Nonprofit/Charitable Organizations: Big Business, Big Risks

The nonprofit sector in the U.S. has grown significantly in the past generation, and it represents a significant portion of the economy. Independent Sector, a network of nonprofits, foundations, and corporate giving programs, reports eye-opening statistics:

  • There are more than 1.9 million tax-exempt organizations in the U.S.—a number that has doubled over the past 30 years
  • Nonprofits employ 13.5 million people, nearly 10 percent of the American workforce, according to the National Center for Charitable Statistics
  • The number of charitable organizations registering with the Internal Revenue Service increased by more than 60 percent from 1998 to 2008
  • Nonprofit organizations account for about 5.5 percent of gross domestic product (GDP), as reported by the National Center for Charitable Statistics.

Read related: "Agents Can Help Nonprofits Put Claims in the Right Place."

For insurance producers, nonprofits represent a big market.

Of the 1.9 million nonprofit organizations, about 1.6 million form what is called “the independent sector,” meaning they are distinct from business and government entities, according to Independent Sector. This includes:

  • 1.4 million 501(c)(3) organizations (social-service organizations of all kinds, hospitals, hospice care, private schools, religious organizations, elder-assistance programs, youth development and mentoring organizations, library support programs, performing-arts groups, public television and radio stations, museums and art galleries, food banks, zoos and botanical gardens, animal rescue groups and shelters, conservation groups, and foundations, just to name a few.) These organizations, according to rules set down by Congress, must benefit the broad public interest.
  • 137,000 501(c)(4) organizations (social welfare and advocacy organizations, including the NAACP, National Rifle Association and the Sierra Club).

A key distinction is that contributions to 501(c)(3) entities typically are tax deductible, while contributions to 501(c)(4) entities are not. The latter have leeway to participate in legislative lobbying, advocacy and political activities.

There are eight major categories of 501(c)(3) organizations:

  • Arts, culture, and humanities
  • Education (colleges/universities, independent elementary and secondary schools, and noncommercial research groups)
  • Environmental and animals
  • Health services (hospitals, clinics, nursing facilities)
  • Human services (housing and shelter groups, sports and recreation programs, and youth programs)
  • International and foreign affairs (relief and development assistance groups, many working outside the U.S.)
  • Public and societal benefit (private and community foundations, civil rights organizations, civic, social and fraternal organizations)
  • Religious groups and houses of worship.

The key shared element among these two broad sectors is that these organizations (and the individuals that lead them, work for them and volunteer for them) have a mission that is based on serving other people or advancing an issue or cause, rather than a primary objective of commerce.

At nonprofits, “the health and well-being of individuals comes before profit and, needless to say, shareholder value, because there are no shareholders,” said broker Ralph M. Ricketson, Jr., senior vice president of McNeary, Inc., Charlotte, N.C. “They strive first and foremost to return value to the people in the community rather than to maximize profits, because this is the No. 1 standard by which they are judged. They pursue public benefit purposes that are recognized under federal and state law.”

Volunteerism is a vital element in the world of nonprofits and charities. The Corporation for National and Community Service (CNCS) estimated that 62.8 million adults volunteered a grand total of 8.1 billion hours for local and national organizations in 2010. CNCS estimated volunteer time for 2010 at $21.36 per hour, meaning that volunteer time was worth $173 billion.

Read related: "Nonprofit Question: Are Volunteers Workers?"

Next week: The unique risks of the nonprofit sector.

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