What is the Third Sector?
The American economy is comprised of three sectors of industry: the public (government) sector, the private(for-profit) sector, and the nonprofit sector. There are a wide range of organizational structures and types that can become confusing, but primarily those are the three areas in which a person in this country can work. Each of the three sectors have their own unique focus and goals which, in theory, work in harmony for our society.
Private: The private sector is driven by revenue and growth; the primary goal of a private sector organization is to increase in value for the benefit of the organization’s stakeholders. In this context, depending on if the company is publicly held or privately held, the stakeholders can be employees, shareholders, investors, owners, partners, and even local communities.
Public: While there is clearly debate around the role of government today, in theory, the public sector’s goal is the effective running of a country, city, town or other municipal area. This includes any purely government run organization such as public schools, police and fire departments, and government agencies like the EPA and IRS.
Nonprofit: The nonprofit sector is driven by specific causes and issues. The primary goal of a nonprofit sector organization is to serve the clients of that organization based on its mission through resources, programs, and services. The reason these are called nonprofits is because these organizations do not have owners or shareholders, and therefore nobody to distribute their profits to. If a nonprofit organization dissolves, the assets of the organization must be distributed to other 501(c)(3) organizations, not to shareholders, investors, or owners.
A Brief History
The progressive era in the late 19th century and early 20th century was a time of increased social activism. This led to some of the country’s first developments in fundraising like the first true campaign for the YMCA. Throughout World War II organizations found ways to become more global and cooperative, while they also were able to recruit high numbers of volunteers.
In the 1960’s and 1970’s around the civil rights movement there was a lot of attention on advocacy and policy reform in the legislature. The 1969 Tax Reform Act is the first time the Internal revenue Code (IRC) section 501c is put in place. In essence this code sprang from a desire to hold tax exempt organizations accountable for the benefits they receive from being tax exempt and to more accurately classify organizations and their primary modes of operation. This code is still the framework for the modern nonprofit, and it caused a boom in the number of registered nonprofits in the country. Since the IRS began keeping internal records on tax exempt organizations in 1975 the number or charitable organizations with tax exempt status has grown from 259,523 to more than 1.5 Million in 2021.
Since 1991 and the inception of the internet, major technological changes have advanced the nonprofit sector. Most notable the ability to donate online and via social media has changed the nonprofit sector dramatically. In 2012 online giving generated over $2.1 Million and has been growing ever since, including a 20% increase in online giving from 2020 – 2021 which represents 13% of total giving in 2021. Additionally social media has increased the ability to give online through trends like Giving Tuesday which raised $2.7 Billion in a single day in 2021 via social media campaigns.
Within the last decade there has been an increase in desire for companies to be socially responsible, fighting against multiple decades of the Friedman Doctrine’s promotion that for-profit companies’ primary and only responsibility is to generate profits. Now, Corporate Social Responsibility has become an accepted business best practice, with companies being increasingly willing to give to and collaborate with the nonprofit sector.
Tax Exempt Organizations
There are now 29 separate classifications of tax-exempt organizations, meaning the organizations themselves are exempt from some type of federal tax. However, only 5 of these are organization types where contributions to them are tax exempt for the donor.
501(c)(1) – Corporations organized under an Act of Congress
501 (c)(3) – Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations.
501(c)(8) – Fraternal Beneficiary Societies and Associations
501(c)(10) – Domestic Fraternal Societies and Associations
501(c)(13) Cemetery Companies
There are some exceptions to these, but primarily these are the only 5 with deductible contributions. 501(c)(3) is by far the most common organization and that is broken down even further into three categories:
Private Foundations - Private foundations have a smaller donor audience, often only a family, a business or an individual. They generate income from invested endowment funds and use that income to give grants that further the charitable work of other organizations. Examples are the Lilly Endowment and the Ford Foundation.
Private Operating Foundations - The private operating foundation, finances its own programs instead of sponsoring outside charitable activities. Popular private operating foundation endeavors include those that address the needs of low-income communities; promote and support research into diseases, cures, and treatments; and oversee the operation of museums and libraries.
Public Charity - Unlike private foundations, public charities get their financial support from a wide, diverse audience of individuals, foundations, and government entities. By law, they cannot raise more than one-third of their income from unrelated commercial activity or investments.
In addition to these categories there are two other classifications of organizations you may hear or see.
Public Benefit Corporation (B Corp) – A B Corp is a for profit company, meaning that it does have owners, investors and/or shareholders, and its purpose is to earn profits through its operations and distribute those profits to its owners and shareholders. However, Certified B Corporations are businesses that meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose. As a donor, you are not able to contribute to a B Corp and receive tax deductible credits, but the organization can receive some tax incentives for becoming a B Corp.
Non-Governmental Organization (NGO) - a non-profit group that functions independently of any government. NGOs, sometimes called civil societies, are organized on community, national and international levels to serve a social or political goal such as humanitarian causes or the environment. There is no agreed upon definition of an NGO because of their global nature and variety in how they are classified in each country in which they operate, however some examples of NGO’s are the World Wildlife Fund and the Bill and Melinda Gates Foundation. There are many different types of NGO’s based on their cause and their structure. For example, ENGO or Environmental NGO’s advocate for and pursue activity for environmental sustainability. There can be scandal involving NGO’s usually in less developed countries where a more developed country establishes a Government Organized NGO (GONGO) or a Quasi-autonomous NGO (QUANGO) which are NGO’s either with Government funding, Government selected officials or both in an attempt to establish a political regime. Keep in mind NGO’s are not all the same, many are not involved in these kinds of activities, but it is important to do your research when donating to any NGO.
Accountability and Reporting
The average charitable organization is required to file an IRS form 990 every year to report on the activities (financial and otherwise) of the organization and to justify the maintenance of their tax-exempt status. These are public documents and can be found by searching the IRS database. In addition to this database, there are a variety of rating organizations to evaluate the structure and operations of charitable organizations such as Charity Navigator.
Summary
The different classifications and types of organizations in the third sector are varied and can be complicated. It can be easy to be overwhelmed by the variety of organizations, which is why it is so important to build relationships with the organizations you support. Learn as much as you can about an organization before, during and after becoming a donor and your experience will be more satisfying and fulfilling.
