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Rotten AppleNon-profit Corporations are usually called "Public Charities" or just "Charity" in the popular media. This is misleading because most people think of "Charity" as something quite different from a Tax-Exempt corporate business structure that may or may not be charitable in the traditional meaning of the word.

If you want to stay sane in an insane world, think "Tax Exempt" when you see "Non-Profit". Charity has nothing to do with it.

 Non-Profit means that the organization has tax-exempt status under Section 501 of the federal tax code. They are not required to pay federal income tax. The federal exemption often extends to exemption from paying state and local taxes, including property and sales tax.

This is a powerful incentive for business of all types to restructure to fit into the "Non-Profit" model. Tax-Exempt status under Section 501 is available in at least 37 varieties, including churches, labor unions, endowment funds, hospitals, schools, co-ops, insurance, think tanks, fraternal organizations, business leagues, political advocacy groups, political parties, cemeteries, and a host of others. There are 29 different categories under Section 501(c)(3) alone.1

Good tax attorneys and accountants can fit nearly any business activity into the "Non-Profit" model. That is why the Non-Profit sector is the fastest growing segment of the US economy.

The Urban Institute issued a report entitled "The Non-Profit Sector in Brief"2 in 2013. Their data covers the time  period from 2001 through 2011.

In 2011, Non-profits held $4.63 trillion in assets and generated $2.1 trillion in revenues. About 70% of their revenues came from Fees for goods and services. Only 12.6% of their revenues came from private contributions. The point is that Non-Profit is Big Business, not charity.

The upshot of this trend toward non-profit corporations was noted by Burton A. Weisbrod in 1997 in a paper entitled "The Future of the Non-Profit Sector: Its Entwining with Private Enterprise and Government". I have been unable to get permission to reprint this paper so I will summarize his main points:

  • The competition with private business is obvious, Non-Profits derive 70% of their revenues from the sale of goods and services but have no tax liability. They compete directly with private businesses who do have federal, state and local tax liability. Private business will be squeezed out as the trend progresses.
  • The competition with government, particularly local government, is less obvious but just as profound. The assets held by non-profits are not subject to tax but they do need public services financed by taxes. In other words, they decrease the tax base but do not decrease the demand for public services.

Reference Links:

1. See pages 68 - 69 for list of Non-Profit types.




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