About The Author

David Grabitske

David Grabitske is the manager of outreach services at the Minnesota Historical Society in St. Paul, Minnesota.

New York Times for December 5, 2009 carried an article, “Charities Rise, Costing U.S. Billions in Tax Breaks.” After noting that the Internal Revenue Service approves 99 percent of all applications to become new 501(c)(3) charities, and that the $300 billion donated to public charities last year cost the U.S. treasury $50 billion in lost revenue, the real question is whether the pace of expansion is sustainable.

With approximately 1.1 million 501(c)(3) nonprofits on the books already, that is an appropriate question as some colleagues have noted that too many adversely affect their own local fundraising. However, even Sarah Sibley in 1860 noted her difficulty in raising funds in Minnesota for the Mount Vernon Ladies Association when she wrote, “The objects of charity among us are so numerous, as to tax very severely the means of the community at large, and thus prevent those manifestations of good will to the Mt. Vernon Association which I know to exist in the State.” Not only do nonprofit charities affect the national treasury, but the more of them that there are causes increased competition for a finite amount of local resources. Nothing has seemingly changed about local competition for donations in 140 years.

The answer probably is not in establishing quotas, but in guidelines that allow for competition for some number of 501(c)(3)s available that year. If charities affect treasury revenue, they must do so for a public good. Not all good purposes are necessarily as urgent, and therefore competition probably could be one way of managing the growing demand. To speculate still further, one might imagine that an economist has studied the carrying capacity of the U.S. economy in terms of how many nonprofit charities can it safely afford, similar to bond ratings and other financial safety nets. In doing a very brief search online, no such study turned up. If you know of one, please post it here. Solutions for perceived problems in this area will require thoughtful discussion and further research. 

What have you noticed about the growth of 501(c)(3) charities in your community? Do you suppose limitations on the number of charities necessarily focus donations more effectively or limit the adverse affect on the U.S. treasury? Why or why not?

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5 Responses to How many nonprofits are appropriate?

  1. I am curious David by what you mean when you say “competition.” Do we not already have competition between charities? What sort of guidelines are you talking about that would change the nature of this competition? Would they be restrictive guidelines that would prevent more 501(c)(3) groups from forming? Yearly guidelines which if not met would revoke an organization’s 501(c)(3) status?

    I understand the concern here that if the solution doesn’t come from our end it will come from their’s (The Federal Government) likely at some point it may very well be a solution that is detrimental to the missions of our various charities.

    That being said I’d like to know more about these guidelines you have mentioned David, not necesarily details of course but rather the type of guidelines and their intended function.

    Reply

  2. When the GiveMN site came online, I went searched for “Cokato” to see how many charitable organizations were listed. Several on that list made me go “huh?”. I wonder if some groups incorporate, then after a time do grow moribund, and eventually are not active, but still exist on a list somewhere, becoming a number, but not taking donations any more.

    If we–meaning the non-profit world–feel it is too easy to incorporate as a 501(c)(3), then we should work with our federal legislators to tighten then criteria for and organization to incorporate. How that can/would be done though, I am not entirely sure.

    And out of curiosity, how many of you file your papers with the Minnesota AG’s office every year?

    Reply

  3. Mary Warner says:

    We cannot look at nonprofits solely from the standpoint of lost tax revenue. One of the main reasons the government provides a tax break to nonprofits and the individuals and businesses that donate to them is that nonprofits are ostensibly providing services that the government would otherwise have to provide. So the real question is, how much would the government have to pay to provide these services and how does the potential cost compare to the amount of lost revenue?

    Mike is right in pointing out that many nonprofits becoming inactive over time. Unfortunately, the IRS has not really had a way to weed these organizations out until recently. Once a nonprofit got started, it was considered a nonprofit forever. That should be fixed with the recent changes the IRS has implemented – both in having organizations send in a reply card, if they are small, and with the new governance questions that appear on the reconfigured Form 990.

    (For the record, Mike, we faithfully file our papers with the AG’s office every year.)

    Rather than create strict guidelines for which groups can become nonprofits and which can’t, I’d suggest an initiative to reeducate groups about what it means to be a nonprofit, particularly the amount of work that is involved. If nonprofits are supposed to be “forever” and there are lots of complicated rules & regulations to follow (there are!), perhaps groups would hesitate before taking this step.

    Forming a nonprofit should not be the default option for having a collection of people work toward a particular goal. The writers group I belong to is a good example of an ad hoc organization that has no need to formalize itself by becoming a nonprofit.

    I’m aware of another organization that became a nonprofit (initially so that it could host raffles, I believe), but it would operate better as an informal group. This group formed around a particular hobby, more so than out of meeting a true public need.

    For any group or individual looking to start a nonprofit, I’d suggest that check out the Minnesota Council of Nonprofits’ web page on alternatives to starting a new nonprofit:

    http://www.mncn.org/info/basic_start.htm#Alternatives%20to%20starting%20a%20new%20nonprofit

    The other thing I’d suggest people do is think about the mission or goal they are trying to achieve. Is it something that could be accomplished in 10 years or less? If so, then I wouldn’t start a nonprofit.

    If the goal or mission is perennial (i.e. ongoing, long-term, never solved), like poverty relief or saving history, then think about succession right from the get-go. Who’s going to take this on after the original organizers leave the scene? Will there be enough interest to continue the organization? Will there be enough resources to keep the organization going? Yes, these are tough questions. They’re meant to be. Starting a nonprofit should not be a decision that is made lightly.

    Reply

    Mike Worcester reply on December 18th, 2009:

    I wonder, Mary, how many of our colleagues neglect doing the AG paperwork. Glad to see you do!

    Reply

  4. Chad Roberts says:

    The question of how many non-profits is too many is a good one, particularly following the massive growth in the field that occurred in the late 90s in Minnesota and an economy that has led to reduced and more social-service focused corporate and foundation giving.

    Where I see this as a real problem is when two organizations serve the same community and provide the same services. While there are exceptions I’m sure, paying two sets of administrative/overhead costs seems like a tremendous waste of resources. That being said, I don’t think restricting the number of non-profits that have tax-exempt status is good blanket policy (I doubt the IRS will take the time to make appropriate choices). Rather, because so many non-profits (particularly those with annual revenue of less than $10 million) receive government support, I think it is incumbent on local units of government to determine if there are redundant organizations serving their communities and if so pick the stronger/better organization to support. This scenario is, I believe, a bit of a pipe dream though due to the political realities that surround local elected officials.

    Oh, and of course we submit our required reporting (federal and state). I think Mary is right, there will be some reduction in non-profit numbers as some dormant organizations are de-listed. However, I know of at least two non-profits that will continue to be counted even though they have been dormant for over a decade. In both cases a single person fills out the postcard annually (for federal status, no report required by state AG office because of their lack of activity). The people involved refuse to let the organizations fade out even though they have no assets and do nothing.

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