Can We Stop Arguing over “Nonprofit”?

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What's In A Name?

Allison Gauss, in marketing at Classy, whose tagline is “Online fundraising for the modern nonprofit,” gamely asks, in the title of her SSIR article, “Is It Time to Ditch the Word ‘Nonprofit’?”

The short answer is “no.” Here’s the long answer to the old canard that “nonprofit” is no longer cutting it, if it ever did: It’s for us to change the world, but not that word. That is the prerogative of the U.S. government, which created and sustains the confusing terms “nonprofit” (not existing or done for the purpose of making a profit) and the distinct and different “not-for-profit,” which merely serves as a classification in the U.S. tax code for certain activities of for-profit corporations. As Bruce Hopkins says in his book, Starting and Managing a Nonprofit Organization, not-for-profit “refers to an activity that is engaged in without a profit motive.”

And perhaps that’s the point—and a very good one, at that. It may be that on some level, the knowledge that one’s donation isn’t being converted to personal profit is the threshold the public wants. Maybe it reflects the belief that some things are not best served by an unfettered free market, but rather by collective efforts where people meld their interests cooperatively with others—whether through giving cash or time or voice—and agree in so doing not to profit unreasonably.

Of course, the term “nonprofit” was never meant to explain your cause. That ongoing challenge is up to you. If you begin your appeals with “give because we are a nonprofit,” please read some of the hundreds of NPQ articles on the subject of fundraising. If you are raising money for your cause, you may be surprised to learn that your nonprofit is a small subset of the total number of organizations that share your sector. Consider the types of exempt organizations. Ms. Gauss prefers the words “social impact sector.” The Everglades Club in Palm Beach (so exclusive it does not have a website) would likely object.

Yes, all nonprofits must produce an annual surplus to stay healthy. An endowment is also a good thing. That is not the same thing as profit. The IRS is very clear about what the prohibition against inurement of net earnings means.

“Why should groups describe themselves by what they are not?” she asks. And yet… and yet… It is that and yet which is the tidal return of the persistent need to distinguish a nonprofit from, say, Ms. Gauss’ employer, the for-profit Classy, though both are about benefiting society.

Referencing Dan Pallotta’s writings, Ms. Gauss notes, “‘Nonprofit’ means, etymologically, nonprogress.” Yes, the prefix “non” opposes what the sector stands for (except if you are the Everglades Club), but like the thumb opposing the fingers, the term nonprofit ably grasps the far-flung edges of all exempt organizations.

Ms. Gauss cites names for the sector suggested by others—Dan Pallotta’s “humanity sector,” Robert K. Ross’ “delta sector” (not the military unit or the first-person shooter video game). Others include “social sector, third sector, independent sector, and social good sector.” Far more common alternative names not cited in her article include “voluntary sector,” “civil society,” and the globally recognized non-governmental organization (“NGO”) created by the UN in 1945, of which there are 10 million worldwide.

Here is one among many observations from when NPQ addressed this issue back in 2014:

Peter Hero, who for many years was head of the Silicon Valley Community Foundation, thought that we should change the name of the sector to “public benefit corporations,” or PBCs for short. So, for a long time, during Peter’s tenure, if you were in Santa Clara County, everybody would say, “I come from a public benefit corporation.” And then, of course, five minutes after Peter resigned, everybody stopped using that and went back to a word that everybody could understand: “nonprofits.”

Ms. Gauss claims that the use of the word “charity” is in decline (tell that to the IRS, the UK’s Charity Commission, or to Charity: Water, arguably the world’s smartest nonprofit brand). She also makes reference to Dan Pallotta’s assertion that “the Puritans’ idea of charity was more about cleansing the giver than uplifting the beneficiary.” Just because Pallotta has a cagey way with words, such as in his 18-minute TED talk, “The way we think about charity is dead wrong,” does not mean they spring from scholarship. The history of the tax-exempt sector is a long and complicated one.

Other signs that the word “nonprofit” still seems to work are that giving is up and no one has accused our sector of being a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

Classy.org is a creative and reputable service helping the nonprofit sector change the world for the better, but why no for-profit donate button or volunteer sign-up? Why not organize as a nonprofit or B-corporation? Exactly.

Some tax-exempt organizations stretch the definition of “nonprofit” ever-farther, such as Stanford University, “a $5.5 billion enterprise” with a $22.5 billion endowment. Others, such as the NFL, which wore its nonprofit authenticity like a Roman greeter at Caesars Palace, eventually change their tax status to fit their reality better.

“Nonprofit” is why the general public supports the sector with its tax-deductible dollars. They trust that all earnings will not inure to any private shareholder or individual. Congress, attorneys general, and the FTC are there to ask questions whenever that line is apparently crossed.

Yes, informal networks, corporate and cause marketing initiatives, the sharing economy, social entrepreneurship, and yet-to-be-invented social impact ventures are all viable channels for philanthropy. This is particularly the case for tax code agnostic initiatives, such as Zuckerberg’s new LLC and the recently announced MacArthur Foundation contest. Still, for the general public, a need for the classification of “nonprofit” remains.

Yes, as nonprofits integrate earned income models into their activities, and socially oriented businesses integrate social impact into their for-profit activities, the lines between some for-profit and nonprofit organizations are blurring. Are we not all social entrepreneurs? Do we not all have a passion for a mission? Nevertheless, the nonprofit has the privilege of receiving tax-exempt gifts and the for-profit does not. The distinction matters because it denotes an appropriately stewarded use of donor money, and we all are required—or should be required—to live up to that assurance.

The word “nonprofit” never called for a mental capital letter. Nearly one in three people worldwide donate and one in four volunteer because they are inspired by that charity, though admittedly comforted by the sector in which that nonprofit is registered by its government.

  • Joelle Gallagher

    I could not disagree more with this position. Just because “nonprofit” has become our default does not mean it is appropriate. The word profit has several meanings, not just financial. I agree wholeheartedly with Gauss and Pallotta. We run businesses, not “charities” and empowering the vulnerable, protecting the planet and enriching lives is hardly “nonprofitable.” Its our job to educate the public, not perpetuate misunderstanding for their convenience!

  • Phil Buchanan

    Thank you, thank you, thank you, Jim Schaffer for this thoughtful, reasoned, and right on contribution to the tiresome and repetitive discussion of the supposed shortcomings of the words “nonprofit” or “not-for-profit.”

    The nonprofit sector in the U.S. is the most trusted of the sectors by the public — has been and continues to be (notwithstanding erroneous and irresponsibly false assertions to the contrary). See for example the Edelman Trust Barometer.

    Why is it trusted?

    As you point out, “It may be that on some level, the knowledge that one’s donation isn’t being converted to personal profit is the threshold the public wants. Maybe it reflects the belief that some things are not best served by an unfettered free market, but rather by collective efforts where people meld their interests cooperatively with others—whether through giving cash or time or voice—and agree in so doing not to profit unreasonably.”

    Exactly!

    And, to all those who say, “nonprofits do generate profits” you remind us of the difference between a surplus that is reinvested in an organization and profit taken by owners. As you point out, “Yes, all nonprofits must produce an annual surplus to stay healthy. An endowment is also a good thing. That is not the same thing as profit. The IRS is very clear about what the prohibition against inurement of net earnings means.”

    We need each of our sectors to play their distinct, different, and (at their best) complementary, roles. To do so, we should be clear about the differences between them, not seek to paper them over.

    Again, thank you for this excellent piece.

    Phil Buchanan
    President
    The Center for Effective Philanthropy

  • GeorgeMcCully

    With respect for both Jim and NPQ, the main reason Allison’s question is timely and correct, is that this hoary and previously inconclusive discussion has now fundamentally changed—from being about rhetoric to being about sheer factual accuracy.

    The technological revolution of computers and the internet are producing an explosion of data about philanthropy and charities, and what ALL this new data is proving, is that “nonprofit” and “philanthropy” are nowhere near synonymous, and in fact wrong by a factor of 9 or 10! Far from 2.5 million “nonprofits”, there are only about 200-300,000 active philanthropies nationwide—i.e., “private initiatives, for public good, seeking private grants and donations” which is the philanthropic marketplace.

    The IRS itself has reported that in 2015 it received only 295,000 990s. FidelityCharitable, with the world’s largest charities dataset purified of confusion with “nonprofits” because based only on grants and donations, reports their cumulative total of 220,000 charities, produced over 25 years by millions of donors and of grants nationwide. Network for Good, the largest online giving platform, now keeps a running total of charities receiving gifts in the previous 12 months, and as of June 2016 over 1 million donors nationwide have given nearly 2 million gifts to only 31,295 charities—clearly not chosen from among 2.5 million eligible organizations.

    Those who still say that “nonprofit” means anything like philanthropy should just take ten minutes to look at the data—the IRS Master Nonprofit Data Files now downloadable by states. Open it up to any page in any state and what you will immediately see is that “nonprofits” include all kinds of noncommercial organizations, 75% of which are obviously self-serving—condo associations, real estate trusts, yacht and country clubs, professional and trade associations, medical doctors’ clinical practices, teachers’ retirement funds, cemeteries, the NFL (recently withdrawn on their own initiative), Blue Cross Blue Shield (which its CEO styles a “nonprofit business”, etc., etc., etc.

    The history of science is punctuated by changes in terminology to fit advances in fields. Philanthropy is now in such a period—a paradigm shift driven by technology and changed demographics of wealth. Our traditional vocabulary is changing to accommodate new data. This is not the old discussion any more, but a new discussion seeking factual accuracy and practical value. We all need to get with the program.

  • Sharon Charters

    This debate is navel gazing by people who have invested many years working in the sector. For the vast majority of people the term “non-profit” is easy to understand and for donors it is the gatekeeper term that their gift will be used by an organization whose mission is altruistic rather than profit motivated.

  • drfinlay

    Today we have naming of parts. Yesterday,
    We had daily cleaning. And tomorrow morning,
    We shall have what to do after firing. But to-day,
    Today we have naming of parts. Japonica
    Glistens like coral in all of the neighbouring gardens,
    And today we have naming of parts.
    Henry Reed