The nonprofit sector is the collective name used to describe institutions and organizations in American society that are neither government nor for-profit business.
Nonprofit FAQs Why Nonprofits Matter to Maine Research on Nonprofits
Types of Nonprofits
Nonprofits come in all shapes and sizes. Most are very small, community based, all volunteer groups, and some are very large, complex, professionally run businesses.
Within the broad umbrella of "nonprofit" are many types of organizations. Section 501(c) of the federal tax code, which outlines the types of organizations eligible for tax exemption, lists more than 25 classifications of tax-exempt entities. The major subcategories of nonprofit organizations include:
Public Charities - 501(c)(3)
This category includes hospitals, museums, orchestras, private schools, religious organizations, advocacy organizations, public television and radio stations, soup kitchens, and health & human service providers To be considered a public charity, the organization must be able to show broad public support, rather than funding from an individual source. Individuals and corporations that give money to these organizations can deduct the value of gifts from their taxable income if they itemize.
Foundations - 501(c)(3)
Many individuals, families, businesses and communities establish foundations as a way to support causes and programs that benefit society. Foundations are one of the most complex 501(c)(3) classifications and can be subject to more stringent regulation and reporting requirements than other nonprofits. The most common types of foundations are Private, Corporate, Operating, and Community.
Social Welfare - 501(c)(4)
Nonprofits such as the NAACP, the National Rifle Association, and National Organization for Women are exempt under 501(c)(4) of the tax code. Contributions to these organizations are not tax deductible and these groups have greater latitude to participate in legislative advocacy, lobbying, and political campaign activities.
Professional + Trade Associations - 501(c)(6)
These include chambers of commerce, business leagues, and other organizations that promote the business or professional interests of a community, industry or profession. Contributions are not deductible, but membership dues may be deductible as a business expense.
Frequently Asked Questions About Nonprofits
Maine does have a high number of nonprofits per capita, and this is consistent with both northeastern states and large, rural states. We rely on nonprofits to provide basic services that, elsewhere, might be provided by state or county governments. This works to our advantage, as smaller organizations are often more nimble and responsive to community needs. Also, as government at all levels has faced fiscal challenges, cities and towns have been looking to nonprofits more than ever to help provide essential services. Nonprofits are a robust part of our economy, employing 1 in 6 Maine workers (over 100,000 people). In addition, 1 in 3 Mainers volunteers for a nonprofit. These organizations create and support the quality of life that we value so highly.
The best source of information is usually the organization itself. Many nonprofits have websites that have a great deal of information about their programs and finances.
Another source is the IRS Form 990, an annual information form that most nonprofits must file with the IRS each year. The Form 990 summarizes the organization’s finances, lists the salaries of the highest paid officials, includes the names of board members, and provides a general snapshot of the organization. Nonprofits are required by law to share their 990 forms with members of the public who ask to see them, and must make the form available during regular business hours or on the Internet. Journalists also can request copies of the 990 from the IRS Exempt Organization center in Ogden, Utah, under the Freedom of Information Act.
Nonprofit organizations do pay certain taxes including payroll taxes but they are exempt from federal business income taxes, and some are exempt from property taxes and sales tax, though some pay voluntary fees to city and town governments in lieu of property taxes. Nonprofits are also required to pay taxes on income from activities that are unrelated to their mission.
Why are they exempt from some taxes? Because nonprofits are essential partners with government in maintaining and promoting the public good throughout our state. Tax-exemption recognizes this important partnership between nonprofits and government and ensures that every dollar earned and spent by a nonprofit is dedicated to the mission it was created to serve. These missions are complimentary to the goals of government, and society has recognized the critical role these organizations play in reducing the cost of government as well as enhancing quality of life.
- Nonprofits relieve government’s burden. Private schools and hospitals, day care centers, homeless shelters, and other nonprofits provide services that government might otherwise be required to offer. Through tax-exemptions, governments support the work of nonprofits and receive a direct benefit. Nonprofits are also often more nimble and cost-effective in responding to community needs as they are able to leverage significant volunteer hours and private donations--something government can’t do.
- Nonprofits benefit society. Nonprofits encourage civic involvement, provide information on public policy issues, encourage economic development, build and preserve public structures such as libraries, parks, and open space, and do a host of other things that enrich society and make it more vibrant.
- Taxing nonprofits would be difficult and counterproductive. Determining what qualifies as taxable income would be extremely difficult according to many economists. The adverse effects of taxation on the viability and effectiveness of many nonprofits would be counterproductive and cost more to the community than the taxes it would generate.
- Exemption for religious nonprofits preserves separation of church and state. Tax-exemption limits government’s ability to use tax policy to influence religious choices.
Without the essential infrastructure of the nonprofit sector, government would need to increase taxes in order to provide the range of services and innovative solutions to community needs that nonprofits now provide.
Operating any organization at a deficit or without a sufficient “rainy day” fund is not good business. In order to maintain the viability of any organization, it is important to operate with some “net revenue” at the end of a year. What distinguishes nonprofits is not whether they can make a profit, but what happens to profits. Nonprofits are prohibited from distributing profits in the same way for-profit corporations can. All revenue must be used for the organization’s mission.
Most nonprofits are corporations, which means that they are legal entities distinct from the individuals who founded them. Like their for-profit counterparts, nonprofit corporations are governed by boards of directors with legal and ethical responsibilities that cannot be delegated. Maine's Attorney General has a guide for board members of charitable corporations outlining their duties.
How are nonprofits monitored and regulated?
The overwhelming majority of nonprofits in the United States operate in an ethical and accountable manner. However, nonprofits are not immune to damage that can be caused by unscrupulous and fraudulent solicitors, financial improprieties, and executives and board members who place personal gain above the organization’s mission. Because nonprofits are held to such high standards, they have created many lines of defense against fraud and corruption:
- Boards – All nonprofits are governed by a board of directors or trustees (there’s no real difference), a group that is legally responsible for making sure the organization remains true to its mission, safeguards its assets, and operates in the public interest.
- Private Watchdog Groups – Several private groups (who are themselves nonprofits) monitor the behavior and performance of other nonprofits.
- State Charity Regulators – The Attorney General’s office maintains a list of registered charitable solicitors and investigates complaints of fraud and abuse.
- Internal Revenue Service – A division of the IRS (the Tax Exempt/Government Entities Division) is charged with ensuring that nonprofits are complying with the requirements for eligibility for tax-exempt status. As a result of the thousands of audit investigations, a handful have their tax-exempt status revoked; others pay fines and taxes.
- Donors & Members – Some of the most powerful safeguards of nonprofit integrity are individual donors and members. By withholding their financial support, donors can strongly encourage nonprofits to reappraise their operations.
- Media – Many nonprofit leaders may feel misunderstood or even maligned by negative media coverage, however, this media watchdog role has resulted in increased awareness and accountability throughout the sector.
Politics yes, policy, no! Decisionmakers rely on nonprofits to share expertise, experience, and real-life stories to help them effectively develop policy to address complex social problems. We can all agree that it is at best unusual and at worst ill-advised to make any policy or programmatic decision without soliciting input from those with expertise and experience on the issue.
There are however, important restrictions on how nonprofits engage in advocacy and lobbying.
- Public charities, or 501(c)(3) organizations, are allowed to lobby provided the activity is insubstantial in relation to the overall organization.
- The lobbying activities of 501(c)(4) social welfare groups and 501(c)(6) trade associations are not similarly restricted.
- No nonprofit organization can use funds from government grants or contracts for lobbying activities.
501(c)(3) nonprofits are not allowed to participate in or attempt to influence political campaigns; if they do, they risk losing their tax-exempt status. However, public charities may educate voters during political campaigns, including getting statements from candidates, conducting public forums, giving testimony on party platforms, and providing issue briefings for candidates.
Most Maine nonprofits are actually quite small: about 75% of all nonprofits in Maine operate with an annual budget of under $100,000. That is why it is very unusual for nonprofit leaders to make unreasonably high salaries. For the most part, compensation of nonprofit executives lags behind the compensation of leaders in business and government. The real challenge for many boards is not how to reign in excessive compensation, but rather how to find the resources to pay appropriate salaries. For nonprofits to do their important community-building work, it is critical they are able to attract and retain talent.
To evaluate the appropriateness of executive compensation, consider the following:
- at minimum, the cost of living in the region and what constitutes a living wage;
- the size and complexity of the nonprofit;
- the mission area, geographic location, and financial condition of the organization;
- the qualifications required for the job; and
- compensation at comparable organizations.
The Internal Revenue Service (IRS) has laws in place to ensure that nonprofit compensation is reasonable. If people suspect that someone is unreasonably compensated, they can first file a complaint with the nonprofit’s board, and then with the IRS.