Nonprofit enterprises are society's safety net, entrusted by the community with assuring not only its health, education, and welfare, but also with protecting and advancing its arts, culture, and human values. Nonprofit enterprises create and enhance our quality of life, affecting every community in the nation--and each person's life.
How do these organizations fit into both contemporary society and economy? How do they relate to government and to business (the for-profit sector), and how have they come to exist at all?
The Nonprofit Sector
To begin, it is useful to recognize that the nonprofit sector is a bit of a "catch all" for organizations that do not fit neatly elsewhere.
Also, the reported data for the sector do not include all the economic activity that takes place within it, either because organizations are not incorporated or, if incorporated, are not registered with, and/or do not report to the government. (1)
With this caveat in mind, in 2008 more than 1.7 million nonprofit entities were registered with the Internal Revenue Service. This represents a small fraction of all organizations in the United States. In addition, there are an unknown number of unregistered third-sector organizations (i.e., religious congregations--only about half of the estimated 350,000 religious congregations register) and organizations with less than $5,000 in annual revenue that are not required to register. Also, unincorporated entities and ad hoc efforts are not recognized in the data.
Recognizing these limitations, it is estimated that the nonprofit sector accounts for about 5% of the nation's gross domestic product. If estimated on the basis of salaries and wages, the sector's economic footprint increases to an estimated 8% of the gross domestic product--or about $1.1 trillion. (2)
If measured by expenses or assets, the largest components of the nonprofit sector are providers of health services, followed by research and education institutions. Together they account for more than 57% of the sector's expenses and more than 42% of its assets. Alternatively, if measured by the number of entities, research and education organizations are the largest component (almost 15% of all registered organizations). (3)
As striking as the economic dominance of the health services and education components of the sector is the fact that almost 75% of all reporting public charities (those nonprofit organizations with a 501(c)(3) IRS designation) have expenses of $500,000 or less, and 44% have expenses of $100,000 or less. (4) The simple conclusion is that most nonprofit entities are small, producing a societal impact far greater than their economic footprint.
Exhibit 1 provides a quantitative description of the relative size of the major elements of the sector. While it is clear that the sector is dominated by its health and education components, it is also clear that it is marked by great diversity. The homeless shelter and
the art museum are both encompassed by it, as are the university and the preschool, the nursing home and the child care center, and the research hospital and the AIDS clinic. To understand how this disparate mix of enterprises fits into the contemporary socioeconomic environment, it is helpful to start by creating an analytical construct consisting of a bit of economics, some political science and sociology, and a realistic view of human nature.
Business and government are generally thought of as the basic organizational building blocks of the American economy. In reality, the economy involves a blending of sectors, not individual, discrete blocks or components. However, for purposes of initial discussion, the sectors can be considered to be distinct, with business and government each anchoring one end of an economic continuum. (See Exhibit 2.)
Business is the wheel horse of the economy. …