Why I Don’t Believe in “Non-profits”

No, this is not a veiled argument that the profit motive is the only way to achieve long term and sustainable solutions to the ills of the world. Nor is it another slam at the inadequacy of the sector in accomplishing its vast and bottomless agenda. I am a big believer in, advocate of, supporter and facilitator of, and for much of my earlier career, employee of that sector.

It is, though, time to weigh in on the long overdue and recently robust discussion about what to call it.

Clearly “non-profit” or “not-for-profit” isn’t adequate or descriptive. After all, if a local boutique loses money, it does not make it a “non-profit.” And conversely, if an organization which is recognized as a US 501C3 by the Internal Revenue Service happens to have an annual surplus, it doesn’t immediately morph into a tax paying “for-profit.” [We all know that the bottom line definition has only a little to do with a balance sheet or annual budget. What makes something a non-profit is exclusively who “owns” the assets. They exist for the public good. Should there be a “surplus” or should the organization dissolve, no individual may be the beneficiary of those assets, but they must continue to be used for public good. ]

That doesn’t mean that “non-profit” hasn’t been a functional definition in the past. In the early days of what are now called United Ways or Jewish Federations or Protestant Philanthropies, those umbrella charities existed to cover the annual deficits of a limited group of social service agencies. If they didn’t have a deficit, they wouldn’t receive funding. Of course, no one could ever imagine such a thing.

And it wasn’t so very long ago that organizations felt that they couldn’t have left over money in any year since they feared that funders would say that the organization didn’t really need their contributions. Organizations would go through all sorts of contortions to buy, spend, or hide left over money in those circumstances when they happened to be lucky enough to generate a surplus. Some of us are old enough to remember those days.

Of course, those days are long gone. It is a rare funder indeed who rewards an organization which has an annual deficit for several years running. Most of the established “guidelines” or best practices nowadays recommend that a healthy organization have at least 6 months of available, non restricted reserves to cover recessions, government delays in reimbursables, or unanticipated cash flow challenges. One would be hard pressed to find an established foundation or umbrella charity or experienced funder which would penalize that kind of responsible stewardship. In fact, quite the opposite; today it is deficits that are penalized. [One exception is “start-ups” which are, or should be, held to a different standard.]

But these have more to do with philanthropic practices than they do with the nature of the sector itself.

The words “non-profit” are suggestive of what a society considers normal. Why call something “non…” if it is the preferred or standard way to do things? [It is noteworthy that most other countries refer to this sector as “ngo’s” – non-governmental organizations. In those societies, the assumption, and practice, is that there are societal responsibilities to citizens. The government is charged with fulfilling those responsibilities. ] Non-profit means that it is other than the normal way people do things, which is “for profit.”

In a very real sense, the words misrepresent the vast scope of this field. In every city, “non-profits” are among the largest employers, the largest landowners, and major contributors to the overall economy. Universities and hospitals and museums bring a sophisticated, educated, and respectably paid work force and support a vast array of for profit businesses which flourish in their surroundings. There are thousands of very small “non-profits” but there are also some very large ones. Any sense that one is only talking about “soup kitchens” understates the economic and social impact on every large and medium sized community. This is not an incidental sector, but an essential one. One not well described as simply being a “non-profit.”

There have been no shortage of attempts to more accurately name what this is: “Independent sector”, “third sector,” and “voluntary sector” are two that have resonated with many for a while.

I, though, would like to ascribe to and endorse one of the current formulations which I believe more accurately describe the legal status and gives this essential part of any open society the gravitas it deserves Thus: The distinction should be between two kinds of entities: Those which have historically been called “for profit” are better referred to as “private benefit” entities, and those which have traditionally been called “non-profit” are better referred to as “public benefit” entities.

Words have connotations and meanings. Among the benefits of these new formulations is that it would help redress some regrettable baggage which the “non-profit” appellation brings with it. For example, it would remove the association of public benefit organization being viewed only as “charities” existing only for the neediest. [That is a worthy and crucial component of the sector, just not the whole thing.] Similarly, it would help correct the unfortunate expectation that employees in this sector should have a lower standard of living than those who work in private benefit entities. And it would certainly encompass, more coherently, the large and small, the educational and cultural, human service needs as well as quality of life ones as all being a part of the same sector.

If you agree, I encourage you to begin to use these terms so that they become accepted nomenclature. And, along the way, I am quite sure that it will advance a healthy and productive conversation about what the role of the public benefit sector should be at a time when there is no shortage of debate, not all of it healthy or productive, about who should have responsibility for what in a complex and challenged world.

Richard Marker serves as an advisor to foundations, independent funders, and not-for-profit organizations; he is a Senior Fellow in Philanthropy at NYU’s George Heyman Jr. Center for Philanthropy. Richard specializes in strategic philanthropy and planning and blogs at Wise Philanthropy.