Introduction--The Nonprofit Handbook Sixth Edition

Little has changed about the American propensity to form benevolent associations in the 176 years since de Tocqueville wrote the above words.

In our highly competitive, individualistic society, the nonprofit sector provides a way to express our humanitarian values, to preserve our cultural heritage, to promote various causes, to educate, and to enlighten. It is often through coming together in nonprofit organizations that our citizens exercise their constitutional rights to petition their government, free speech, assembly, and freedom of religion.

Nonprofits play a unique role as an intermediary between the citizens and their government. They maintain and transmit values to a degree that government has been unable to do.

Maybe most important of all, nonprofits formulate much of the moral agenda for society. One only has to think of the response to the September 11, 2001 terrorist attacks, the 2005 Katrina and Rita natural disasters, the 2010 BP oil spill in the Gulf of Mexico, the environmental movement, rape crisis and domestic violence centers, public subsidies of arts and humanities, public awareness of AIDS and support of AIDS programs, and countless other issues that people coming together in voluntary organizations were able to put on the nation’s agenda.

Historically, the primary distinguishing characteristic of the nonprofit sector is that it is mission- and value-driven. Nonprofit organizations exist to accomplish some social good, however that may be defined. A set of values and assumptions underlies this view of the voluntary sector, including altruism, benevolence, cooperation, community, and diversity. The privileges granted to the sector and public expectations are grounded in this belief.

Nonprofits in the United States sometimes take the form of soup kitchens such as Our Daily Bread in Harrisburg, Pennsylvania, which operate on a shoestring budget and charge their clients virtually nothing for their services. They also take the form of enterprises such as hospitals, with budgets in the hundreds of millions of dollars, which often act in ways very much like their for-profit counterparts, seeking to maximize revenue and capture market share.

In January 2000, a Dauphin County (PA) Common Pleas Court judge ruled against the tax exemption eligibility for Hershey Medical Center (HMC), affiliated with Penn State University. One of his objections was that the facility paid salaries to some individuals on staff in excess of a half-million dollars annually. Like almost all hospitals, HMC enters into sophisticated business arrangements. In 1997, the hospital merged with Geisinger, a for-profit health system. The merger collapsed after two years, chiefly as a result of conflicting organizational missions and cultures between the two parent organizations, compounded by financial and operational difficulties.

In contrast to the soup kitchen, the financial aspects of decision-making are of paramount importance to HMC’s decision-making strategy. Yet, as one wag pointed out on the tangible benefits of a nonprofit being selected as a “Point of Light” by the White House, even a “point of light” has to pay the electric bill.

Neither Hershey Medical Center nor Our Daily Bread, about ten miles away from each other, is atypical of the nonprofit sector. While they may appear to be as different as night and day, they also share many things in common. Both depend on government grants, donations from foundations, businesses, and individuals to keep them operating in the black and to supplement fees for service. Both provide free services to those who are unable to pay for them. Both depend on volunteers. Both are governed by a board of directors whose members do not share in any surplus revenues that may be generated, and that consists of unpaid volunteers from the community.

These are some of the aspects that differentiate nonprofit organizations from their government and private sector counterparts that also provide inpatient health care and food services. Nonprofit organizations, especially those qualified under section 501(c)(3) of the Internal Revenue Code, occupy a special and unique place in American society. Their uniqueness has many attributes.

All such organizations are supported by the nation’s taxpayers. They are exempt from federal and state income taxes. Contributors, for the most part, can deduct their contributions from their federal income tax (and from their state income tax in most states). They are eligible to have their postage subsidized by the federal government. Many are exempt from state and local sales and property taxes.

 Some people, including those who formulate tax and regulatory policies that apply to charities, have a vision of charitable organizations that resembles those of the 19th century. In that vision, the workers are all volunteers. Recipients of services are too poor to provide for themselves. Funding comes from wherever it can be found. An example of what this looked like is described on the Web site of Yale University’s School of Medicine:

A 19th century hospital was predominantly a charity institution, although from the beginning, some patients paid for their stay. It was intended for the worthy poor, for sailors, and for other strangers in town. People of means, such as the donors who were members of the General Hospital Society of Connecticut, would receive medical care in their homes, and not in a hospital. The hospital as yet offered no advantages over home care. Physicians served in the hospital without salary on a rotating basis as attending physicians. They did so as a form of charity and civic duty, but hospital service also provided valuable experience, professional recognition, and the possibility of training students in the wards.

from Connecticut and New Haven’s First General Hospital: Hospitals in the Nineteenth-Century; Harvey Cushing/John May Whitney Medical Library; Yale University School of Medicine;  http://info.med.yale.edu/library/news/exhibits/hospitals/

Benjamin Franklin convinced the Pennsylvania Legislature to participate in chartering the nation’s first hospital, Pennsylvania Hospital. He received a commitment to match 2000 pounds donated by private individuals with a like amount appropriated by the state government. Founded in 1751, the institution was created “to care for the sick poor of the Province and for the reception and care of lunaticks” (see: In the Beginning: The Story of the Creation of the Nation’s First Hospital; http://www.uphs.upenn.edu/paharc/features/creation.html; University of Pennsylvania Health System).

The modern charitable institution, however, may bear little resemblance to the typical charity of the 19th century. Burgeoning demands for services, increased government regulation, keen competition for funds, the advance of technology, demographic changes, and the public’s changing perception of our institutions have all worked to increase the complexity of decision-making to those in leadership positions with nonprofit organizations. Pennsylvania Hospital, started with perhaps a handful of employees, has evolved into the University of Pennsylvania Health System, with a 2010 workforce of 17,900, making it one of the largest private employers in the entire state (http://www.linkedin.com/companies/university-of-pennsylvania-health-system). Other nonprofits, such as educational institutions and other integrated health care systems, are on the roster of the state’s largest employers. In fact, one such institution, the University of Pennsylvania, is the largest nongovernmental employer in Pennsylvania other than Wal-Mart (source: http://en.wikipedia.org/wiki/Pennsylvania).    

Virtually every American is touched in some way by the services of this country’s nonprofit organizations. Organizations such as institutions of religious worship, civic groups, hospitals, day care centers, libraries, colleges, symphonies, art museums, the Red Cross, Salvation Army, and the American Cancer Society work in partnership with government and the public to improve our lives and those of our neighbors.  

The nonprofit sector’s participation in the American economy is impressive. According to the Urban Institute’s The Nonprofit Almanac (2008), the voluntary sector contributes at least 5% of our national economy and paid about 8.1% of all wages in 2006. The sector employed 12.9 million workers in 2005, or about 9.7% of non-farm employment. According to the U.S. Department of Commerce’s Bureau of Economic Analysis, 2005 revenues of nonprofit organizations were $930 billion, with outlays during that year of just over $915 billion. In 2007, 383,000 nonprofit organizations reported to the IRS that they collectively controlled property, cash, and investments with a value of about $3.2 trillion (source: http://www.irs.gov/taxstats/article/0,,id=102886,00.html). This figure does not include wealth controlled by churches or small nonprofits that are not required to file Form 990 annual tax returns.  

Most Americans recognize the value of nonprofit organizations in society. Of 142.35 million individual tax returns filed nationally for tax year 2008 by individuals and couples, 39.2 million claimed a tax deduction for charitable giving, totaling $161.87 billion in deductions, according to the IRS (source: http://www.irs.gov/pub/irs-soi/10winbulindincretpre.pdf). Many more billions of dollars were donated by persons who did not itemize, or who did not bother to declare the value of their charity on their tax returns.

The business community also donates billions of dollars each year to charitable institutions. More than half of individual taxpayers who take a deduction also make non-cash contributions, valued at $58.7 billion for tax year 2007 (source: http://www.irs.gov/pub/irs-soi/10sprbulindcont07.pdf).

According to the June 2010 annual report of Giving USA, published by the American Association of Fund-Raising Counsel Trust for Philanthropy, total charitable giving by individuals, corporations, and foundations fell in 2009 over the previous year to an estimated $303.75 billion (source: http://www.givingusa2010.org/news). Although this represented a 3.6% decrease in individual giving over the previous year in current dollars, a reflection of a national economy in crisis, there were positive signs that giving during 2010 increased modestly.

Billions of hours annually are volunteered to nonprofits. Independent Sector estimates that about 63.4 million Americans, or 26.8 percent of the adult population, gave eight billion hours of volunteer service worth $169 billion in 2009, based on an estimate that each hour is worth $20.25 (which increased to $21.36 for 2010) (Source: http://www.independentsector.org/volunteer_time). As those who volunteer can attest, the value to society, such as the relief of human suffering, far exceeds any dollar value.

It is difficult to foresee and anticipate all of the barriers that stand in the way of a nonprofit organization’s creation and survival. One thing is certain―there will be barriers. Forming and running a nonprofit corporation, or any corporation, is a major challenge. Yet it is known that the accomplishments such organizations can achieve far exceed what any single person, operating without an organizational structure, can achieve alone.

Starting and running a nonprofit corporation in the 21st century requires political acumen, immense technical skill, vision, physical and mental stamina, and, perhaps most of all, luck and a sense of humor.

In the fall of 1984, the Internal Revenue Service, because of a computer glitch, lost $300 million in federal tax withholding payments of 10,000 companies. Even after the snafu was discovered, thousands of the companies received curt letters threatening that the government would seize their property and bank accounts if the tax payments were not made within 10 days. As a nonprofit executive who was on the receiving end of one of these letters, I can certify that “maintaining a sense of humor” was not easy at that time. Yet in the years after that IRS debacle, several more calamities beyond my control afflicted the nonprofit I ran.

There were times when running a nonprofit was no picnic. And then there were times when it was the most fun I ever had. I would like to think that if a publication such as The Nonprofit Handbook had been around when I first started, my job would have been easier.

As one might expect, a plethora of laws, regulations, court decisions, and other government policies apply to nonprofit corporations.

The purpose of this handbook is to provide answers to questions such as:

•     What does one have to do to form a nonprofit corporation?

•     What are the advantages and disadvantages of incorporating?

•     How does a nonprofit organization qualify and apply for 501(c)(3) status?

•     What kind of paperwork is involved in typical nonprofit operations?

•     What should be in a nonprofit corporation’s bylaws?

•     How does a nonprofit organization qualify for discount bulk mailing privileges?

•     How does a nonprofit organization qualify for a state sales tax exemption?

•     Can a nonprofit organization engage in unrelated activities that generate income?

•     Will the tax exemption of a nonprofit organization be at risk if it engages in lobbying?

  •    How can nonprofit organizations use the Internet to increase revenues?

This handbook cannot purport to answer every conceivable question, but it does attempt to provide sources for answers to many of the questions posed by nonprofit board members and staff. It also provides references to primary source material, much of it available on the Web, on important state and federal laws and regulations, sources for some of the most useful government forms, and sound advice about many nonprofit management issues.

For each state and the District of Columbia, this handbook provides basic information about incorporation, lobbying registration and reporting, income and sales tax exemptions, and registration to conduct charitable solicitations. The names and addresses of the appropriate government contact offices are provided. It also provides the addresses of useful Web sites where additional resources may be found.

Among the new features that appear in this edition are―

•    An expanded section in Chapter 4 on the legal responsibilities of board members

•    Information about parliamentary procedure

•    An expanded section on social networking

This handbook will be a useful reference for―

•    those who are considering forming a nonprofit corporation

•    those who need to keep current on laws, regulations, and court decisions that affect nonprofit organizations, including executive staff and board members of existing nonprofit organizations

•    those who will benefit from the advice included in this handbook on running a nonprofit organization, such as fundraisers, lobbyists, public affairs consultants, staff and leadership of funding organizations, and government officials, in addition to those who serve as the staff and board members of nonprofit organizations and their associations

•     those who are students of nonprofit management at both the graduate and undergraduate levels.  

This is the sixth edition of this publication. Every effort has been made to make this Handbook as useful and free from errors as possible. It is the intent of the author to seek corrections as well as suggestions for improving this publication, and to incorporate these contributions in future editions. A survey/order form has been included in the Appendix to provide feedback to the author and publisher.

The author gratefully acknowledges the contributions of scores of individuals and organizations to this book. Among them are Kathleen Steigler and Linda Grobman, who edited the first edition of the Pennsylvania Non-Profit Handbook, on which this book is based; Michael Sand, who wrote the chapter on boards, as well as the chapter on applying for grants; and Bob Mills, Esq., who was the initial author of the chapter on volunteer and staff liability, which has since been completely revised, updated, and expanded, thanks to the efforts of Melanie Herman of the Nonprofit Management Risk Center. Thanks are due also to those who reviewed and edited specific chapters of the previous editions, including Terry Roth, Esq.; W. Barney Carter; George Bell, Esq.; Bill Knoll, Classification Reform Instructor for the U.S. Postal Service; Otto Hofmann, Esq.; Phil McKain; Jim Fritz, Esq.; Frederick Richmond; Steve Zneimer; Jim Redmond; Elizabeth Hrenda-Roberts; Ron Lench; Christine Finnegan; Joan Benso; Dick Shelly; John Briscoe; and Ken Wickham. Patricia Mogan, Standards for Excellence Officer of the Pennsylvania Association of Nonprofit Organizations (PANO), updated the section in Chapter Seven related to the Standards for Excellence program. I wish to thank John Hope, Adam Grobman, and Barbara Blank, who reviewed and edited this edition and/or previous editions of this book.  

 I am also appreciative of the contributions to this publication made by Gerald Kaufman, executive director of the Awbury Arboretum Association, whose contribution to the chapter on nonprofit ethics deserve to be shared with every board member and staff person who is affiliated with a charity. Joel Cavadel, an attorney from York, PA, made many contributions to the section on mergers and consolidations, for which I am most grateful.  Esther Hyatt of Virginia Commonwealth University reviewed the chapter on evaluation. Nearly a score of members of the teaching section of the Association for Research on Nonprofit Organizations and Voluntary Action (ARNOVA) reviewed chapters of An Introduction to the Nonprofit Sector, a textbook based on the third edition of The Nonprofit Handbook. Some of their suggestions have been incorporated into this 6th edition. Some of the material in the chapter on change management was adapted from material on outcome-based management jointly written by Frederick Richmond and myself, and from material on large group intervention that Gerald Gorelick and I wrote together. Gary Grant and I wrote the material that comprises Chapter 22, Fundraising on the Internet, which I feel makes a significant contribution to the value of this edition.

Finally, a word of thanks to the Pennsylvania Association of Nonprofit Organizations, particularly to its executive director, Joe Geiger, for participating in this sixth edition. PANO is the authority Pennsylvania nonprofits turn to for information, products, services, and training to make them the best they can be.

G.M.G.

May 2011