Strategic Leadership and Management in Nonprofit Organizations
Theory and Prac T ice
Second edition
Martha Golensky
Grand Valley State University
Mark A. Hager
Arizona State University
1
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Library of Congress Cataloging-in-Publication Data
Names: Golensky, Martha, author. | Hager, Mark A., author.
Title: Strategic leadership and management in nonprofit organizations: theory and practice / Martha Golensky, Grand Valley State University, Mark A. Hager, Arizona State University.
Description: Second Edition. | New York : Oxford University Press, 2019. | Revised edition of Strategic leadership and management in nonprofit organizations, c2011.
Identifiers: LCCN 2019032301 (print) | LCCN 2019032302 (ebook) | ISBN 9780190097844 (paperback) | ISBN 9780190097868 (epub) | ISBN 9780190097851 (updf)
Subjects: LCSH: Nonprofit organizations—Management. | Nonprofit organizations. | Strategic planning.
Classification: LCC HD62.6 .G64 2019 (print) | LCC HD62.6 (ebook) | DDC 658.4/092—dc23
LC record available at https://lccn.loc.gov/2019032301
LC ebook record available at https://lccn.loc.gov/2019032302
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Printed by Marquis, Canada
i Contents
Preface ix
Acknowledgments xiii
Instructor Resources xv
Section 1 | Understanding the Nonprofit Sector
Key Themes 2
1. Definition of a Nonprofit Organization 3
What’s in a Name? 3
Turning a Negative into a Positive 5
Final Thoughts, Questions to Consider, and Selected Readings 11
References 12
2. Historical Moments in the U.S. Nonprofit Sector 13
Tracing the Evolution of the U.S. Nonprofit Sector 14
The Human Services Subsector 21
Final Thoughts, Questions to Consider, and Selected Readings 25
References 26
3. Political and Economic Considerations 28
Theories of Change 29
The Example of Managed Care 30
The Ties That Bind 32
The Permeability of Sector Boundaries 35
Final Thoughts, Questions to Consider, and Selected Readings 44
References 45
Section 2 | Leading in Turbulent Times
Key Themes 48
Conflicting Agendas for the Future of a Youth Agency, Part 1 48
4. The Nature of Leadership 53
The Meaning of Leadership 54
A Shared Leadership Model 60
The Board–Executive Relationship 63
Final Thoughts, Questions to Consider, and Selected Readings 73
References 74
5. The Practice of Leadership 77
Organizational Culture 78
Leadership Versus Management 82
Transformational and Transactional Leaders 82
Performing Multiple Roles 85
Final Thoughts, Questions to Consider, and Selected Readings 92
References 94
6. Decision-Making 96
Decision-Making Strategies 97
Practical Considerations 101
Six Thinking Hats 108
Final Thoughts, Questions to Consider, and Selected Readings 112
References 113
7. Organizational Change 115
The Ubiquity of Change 116
Managing Change 122
Strategies for Change 129
Final Thoughts, Questions to Consider, and Selected Readings 136
References 137
Section 3 | Securing Material Resources
Key Themes 142
Conflicting Agendas for the Future of a Youth Agency, Part 2 142
8. Strategic Planning 147
Practical Considerations 149
Strategic Planning Models 156
Final Thoughts, Questions to Consider, and Selected Readings 163
References 165
Appendix 8A: Report of the Youth Services Network (YSN) Strategic Planning Committee (Excerpts) 167
9. Program Development 171
Project Development 172
Program Planning 174
Program Monitoring 181
Program Evaluation 186
Final Thoughts, Questions to Consider, and Selected Readings 192
References 193
10. Resource Generation 195
Basic Principles of Resource Generation 196
Philanthropic Fundraising 201
Government Support 209
Commercial Ventures 211
Final Thoughts, Questions to Consider, and Selected Readings 213 References 216
Appendix 10A: Glossary of Selected Resource Generation Terms 218
Appendix 10B: Sample Proposal Letter 219
11. Financial Performance Indicators 221
Fiscal Fundamentals 222
The “New” Cutback Management 233
Performance and Effectiveness 237
Final Thoughts, Questions to Consider, and Selected Readings 239 References 240
12. Technology and Communication 242
The Basics of Effective Communication 243
Technology and Internal Communication 245
Technology and External Communication 252
Final Thoughts, Questions to Consider, and Selected Readings 257 References 260
Section 4 | Maximizing Human Resources
Key Themes 264
Conflicting Agendas for the Future of a Youth Agency, Part 3 264
Presentation of the Strategic Plan 266
13. Leadership by Example 269
Basic Ethical Principles 270
Providing Ethical and Moral Leadership 273
Risk Management 278
Final Thoughts, Questions to Consider, and Selected Readings 285 References 286
14. Human Resources Management 289
Promoting Job Satisfaction and Commitment 290
Practical Considerations in Human Resource Management 293
Addressing Diversity in the Workplace 308
Final Thoughts, Questions to Consider, and Selected Readings 311 References 313
15. The Nonprofit Governing Board 315
An Overview of Effective Governance 316
Practical Considerations 321
Final Thoughts, Questions to Consider, and Selected Readings 333
References 334
16. Volunteer Administration 336
An Overview of Volunteerism 337
Elements of Effective Volunteer Management 343
Final Thoughts, Questions to Consider, and Selected Readings 354
References 356
About the Authors 359
Index 361
Preface
Welcome to the second edition of Strategic Leadership and Management in Nonprofit Organizations! The first edition was written wholly by Martha Golensky, a culmination of knowledge and experience she gained through fifteen years as a nonprofit executive and twelve years as a full- time university professor, teaching nonprofit management courses, conducting research on leadership and decision-making, and providing consultation to local organizations on management issues. In the second edition, Golensky is joined by Mark Hager, who directs the master’s degree in nonprofit leadership and management at Arizona State University. Fans of the first edition will be glad to know that this revised edition maintains the bones and content of the original edition.
So what’s new? Many of the classic references that have had so much influence on the field are still here, but we have updated each chapter with new thinking and research from the past decade. When statistics are used to provide context for a particular topic, we have updated those. In some chapters, Hager has added more flavor that reflects his expertise— for example, you will find expansions in the chapter on volunteer administration, a topic on which Hager has written extensively. Perhaps the biggest change is in our references to technology, which has influenced the nonprofit workplace in every way over the past decade. When the first edition of this book was written, social media and smartphones had not been invented yet. Now, they are fundamental parts of our lives, and nonprofits make use of them every day to interact with their stakeholders. So, the second edition of Strategic Leadership and Management in Nonprofit Organizations melds classic research with new thinking on how best to run nonprofits.
Although the book incorporates the work of many scholars in the field of nonprofit and philanthropic studies, it is fundamentally practical in its orientation. It takes as its departure point the smorgasbord of challenges facing real-life decision makers in today’s world— challenges around service delivery, staff performance, financial stability, interaction with a board of directors, strategic planning, program effectiveness, volunteer engagement, and uses of technology.
The principal audience for the book is students of the nonprofit sector. This includes professionals who are about to or have recently entered the workplace as interns, employees, or volunteers, in direct practice or a supervisory role. Our goal is to help you understand how nonprofit organizations function and to increase your appreciation of the conflicting demands on the board and top management team. More experienced staff, especially those engaged in the daunting task of effecting organizational change, may also find the book a useful resource. Workers at all levels must have both technical competency and the ability to navigate skillfully through the intricacies of the work culture.
A distinctive feature of the book is the use of an extended case study to illustrate different leadership and management issues. The case, which Golensky wrote to use in the classroom, is based on the experience of a real human service organization. Unlike most case studies, this one tells the organizational story from two viewpoints: the executive director and the board president. These two important leaders disagree on the best strategy for the agency’s future. Thus, the case mimics real life, where critical decisions are seldom simple. By addressing a range of significant organizational issues as seen through the eyes of the key decision makers, the case featured in this book should stimulate both personal reflection and lively discussion about basic concepts, processes, and their consequences.
In addition to the case study, the book includes many examples of the issues nonprofit leaders and senior managers face. Some are relatively new concerns, such as how to incorporate individuals who wish to volunteer only now and then, or episodic volunteers. Some have a long tradition, like promoting the effectiveness of the board of directors. Although many of the examples in the book are drawn from the human services, they depict situations common to a variety of nonprofit organizations.
Organization
The book is organized into four sections. The introduction to each section summarizes the contents and lists key themes. Portions of the case study, addressing many of these same themes, appear in the introductions for sections 2, 3, and 4. The last part of the case, containing the resolution of the conflict between the two main characters, appears only in the accompanying teacher’s manual, so readers can reach their own conclusions about the issues in the case. Each chapter ends with discussion questions and recommended reading.
Preface
Section 1 provides the context for the rest of the book. Here the focus is on the characteristics of a nonprofit organization, with an explanation of the specific attributes of both charitable and member- serving nonprofits. We also consider the historical development of the nonprofit sector as a whole and of the human services subsector in particular. This section also features a review of the political and economic climate in which nonprofits must operate.
In section 2, the concept of leadership is examined from several perspectives, starting with general theories of leadership and the particular structure of leadership in a nonprofit. Next, the multiple roles of the nonprofit professional leader are delineated, to recognize that the same person may serve as manager and administrator, motivated by different priorities when functioning in each capacity. Ethical issues are also considered. The last two chapters in this section are concerned with the theoretical and practical aspects of decision-making and the relationship between organizational culture and organizational change, a critical element of present-day leadership and management in nonprofits.
Sections 3 and 4 address the specific skills of the nonprofit leader involved in securing material resources and managing human resources, respectively. In section 3, strategic planning, program planning and evaluation, resource generation, organizational performance indicators, and technology and communication are the areas of emphasis.
Section 4 includes chapters dealing with leadership to create and protect a culture of integrity, human resource management, and the practical aspects of board governance. We end with a focus on the role of volunteers and the need for organizations to provide good experiences if they want volunteers to keep coming back.
A teacher’s manual has been prepared to accompany the text. It contains suggestions on ways to present the information covered in each of the book’s chapters as well as exercises and assignments suitable for applying what has been learned to everyday practice. With a few exceptions, this is original material that Golensky developed over the years and tested thoroughly in the classroom, with a few additions from Hager. Also included is Golensky’s version of a management audit, which might be an effective final course project.
Acknowledgments
Thank you to Martha Golensky for inviting me to contribute to the second edition of this great textbook. This work is hers, and I am humbled to be part of it. Thank you to Kathy Renfro for her research assistance as we worked through the updates and revisions. Martha Golensky wishes to thank again all of the people who contributed to the first edition of this book.
Mark Hager
Instructor Resources
i
The Oxford University Press Ancillary Resource Center (ARC) houses an Instructor’s Manual with teaching tips, exercises, and worksheets. To access these materials, please visit www.oup.com/he/golensky2e.
Section
1
Understanding the Nonprofit Sector
The first part of this book aims to introduce readers to the nonprofit sector in the United States, although some of the material may be applicable to nonprofits in other countries as well. The intent is to establish the context for the rest of the book by providing useful definitions and background information about the sector, and especially health and human services.
Chapter 1 identifies the different types of nonprofit organizations, including those classified as public charities under section 501(c)(3) of the Internal Revenue Code since those are the ones we give the most attention to in this book. The chapter also notes the part of the nonprofit sector that serves members rather than clients, including mutual benefit organizations.
Chapter 2 offers an overview of the historical development of nonprofits in the United States. It also provides specific background information on human service organizations (HSOs) for several reasons: They represent the largest and most diverse subgroup of charitable nonprofits, they are arguably the nonprofits most recognized by the general public, and the case study that is used throughout the book deals with situations occurring in an HSO.
Chapter 3 explores the external political and economic climate in which nonprofits must operate and the ramifications of this environment on internal decision-making by top leaders. It also explores the interrelationships among the three sectors of society.
Key Themes
Chapters 1 to 3 address these topics and concerns:
• The distinguishing characteristics of a nonprofit organization: What makes a nonprofit a nonprofit, and why does it matter?
• The role of nonprofits in American society from colonial days to the present: What historical circumstances must be considered to understand the contemporary nonprofit sector?
• The evolution of the human services subsector: What sets an HSO apart from other types of nonprofits?
• The impact of the external political-economic climate on internal operations and strategic decision-making: Why is political economy theory so applicable to nonprofit organizations today?
• The dynamic relationship between nonprofits and government: What are the driving forces that have shaped their interactions over time?
• The multifaceted dimensions of the relationship between nonprofits and the business sector: Is commercialization of the nonprofit sector a positive or negative development?
Definition of a Nonprofit Organization
Harvard College, founded in 1636, holds the distinction of being the first charitable corporation founded in the American colonies, although it lacked many of the characteristics now associated with such organizations. By the middle of the eighteenth century, a variety of voluntary entities had been formed, but only since the latter part of the twentieth century have nonprofits begun to occupy a place of major importance in American society. Today, nearly 1.6 million nonprofits contribute their richness to our culture. Most of those are very small, but a few are large, well-known, and influential. This chapter establishes the parameters of the nonprofit world, with attention to organizations qualifying as public charities as well as those primarily serving their own members.
What’s in a Name?
Generally speaking, we can identify three major sectors of society: government, also known as the public sector; business, often called the corporate sector; and voluntary organizations, usually referred to as the nonprofit sector. If the average person were asked to describe the purpose of the first two of these, he or she would most likely respond that governments exist to protect and promote the interests of the general public, and businesses exist to turn a profit (O’Neill, 2002).
However, this little exercise is not so simple when we turn to nonprofits, which come in many shapes and sizes. If that same average citizen were asked for examples
of nonprofits, the expected response might be the American Red Cross, the YMCA, or the Girl Scouts—large organizations with high visibility. A savvier individual might be able to identify the homeless shelter, a health clinic, a soup kitchen, and so on—locally familiar names recognized for their good works and service to the community. Yet this ignores the many nonprofits that have a narrower purpose of benefiting only their members. We can divide the nonprofit sector into two very broad categories: publicserving and member- serving organizations. The National Taxonomy of Exempt Entities, a project of the Urban Institute’s National Center for Charitable Statistics, is a wellrecognized classification system that provides detailed information on the scope of the nonprofit sector. Table 1.1 presents an overview of the organizational categories.
Because of the difficulty in pinpointing the mission of a nonprofit, over the years, observers have used a variety of terms to capture this sector, such as not- for-profit, voluntary, philanthropic, and even third (Grobman, 2015; O’Neill, 2002; Wolf, 2012). Outside of the United States, the term nongovernmental organization (NGO) is frequently used. In 1980, a national organization based in Washington, D.C., called Independent Sector, was launched to act as a kind of common space for the diverse institutions making up the nonprofit world to share their concerns and plan joint action.
According to Hall (2006), the distinguishing feature of American NGOs— what makes them so important in the grand scheme of things—is their institutional culture developed over time, which incorporates values, resources, organizational technologies, legal infrastructure, and styles of leadership. Nonprofits, by their very nature, perform certain basic roles in society that other institutions cannot. For example, they are often the first to react to a growing societal problem. Without the constraints imposed on both the public and corporate sectors, voluntary organizations are freer to experiment with innovative ideas and processes. Once these innovative approaches have been developed and proven effective in addressing the problem, government and even business may then step in to support and expand on this work. The AIDS crisis is a case in point. At the same time, nonprofits, such as museums and historical societies, preserve our traditions. Nonprofits also reflect the diversity
Source: IRS Exempt Organizations Business Master File retrieved from https://www.irs.gov/charities-nonprofits/exempt-organizations-business-master-file-extract-eo-bmf; data current for December 10, 2018.
Note: The figures exclude 3,574 foreign organizations with U.S. tax-exempt status.
Table 1.1. Overview of the Nonprofit Sector, 2018
of American society by supporting minority and local interests as well as a broad range of political views. Some nonprofits function as watchdogs, monitoring and overseeing both government and the marketplace. Others fulfill less weighty but no less important social and recreational needs (O’Neill, 2002). And these are but a few examples of the richness of the nonprofit sector.
The most accurate way to describe a nonprofit may be to note what it isn’t, that it is not a part of government and is not primarily driven by profit, but this seems to beg the question of a full definition. One way to address the matter is from a legal perspective. A nonprofit is created essentially as a matter of state law, although a few have been chartered as a result of federal legislation. The first decision in the process is to determine the type of organization, with most contemporary nonprofits choosing to become a corporation (Hopkins, 2013). The next step is to develop the articles of incorporation, a document that establishes the organization’s purpose as well as its goals and objectives and is signed by those responsible for forming the nonprofit, known as the incorporators. Once this document has been filed and approved by the designated state agency, technically the incorporators have fulfilled their duty. However, many elect to take on different roles on behalf of the organization, including fundraising, recruiting staff, and even purchasing property.
Part of the necessary legal structure for a nonprofit is a voluntary board of directors who accept responsibility that the organization will carry out its defined mission and will use its funds solely to achieve that end. The board is selected at the first formal organizational meeting, which the incorporators are expected to attend. Commonly, some or all incorporators are elected as members of the initial board. Moreover, an organization may decide to have members, who are granted legal power to vote on the affairs of the corporation, as a mechanism to ensure that the board does not have sole authority to govern.
A second key document, the bylaws, sets forth rules for how the organization will be operated, including details on the composition and responsibilities of the board and its officers, the committee structure, the fiscal year, when and how meetings will be conducted, protections against losses or damages, a provision for amending the bylaws, and other procedural matters as warranted. These bylaws should be formally adopted at an organizational meeting and this action noted in the minutes, the official record of all that transpired. In addition, the minutes should reflect the election of directors and officers, a decision on the use of one or more financial institutions, and authorization given to someone to seek federal tax exemption and take any other actions required by law (Hopkins, 2013; Grobman, 2015).
As just noted, once incorporated, an important action for most nonprofits is to acquire tax-exempt status under §501(c) of the Internal Revenue Code by completing Form 1023 for public charities and Form 1024 for other types of nonprofits, both
of which can be downloaded from the Internal Revenue Service (IRS) website or completed online. Many nonprofits that receive this special qualification will also be exempt from certain state taxes, such as income, sales, use, and real property.
Public Charities
Of the total number of nonprofits, public charities constitute the lion’s share, representing over 70 percent of the nonprofits currently operating in the United States. The National Center for Charitable Statistics (McKeever, 2018) values the 2015 total revenue for public charities at $1.98 trillion and total assets at $3.67 trillion. Within this group, some organizations are classified as sectarian or faith-based, meaning they operate under the auspices of or with the financial backing of a specific religious denomination. The largest subsectors by number of organizations are those set up for religious or spiritual purposes, educational institutions, arts and culture groups, and those providing human services.
To be considered a public charity, an organization must meet the requirements set forth in §501(c)(3) of the IRS code. Before applying for exempt status, the organization needs to obtain an employer identification number (EIN), even if the organization has no employees. As part of the submission process, the organization must attach copies of its articles of incorporation, showing certification of filing by the appropriate state office, and its bylaws, if they have already been adopted. Obtaining IRS recognition of 501(c)(3) exempt status conveys a certain level of legitimacy. It also brings many concrete benefits. Besides the most obvious one, exemption from virtually all federal and many state taxes, public charities are eligible to receive tax-deductible contributions from both individuals and institutional funders such as foundations and United Way, thus providing a great incentive to prospective donors.
The burden of proof is on the organization to demonstrate it meets the code’s requirements for recognition of exemption. Except for churches and most public charities with annual gross receipts under $5,000, organizations that wish to be considered under §501(c)(3) must apply for recognition of this status, generally within twenty- seven months from the date of formation. Exempt purposes include charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children and animals. The term charitable is used in its generally accepted legal sense and includes relief for poor, distressed, or underprivileged people; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice or discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency (IRS, nd).
Strangely enough, although this language is quite inclusive, as O’Neill (2002) notes, it fails to specify healthcare, which accounts for a substantial amount of the
expenditures and staff of the whole nonprofit sector. This does not mean that health care organizations cannot be nonprofit; rather, it means the IRS has adjusted its definitions for inclusion over time. Now, beyond establishing its charitable purpose, the organization must satisfy two conditions. First, it must affirm that “none of its earnings . . . inure to any private shareholder or individual” (IRS, 2016). In other words, any monies that a charitable nonprofit realizes must be used to support its mission. This does not mean a public charity cannot suitably compensate its employees, commensurate with salaries in other organizations within its field and in accordance with community standards. Another misconception is that these organizations cannot turn a profit. In truth, a well-run organization should aspire to end the fiscal year with revenues in excess of expenses, which can then be applied to enhance programs and services.
The second defining condition is that public charities may not participate in partisan political activities, which usually means the support or opposition to specific candidates for public office. Religious leaders who voice support or opposition to candidates from their pulpits are the ones who most regularly run afoul of this restriction. However, within broad limits, nonprofits may lobby on behalf of particular issues. Indeed, championing policy change is a vital part of the nonprofit sector and is central to the missions of many nonprofit organizations. This is perhaps one of the most misunderstood dimensions of the nonprofit sector. Even people who have worked their whole careers in the nonprofit sector may say that nonprofits cannot lobby for specific legislation or policies, but that is not true. Lobbying includes communication with the general public that expresses a view about specific legislation (grassroots lobbying) as well as communication with legislators that expresses a perspective on specific legislation (direct lobbying). The IRS offers broad guidelines for the involvement of nonprofits in lobbying activities. So long as lobbying is not substantial in relation to the other activities of the organization, nonprofits can and do work to introduce and change laws. The operative word here is substantial, which is determined by the level of human and material resources dedicated to such endeavors. Public charities may attempt to educate the public on issues of public policy by holding meetings and by preparing and distributing materials that lay out the facts of the matter. They may also engage in voter-education programs, including the publication of voter guides and the holding of public forums, as long as this is done in a nonpartisan way; encourage voter registration; and conduct get-out- the- vote drives, again without favoring one candidate or party over another. Yet many nonprofits continue to refrain from any lobbying, either due to the erroneous belief that it is illegal or out of a concern for potentially negative public and constituent perceptions of their actions. When in doubt about the appropriateness of such activities, it may be advisable to seek legal counsel.
Once the IRS determines an organization qualifies for exemption under §501(c) (3), one final hurdle must be jumped. Under the federal tax law, charitable organizations must demonstrate that they are not private foundations (and thereby
subject to less regulation and excise taxation) by meeting one or more of these requirements:
• [they] are churches, hospitals, qualified medical research organizations affiliated with hospitals, schools, colleges, and universities;
• have an active program of fundraising and receive contributions from a variety of sources, including the general public, governmental agencies, corporations, private foundations, or other public charities;
• receive income from the conduct of activities in furtherance of the organization’s exempt purposes; or
• actively function in a supporting relationship to one or more existing public charities. (IRS, 2016)
If the application process is successful, the organization will receive a determination letter from the IRS, classifying the entity as a public charity. This is the “gold ring” that most nonprofits try to grab, since it affords important benefits in both exemption from paying income taxes and in offering donors the opportunity to deduct their contributions from their personal income taxes. Annually, the organization must file an information return with the IRS, called Form 990. Nonprofits with gross receipts under $200,000 and with assets less than $500,000 may use the much shorter Form 990-EZ, and those with gross receipts under $50,000 may use the very, very short electronic Form 990-N (e-Postcard). For the Form 990 and 990-EZ, all of the financial support received during the year is listed as well as all disbursements, categorized by function as program services, management and general, or fundraising (IRS, 2019). See www.guidestar.org (now part of www.candid.org ) for further information.
Member-Serving Organizations
Although some observers may question whether public charities really deserve the “public” label because, unlike government agencies, they do not necessarily serve everyone who might be eligible for their services (Moulton & Eckerd, 2016). Those nonprofits set up as member- serving make no such claims about equity, proudly identifying their respective constituencies, who frequently pay dues to receive programs and services. Another way to categorize these organizations is to say they are “of mutual benefit,” a legal term used in many states. As shown in Table 1.1, the IRS has recognized around 360,000 mutual benefit organizations, which take many forms and directions; some of the more prominent types are discussed in the following text. McKeever (2018) estimates 2015 revenue for mutual benefit organizations at $460 billion and total assets around $2.12 trillion.
These member- serving organizations have been divided into more than thirty sections by the IRS. These are sometimes called the “c-others,” to differentiate them from the public charities exempt under §501(c)(3). Some categories have just a handful
of eligible organizations, such as the three nonprofits classified as trusts for prepaid group legal services under §501(c)(20), while the largest group is the “social welfare organizations,” exempt under §501(c)(4), which had around 80,000 member groups at the end of 2018. Other sizable sections include fraternal societies, with around 58,000, some of which are categorized under §501(c)(8) and others under §501(c)(10); business leagues, chambers of commerce, and boards of trade, with over 62,000 under §501(c) (6); social and recreational clubs, with nearly 49,000 under §501(c)(7); labor and agricultural organizations, with almost 46,000 under §501(c)(5); and veterans’ organizations, with over 28,000 under §501(c)(19). Collectively, these sections account for around 93 percent of all mutual benefit organizations. Financial support for these organizations may come from member dues, contributions by individuals and groups, fees for service, and fundraising activities, such as benefits, walk-a- thons, direct mail campaigns, and so on.
Although many of the same requirements for exemption apply to both public charities and member- serving nonprofits, many categories of the c-others have special provisions, cobbled together through decades of revisions to the tax code. One of the main distinguishing features between the two broad types of nonprofits is that, with a few exceptions, individual and corporate contributions to mutual benefit organizations are not tax deductible. The rationale is that mutual benefit organizations do not serve the needs of the general society, at least not by direct intent, but with some of these categories, this distinction can seem a bit contrived (O’Neill, 2002). However, when it comes to organizations that clearly cater to member groups, such as fraternal groups or political parties, the difference in purpose is very clear.
According to the IRS (2019), to receive tax exemption under §501(c)(4) as a social welfare organization, the stated intent must be “to further the common good and general welfare of the people of the community, such as by bringing about civic betterment and social improvements.” These groups may seek legislation directly pertinent to their programs, and so engaging in lobbying as the primary activity will not affect their exempt status. Indeed, many nonprofits seek their exemption under §501(c)(4) purely to avoid the limitations on lobbying that can restrict the activities of organizations exempt under §501(c)(3). Like public charities, social welfare organizations cannot directly or indirectly participate in a political campaign for or in opposition to a specific candidate for public office. Depending on the extent of the lobbying, social welfare organizations may need to notify members of the percentage of dues applied to these activities or to pay a special proxy tax to the government.
To qualify for exemption as a fraternal society, the organization must have a purpose derived from a common tie or the pursuit of a common goal and engage in a wide range of fraternal activities. Many operate under the lodge system, which requires a parent organization and a subordinate, often called a lodge or branch, which is chartered by the parent and mainly self-governing. An organization falling under §501(c) (8) is designated as a beneficiary society, order, or association; one of the requirements is to provide for the payment of life, sick, accident, and other benefits for its members or their dependents. These organizations are sometimes therefore called “fraternal
