What Makes a Nonprofit a Nonprofit?

Group of people put hands in a circle representing an activity at a Nonprofit Organization

What Makes a Nonprofit a Nonprofit?

Many people make the mistake of thinking of nonprofits as an industry.  That’s a big and costly mistake.  Nonprofits are an entire sector of the economy and, as a sector, is comprised of many industries.  But, alas and lack, most people don’t think that way and to raise a flag in the minds of the uninformed, is nothing but a technicality.

The term, “nonprofit,” was coined by the Internal Revenue Service about a hundred years ago. As a government term, it doesn’t do much other than describe an organization’s relationship with the government and not its relationship with society.

The word “nonprofit,” which is only used in the United States, sells its operations and benefits short.

Think about it:  A for-profit’s objective is to make a profit.  Does that mean a “nonprofit,” on the other hand, should have as its objective to make no profit?  We don’t think so.  Any entity that isn’t making more than its spending doesn’t have much of a future.

Why would any organization be thrilled to establish an enterprise that helps people and have as its objective not to create working capital to grow and help even more in future years?

The “Anti-Profit” Mindset

There is a school of thought that contends that the term “nonprofit” equates in the minds of too many people “anti-profit.”

It’s the “anti-profit” mindset that keeps small organizations with huge potential, small.  It’s the same point of view that discourages people from pursuing careers in the nonprofit sector as the “anti-profit” mindset provides an excuse for not paying smart and committed people, who want to better the world, a decent wage to get the tough job done.

In the “for-profit” world, it’s pretty easy to define its industries like finance, manufacturing, services, and retailing to name a few. Intelligent business analysts know that the metrics of success for a manufacturing plant probably would have little relevance, let alone serve as  the standard by which the retailing industry would operate.

Most would say it’s a conclusion that makes “good business sense.”

Turning to the nonprofit world, however, some of that supposed business sense gets lost.  The industries of the third sector include health care, education, social services, advocacy and social justice, religion, and associations.  To even consider a standard when comparing a nonprofit hospital to a church to an independent elementary school would be ludicrous.

Yet, because each are nonprofits, it’s easier to lump them all together and throw out some baseline comparison which brands each as either a good nonprofit or a sloppy one.

The Business of Social Benefit

The nonprofit sector is victim to a double-standard that says the industries of one sector must develop best practices according to their industry and profit-making objective; while the other sector will be treated like an industry and all should develop best practices to actually be like one another.  Good luck with comparing a good museum with a good food bank.

Believe it or not, most nonprofits have the best practices according to their industry and social-benefit objective, it’s just a matter of getting the rest of us who aren’t in the sector to wake up and realize today’s nonprofit sector is not a collection of clubs and little charity groups.

Giving USA recently reported that Americans contributed $390 billion dollars to charitable organizations in 2016.  Add to that the amount of tax dollars allocated to nonprofit organizations as well as the amount of dollars these organizations earn themselves through tuition, professional services, admissions, and product sales, it doesn’t take a calculator to realize this is big business.

And, because it deals with creating social benefit instead of a widget, it’s serious business.

What Are The Different Types of Nonprofit Organizations?

There are 29 different types of nonprofits.  The one commonality among all twenty-nine is that an argument has been successfully made to the Internal Revenue Service that a public good is somehow being fulfilled as its primary objective is not to make a taxable monetary profit, but rather, to pursue a social profit.

In a democracy, there are lots of people with exact opposite opinions about the kind of social profit each is seeking through their work!

The most common nonprofit is what is known as a 501(c)3 organization which has a religious, charitable, scientific, literary or education.  Other common nonprofits are 501(c)4 organization’s that lobby and are in the business to push a social agenda.  The 501(c)6 organization is usually the trade association that represents professions.

Examples of lesser known include the (c)18 for employee-funded pension trusts or a c(23) if it’s a veteran’s organization incorporated prior to 1880 and finally, a (c)8 for fraternal organizations.

Nonprofits are not one size fits all. It’s a network of industries, causes, and those who fight to make the world a better place in one way or another.

At Third Sector Company, we serve nonprofits of all kinds to create and sustain leadership continuity within their organizations. To learn more about the work we do at Third Sector Company, subscribe to our newsletter today!

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