The Nonprofit Sector

History and development of the nonprofit sector

Although the term nonprofit sector came into use during the 1960s, voluntary associations have been part of the history of the United States since before the republic was formed. Those efforts occurred either informally in neighborhood groups or with more structured ways of voluntarism through the church^{1LeRoux, K. & Feeney, M.K. (2015). Nonprofit Organizations and Civil Society in the United States. Routledge.} . The Elizabethan Statute of Charitable Uses governed charitable giving and organizing in the colonial period. The American Revolution brought on a surge in voluntary activity. The Constitution offered more formal structures for volunteer activity.

Thereafter, the sector has been redefined, transformed, and expanded. Key to the sector’s growth was the legal definition of not-for-profit corporations and the expansion of the charitable purposes for which these might receive tax exemption towards the end of the 19th Century. The post-Civil War decades saw a rapid increase in million-dollar donations, mainly towards education. This led to the funding of schools such as Stanford (in 1885) and John Hopkins (in 1873). This surge in giving led to questions about ethically dubious ways of accumulating wealth, how that wealth was distributed, and the influence the benefactors held in the decisions those organizations made. After World War II federal support for nonprofit institutions grew. In the postwar decades, the federal government became the largest source of funding in many domains, displacing private philanthropy as the primary funder^{2Soskis, B. (2020). A History of Associational Life and the Nonprofit Sector in the United States. In W. W. Powell & P. Bromley (Eds.), Nonprofit sector: A research handbook (pp. 23–80). Stanford University Press.}.

The growth in financial support resulted from a shift in the relationship between NPOs and the federal government. Consequently, that shift also caused growth between 1950 and 1968. The federal government started relying on private nonprofits to deliver publicly financed services and goods, primarily through President Lyndon Johnson’s Great Society programs. Those programs allowed federal funds to flow directly into organizations, such as Head Start preschool programs. Additionally, for a long time, nonprofits primarily served those who were wealthy and well-established, organized religious groups, and men more than they served the poor, people of color, or women. However, the civil rights movement pushed the federal courts to more universally apply the First Amendment rights to publish, petition, and assemble in nonprofit organizations, which thus far had been denied to so many^{3Perelmann (1988) in Hammack (2002).}. It in turn propelled the creation of organizations pushing for the rights of marginalized communities.

Since then, the sector has continued to grow, especially around human services. Between 1995 and 2016 the number of NPOs nearly doubled. The 21st century has seen an amplification of trends observed before in the sector, such as its expansion, a reflection of the country’s changing demographics, an increase in public-private partnerships, and the absorption of commercial and market-based values and practices into the sector^{4Soskis, B. (2020). A History of Associational Life and the Nonprofit Sector in the United States. In W. W. Powell & P. Bromley (Eds.), Nonprofit sector: A research handbook (pp. 23–80). Stanford University Press.}.

Nonprofits today

The nonprofit realm includes a diverse collection of organizations and activities. Thus, finding a precise definition for the sector can be difficult. In the United States, many nonprofits are born in response to a social need, sometimes a need neither the private sector nor the government has met^{5LeRoux, K. & Feeney, M.K., (2015). Nonprofit Organizations and Civil Society in the United States. Routledge.}. Under the Internal Revenue Code (IRC), the body of law that codifies federal tax laws, most nonprofit organizations are registered under Section 501(c)(3), meaning they are created typically for charitable, religious, educational, scientific, and literary purposes, among others ^{6 Rudder, A. & Main, K. (2023). 501(c)(3) Vs. 501(c)(4): Differences, Pros and Cons. Forbes Advisor. https://www.forbes.com/advisor/business/501c3-vs-501c4/} . According to the National Center on Charitable Statistics (NCCS), there are 1.5 million formally registered 501(c)(3) organizations and 1 million unregistered groups.

There are, however, other legal forms of nonprofit organizing. These include other categories for IRC’s Section 501(c), such as 501(c)(4), which regulates social welfare and civic organizations, and 501(c)(6) establishing business leagues and professional associations. The main difference is that contributions to these organizations are not tax-exempt. These nonprofits can engage more directly in some political campaigning and lobbying activities. On the other hand, 501(c)(3) organizations are prohibited from political campaigning for any candidate, and their advocacy and lobbying activities are restricted^{7Casey, J. (2011). Understanding advocacy: A primer on the policy-making role of nonprofit organizations. Center for Nonprofit Strategy.}.

Beyond their legal categorization, there are certain features that characterize not-for-profit organizations and consequently the nonprofit sector:

• Tax exempted: NPOs don’t have to pay many forms of tax.
• Non-distribution constraint: They are not allowed to distribute any profit to managers, “owners”, or board of directors of the nonprofit.
• Mission driven: NPOs are expected to work towards the public good in exchange for their tax exemption benefit, meaning they are mission driven, not profit-seeking.

Regarding their mission-driven characteristic, while an organization generally arises in response to an unmet social need, it is important to consider the approach organizations can take. Approaches differ considerably. For example, paternalistic approaches or using certain labels can turn participants of these organizations from citizens with rights to merely participants with needs. But an organization can partner with the communities it wants to serve, both supporting, and recognizing the participants’ experiences and leadership capabilities, while helping them claim their rights^{8Benjamin, L. M. (2022). How Helping Can Reinforce or Attenuate Status Inequalities: The Case of Nonprofit Organizations.The Russell Sage Foundation Journal of the Social Sciences, 8(7), 210-227.} .

Some interesting statistics on the nonprofit sector:

• It employs 10% of the U.S. workforce, becoming the third largest workforce behind manufacturing and retail.
• It represents 5.7% of the U.S. Gross Domestic Product (GDP).
• 10.2% of the companies in the U.S. are nonprofits.
• Government grants represent 80% of all nonprofit revenues^{9Ariella, S. (2023). 26 Incredible Nonprofit Statistics [2023]: How Many Nonprofits Are In The U.S.?. Zippia. https://www.zippia.com/advice/nonprofit-statistics/}.
• Within the sector, around 34.4% of all the registered 501(c)(3) organizations are related to education (i.e., classified as “Education”, “Higher Education”, or “Other Education”)^{10NCCS. (2020, June). The Nonprofit Sector in Brief 2019. Urban Institute. National Center for Charitable Statistics. https://nccs.urban.org/publication/nonprofit-sector-brief-2019}