonprofit organizations receive their funding from several possible sources: independent, community or corporate foundations; for-profit businesses that offer grants or make charitable contributions to nonprofits; membership organizations (such as service clubs like the Kiwanis, local chambers of commerce, and professional societies like bar associations); religious groups; centralized fundraising groups like the United Way; contributions from individuals; and government funding through grants or contracts.
Expenses: This funding is used to cover: the nonprofit's general operating expenses such as rent, utilities, and employee salaries; the cost of conducting surveys, setting up computer systems, running conferences, and other short-term activities; legal and accounting fees; and the cost of running fundraising campaigns.
Fundraising: Nonprofits continue their work through regular fundraising operations, and (for some groups) setting up an endowment fund (created through the contributions of one or more wealthy individuals or families).
Incorporation: Nonprofit organizations may or may not be incorporated. Incorporation is a necessary step to take before any nonprofit may to apply to the Internal Revenue Service (IRS) for tax-exempt status. An unincorporated nonprofit will need to pay federal and state taxes. There are advantages and disadvantages to incorporation, regardless of whether the nonprofit is environmentally-oriented.
Financial advantages: Nonprofits are legally allowed to solicit gifts, donations, and other financially-viable goods from the public; in return, supporters may deduct donations to the organization from their individual federal income taxes.
Nonprofits may apply for, and use, a special permit from the U.S. Postal Service that allows them much lower rates on mailings than private citizens or for-profit businesses. With the rise of email for business communications, however, this discount is slowly dropping in importance: In 2005, 74% of nonprofits in the annual "Blackbaud Survey of the Nonprofit Industry" used direct mail to reach their donors; that figure dropped to 68% in 2006, 59% in 2007, and 57% in 2008.
Fiscal year: A nonprofit corporation is able to time its fiscal year so that it ties in to seasonal variations of sponsor donations, product releases, or other yearly income patterns. For example, if a nonprofit receives most of its funding from government grants, it may be beneficial for that organization to set the end of its fiscal year to coincide with the government's fiscal year ending date of September 30.
Labor law exemption:
In many states, nonprofit corporations are not required to follow standard collective bargaining regulations, even when dealing with labor unions. They may also be exempt from collective bargaining, contributing to unemployment compensation funds and other typical employer payments.
Legal advantages: A nonprofit corporation exists as a legal entity that is separate from the group of people who created it. It can conduct business, enter into contracts, borrow money, own property, hire/fire employees, bring suit against people or organizations, and be sued in return.
Limited liability: The officers, members, founders, directors and employees of a nonprofit corporation are protected against seizure of their personal property or bank accounts to repay debts of (or pay for court judgments against) a nonprofit corporation.
Extended existence: A nonprofit corporation has a legal existence beyond the lives of its originators, while unincorporated nonprofits may cease to exist upon the death of their founders.
Organizational structure: Corporate law stipulates that a nonprofit corporation follows legal requirements for its management structure, for the election of officers and board of directors, and for the drafting and communication of bylaws, meeting minutes, and other corporate paperwork.
Employee benefits: Nonprofit corporations are able to create economical pension and retirement plans, and offer health, accident and life insurance coverage at a level unavailable to unincorporated nonprofits.
Disadvantages: In nearly all cases, a nonprofit corporation requires the services of a lawyer and an accountant to create the corporation, establish its financial structure, and prepare and file the necessary paperwork with proper state and federal agencies.
Control: In nonprofit organizations, founders may set rules and regulations as they see fit, without legal requirements set by the U.S. or state governments. In nonprofit corporations, however, founders are required to run (and set goals for) the corporation in conjunction with the wishes and goals of board members and directors.
Lack of flexibility: Corporate bylaws set the rules and procedures for the operation and administration of a nonprofit, and these bylaws may make it difficult to change corporate policies and put those changes into effect. For example, bylaws may dictate the number of people on the board of directors, when and how votes will be taken on important issues, and the responsibilities of corporate officers.
Commitment of time and energy: By necessity, a nonprofit corporation has a larger and more defined structure than unincorporated nonprofits. Associated tasks may be time-consuming, such as the scheduling and running of corporate meetings, and the handling of tax, payroll, legal, and personnel issues.
Delaware corporation: A Delaware corporation allows a single person to hold all offices on a corporation's board of directors, and run the organization as he or she sees fit. A Delaware corporation is incorporated in the state of Delaware, but is not required to do business in the state; a physical Delaware address is the sole requirement, which can be fulfilled with the legally-allowed cooperation of a registered agent in the state.
Influence: Examples of groups that have benefited from nonprofits include: The Cascadia Wildlands Project in Eugene, OR, which received a $15,000 grant from the Ben & Jerry's Foundation in 2008 to help put an end to destructive logging in the Cascadia region; and the International Institute of Rural Reconstruction (IIRR), which received a $250,000 grant in 2005 from The Starr Foundation. This grant provided support for IIRR's sustainable, people-oriented construction projects in rural areas of Africa and Asia.
Nonprofit fraud or misuse:
In a study of occupational fraud in the United States, 12% of all cases of fraud in 2004 occurred in nonprofit organizations. (Nonprofits in the study received no further categorization, such as religious, educational, or environmental purposes.) Billing fraud was responsible for 47% of all nonprofit fraudulent schemes, and 46% of the cases occurred in organizations with fewer than 100 employees. The median loss for nonprofits was $100,000 per incident. This amount is significantly higher than the $40,000 median in a similar 2002 study.
Nature Conservancy scandal: The Nature Conservancy, one of the wealthiest environmental nonprofits in the world, was involved in a scandal in 2003. At that time, the Conservancy received a donation of coastline in Texas from the Mobil Oil Corporation. Rather than protecting this undeveloped land, the nonprofit instead placed a gas well on the property, and lost millions of dollars in a lawsuit filed by another nonprofit that claimed rights to the land (and the oil underneath it). The Conservancy then sold parcels of the land below cost to some of the charity's supporters. In return, these supporters made tax-deductible donations to the Nature Conservancy for the difference in land value.
As a result of nonprofit scandals like the Nature Conservancy's, the Senate Finance Committee is working on a plan to improve monitoring of nonprofit organizations.
Human health: Many nonprofit corporations and foundations are dedicated to improving the health of people in the United States and around the world.
Global and public health: Nonprofits may continue to benefit and affect health in the future by funding public health initiatives for the public good. For example, the Public Health Foundation of New Hanover County (NC) was created to help fund a mobile dental care program for county schoolchildren.
Additionally, the Bill and Melinda Gates Foundation dedicates a portion of its grants to global health initiatives. As of December 2008 (and extending over the past 14 years), the Foundation has provided $11.6 billion in funding to health-related programs around the world. These programs involve the areas of HIV/AIDS treatment and research; malaria; maternal, newborn and child health; nutrition; polio; tuberculosis; and support for the Global Alliance for Vaccines and Immunization (GAVI), an organization addressing the issue of two million people who needlessly die in developing countries each year due to lack of access to immunizations.
Environmental conservation: Many nonprofit corporations and foundations are dedicated to environmental conservation. For example, Beyond Pesticides (formerly the National Coalition Against the Misuse of Pesticides) identifies and interprets the hazards involved in using toxic pesticides. It also helps to design environmentally-friendly pest management solutions.
World Wildlife Fund (WWF): This nonprofit is working to build support for an international agreement to reduce greenhouse emissions. The WWF has also provided expert testimony before Congress on the issues of melting Arctic sea ice, acidification of the oceans and the resulting impact on marine life, and the damage done by tropical deforestation.
Physicians for Social Responsibility: This group is working to prevent the use of nuclear weapons, and to slow, stop and reverse global warming and toxic degradation of the environment.
Partnership for Children's Health and the Environment: This nonprofit is a North American coalition of 175 member groups dedicated to protecting current and future generations from the effects of harmful environmental products or situations.
Environmental Law Institute: Among other groundbreaking research, this organization created "Institutional Controls in Use," a 1995 critique of state and federal oversight of Superfund toxic waste sites. This report led to the reform of the EPA's policies towards cleanup of these sites.
Greenpeace International: This nonprofit has a history of success in environmental advocacy. For example, based on a 2007 ad campaign produced by Greenpeace, Apple Computer agreed to phase out the most harmful chemicals in its U.S. product line (brominated fire retardants and polyvinyl chloride). This step would help to prevent contamination of landfills from discarded computer equipment.
National Wildlife Federation (NWF): This organization was instrumental in the passage of the Higher Education Sustainability Act in 2008. The bill provides grants to colleges and universities in order to: (1) offer academic programs on the topic of sustainability; and (2) help campuses in their quest for energy efficiency.
FUTURE RESEARCH OR APPLICATIONS
Technology: As the use of technology grows in business, there will be similar applications in the world of nonprofits. For example, social networking through services such as Twitter and Facebook may allow nonprofit supporters to connect more tightly with their organizations, and for the nonprofit groups to reach out to more people in need.
Global environmental organization: In 2008, the Progressive Policy Institute (PPI) called on President Obama to establish a global environmental organization (GEO) to monitor and enforce environmental regulations enacted by its member nations. Currently, the only international oversight on the environment is provided by the United Nations Environmental Programme (UNEP); this group operates on an annual budget that is 50% less than that of the U.S. Environmental Protection Agency (EPA).
Executive compensation: Some officers in larger nonprofit corporations have received undue amounts of monetary compensation for their services. For example, Steven McCormick, the CEO of the Nature Conservancy, received a signing bonus of $75,000, a living allowance of $75,000, and a $1.55 million home loan, in addition to his annual salary of $275,000 (with health and retirement benefits). When the situation was exposed by the Washington Post in 2003, Congress pushed for an overhaul of the Conservancy's accountability practices. Excessive compensation along these lines circumvents the original charter of nonprofit corporations to provide services that do not enrich founders or individual stakeholders.
Misuse: According to a 2003 report from the Hauser Center for Nonprofit Organizations at Harvard University, the top management of 152 selected nonprofits mishandled or stole about $1.28 billion in the years from 1995 to 2002. As a result, state and federal lawmakers are calling for greater accountability and transparency in the actions of upper nonprofit management. It is expected that the IRS will monitor the financial actions of unscrupulous nonprofits and conduct audits as needed. In addition, several online watchdog groups, such as the BBB Wise Giving Alliance and GuideStar, have begun the online publishing of financial records for up to 350,000 nonprofits.
Accounting practices: In some cases, the line between a nonprofit's taxable "unrelated business income" and its allowable tax-exempt for-profit activities has become blurred over the years. There is a call for increasing oversight and regulation of this issue, possibly by the IRS.
This information has been edited and peer-reviewed by contributors to the Natural Standard Research Collaboration (www.naturalstandard.com).
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