Nonprofit Myth’s Debunked: A History of the Third Sector

In preparation for Giving Tuesday, I decided to write an insider informed post summarizing nonprofits myths and charitable giving trends. The nonprofit field synonymous with the third sector, meaning existing between the private market and the public state, constituted 5.4% of the U.S. GDP in 2013 (or $905 billion dollars). With 1.5 million organizations providing 11.4 million jobs, this significant industry is often overlooked as a capable leader of innovative change which I argue that it should not be seen or stereotyped as simple charity.

Nonprofits are inherently different than public or private institutions, as their charitable mission is often the easiest difference to spot. Still, nonprofit corporations follow the same guiding business principals of the private sector and often work in coordination with the public sector. The biggest difference, tax provisions, are also one of the biggest reasons nonprofits came to exist. Public officials realized nonprofits operate more nimbly to address social needs that cannot be filled by the government. Thus, the government incentivizes charitable giving by tax breaks and also stimulating nonprofits with federal funding grants.

With the rise in DAFs (Donor Advised Funds) as seen in Fidelity Charitable Gift Fund overtaking the United Way as the top ranking charity in raising funds, easier transparency with GuideStar and increased accessibility with a plethora of online giving platforms including Amazon Smile and Crowdfunding, the popularization of Impact Investing, and the recent growth in new nonprofits, there is much talk but still much that the general public does not know about nonprofits. Following are three common myths about nonprofits debunked.

Myth: Nonprofits Are Never Self-funded

Some nonprofits are actually 100% sustainable with self-funding from their program fees. Of course, nonprofits are diverse and understandably have varied revenue models, but the proportion of funding from charitable giving makes up a meager 12% of overall funding. The National Center for Charitable Statistics data below shows 47.5% comes from fees from service, 32.5% from government grants, 9.6% from individual giving, 4.8% from investments, and 2% from foundations.


Myth: Nonprofits Should Not Earn a Profit

Nonprofits CAN and should keep excess revenue. Most commonly in reserve funds, nonprofits build funding to ensure sustainability. Nonprofits should aim for excess revenues, especially when building funding to expand programming or start a capital campaign.

Myth: Unrestricted Funding is Bad

The lack of unrestricted funding is debilitating and one of the biggest problems faced by nonprofits. Understandably, donors do not wish to support organizations with frivolous administrative expenses, but restricting where funding goes by cutting expenses for salaries, particularity in direct programs focused nonprofits, constrains progress. Services cannot be provided unless you pay someone’s salary to provide them.

This analogy from the Stanford Social Innovation Review sums it up: “We are asking nonprofits to construct the frame of their own Empire State Buildings (and some social challenges are surely the same scale), but no one will give them money for bathrooms and only for certain kinds of i-bars. After all, who would want to fund bathrooms?”

Another difficulty for nonprofits receiving restricted funding lies within conditions put on multiyear grants. Programs change names, are absorbed by other nonprofits, and even cease to exist, all as a natural part of the growth cycle. Finally, from a financial standpoint restricted funds negatively affected bond rating, increase debt costs, and directly impacts loan worthiness. Because nonprofits are required to meet donor’s charitable intent, painting with a broader brush of an unrestricted gift is the best way to make your dollars mean the most.

With 2015 total Charitable Giving at $373.25 billion, the scope and significance of the sector should be seen as an instrumental, not tangential, part of our economy. After you brazenly indulge in the gluttony of Thanksgiving overeating, Black Friday shopping, and max out your credit cards on Cyber Monday, do not forget to support the great nonprofits doing work in your community on Giving Tuesday!




Thoughts on “Nonprofit Myth’s Debunked: A History of the Third Sector

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