Maine's future prosperity will depend on strengthening communities throughout our state by advancing creative ideas and solutions, and connecting citizens to opportunities. Advancing, connecting and strengthening - this is the daily work of an often overlooked part of our economic engine: the nonprofit community.
Throughout our state, nonprofits invest significant financial and organizational resources in Maine communities, promoting the ideals that attract so many to our quality of life. From protecting the environment to developing our future community leaders and entrepreneurs, to supporting the early care and education of our children, to protecting our most vulnerable citizens, nonprofits are key to our present and our future.
For more information on the sector's economic & social impacts in Maine, download our free studies entitled "Partners in Prosperity" 
and “Maine Nonprofit Employment Study” .
Frequently Asked Questions About the Nonprofit Sector
Excerpted from "What You Should Know About Nonprofits" a
joint project of the Board
Source 
and Independent
Sector .
What is the Nonprofit Sector?
The nonprofit sector is the collective name used to describe institutions and
organizations in American society that are neither government nor business.
Other names often used include the not-for-profit sector, the third sector,
the independent sector, the philanthropic sector, the voluntary sector, or
the social sector.
Within this group, there are many types of organizations. Section
501(c) of the federal tax code, which outlines the types of organizations
eligible for tax exemption, lists more than 25 classifications
of nonprofits. The major subcategories of nonprofit organizations
include:
- Charities: This category includes hospitals,
museums, orchestras, private schools, religious organizations,
advocacy organizations, public television and radio stations,
soup kitchens, and health & human service providers. To be
considered a public charity, the organization must be able to
show broad public support, rather than funding from an individual
source. Individuals and corporations that give money to these
organizations can deduct the value of gifts from their taxable
income if they itemize.
- Foundations: Many individuals, families,
businesses and communities establish foundations as a way to
support causes and programs that benefit society. Foundations
are one of the most complex 501(c)(3) classifications and can
be subject to more stringent regulation and reporting requirements
than other nonprofits. The most common types of foundations are
Private, Corporate, Operating, and Community.
- Social Welfare: Nonprofits such as the NAACP,
the National Rifle Association, and National Organization for
Women are exempt under 501(c)(4) of the tax code. Contributions
to these organizations are not tax deductible and these groups
have greater latitude to participate in legislative advocacy,
lobbying, and political campaign activities.
- Professional & Trade Associations: These
include chambers of commerce, business leagues, and other organizations
that promote the business or professional interests of a community,
industry or profession. Contributions are not deductible, but
membership dues may be deductible as a business expense.
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Why are nonprofit organizations
tax-exempt?
All nonprofits are exempt from federal corporate income taxes. Most are also
exempt from state and local property and sales taxes. Nonprofits are, of course,
not exempt from withholding payroll taxes for employees, and they also are
required to pay taxes on income from activities that are unrelated to their
mission.
Here are some of the reasons why nonprofit organizations are
tax-exempt and why it makes sense to preserve these tax-exemptions:
- Nonprofits relieve government's burden- Private schools
and hospitals, day care centers, homeless shelters, and other
nonprofits provide services that government might otherwise be
required to offer. Through tax-exemptions, governments support
the work of nonprofits and receive a direct benefit.
- Nonprofits benefit society- Nonprofits encourage
civic involvement, provide information on public policy issues,
encourage economic development, and do a host of other things
that enrich society and make it more vibrant.
- Taxing nonprofits would be difficult and counterproductive. Determining
what qualifies as taxable income would be extremely difficult
according to many economists. The adverse effects of taxation
on the viability and effectiveness of many nonprofits would be
counterproductive and cost more to the community than the taxes
it would generate.
- Exemption for religious nonprofits preserves separation
of church and state. Tax-exemption limits government's
ability to use tax policy to influence religious choices.
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Can a nonprofit make a profit?
Operating any organization at a deficit or without a sufficient "rainy
day" fund is not good business. In order to maintain the viability of
any organization, it is important to operate with some "net revenue" at
the end of a year. What distinguishes nonprofits is not whether they can make
a profit, but what happens to profits. Nonprofits are prohibited from distributing
profits in the same way for-profit corporations can. All revenue must be earmarked
for the organization's mission.
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How are nonprofits monitored,
regulated and governed?
The overwhelming majority of nonprofits in the United States operate in an
ethical and accountable manner. However, nonprofits are not immune to damage
that can be caused by unscrupulous and fraudulent solicitors, financial improprieties,
and executives and board members who place personal gain above the organization's
mission. Because nonprofits are held to such high standards, they have created
many lines of defense against fraud and corruption:
- Boards- All nonprofits are governed by a board of
directors or trustees (there's no real difference), a group of
volunteers that is legally responsible for making sure the organization
remains true to its mission, safeguards its assets, and operates
in the public interest.
- Private Watchdog Groups - Several private groups
(who are themselves nonprofits) monitor the behavior and performance
of other nonprofits.
- State Charity Regulators - The attorney general's
office or some other part of the state government maintains a
list of registered nonprofits and investigates complaints of
fraud and abuse.
- Internal Revenue Service - A division of the IRS
(the Tax Exempt/Government Entities division) is charged with
ensuring that nonprofits are complying with the requirements
for eligibility for tax-exempt status. As a result of the thousands
of audit investigations, a handful have their tax-exempt status
revoked; others pay fines and taxes.
- Donors & Members - Some of the most powerful
safeguards of nonprofit integrity are individual donors and members.
By withholding their financial support, donors can strongly encourage
nonprofits to reappraise their operations.
- Media - Many nonprofit leaders may feel misunderstood
or even maligned by negative media coverage, however, this media
watchdog role has resulted in increased awareness and accountability
throughout the sector.
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Why do nonprofits have boards,
and what do boards do?
Most nonprofits are corporations, which means that they are legal entities
distinct from the individuals who founded them. Like their for-profit counterparts,
nonprofit corporations are governed by boards of directors with legal and ethical
responsibilities that cannot be delegated. The board's responsibilities fall
into the following broad categories:
- Legal & Fiduciary- The board is responsible
for ensuring that the organization meets legal requirements and
that it is operating in accordance with its mission. It is also
responsible for protecting the organization's assets.
- Oversight- The board is responsible for ensuring
that the organization is well run. It moderates the power of
management and has the power to hire and remove the chief executive,
usually called the executive director or president.
- Fundraising- Board members raise money, make personal
financial contributions, and serve as advocates for the organization
to potential donors as a part of their responsibility to ensure
the financial viability of the organization.
- Representation of Constituents and Viewpoints- Often,
board members are chosen to bring the experience or perspective
of the organization's constituents to the board. By doing so,
nonprofits better serve their communities.
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What is conflict of interest?
Conflict of interest arises whenever the personal or professional interests
of a board member are potentially at odds with the best interests of the
nonprofit. An example could be when a board member performs professional
services for an organization, or proposes that a relative or friend be considered
for a staff position.
The Maine Legislature recently refined some of the definitions
and penalties for conflict of interest in LD
1770
.
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How much money should an organization
spend on overhead or fundraising?
Because most donors want to ensure that their gifts are well spent, many are
concerned about the level of overhead and fundraising. The answer to this question
is far from simple for some of the following reasons:
- First, there is no universal formula for calculating overhead.
The CEO's salary is a good example. Many would consider it overhead;
others would argue that since the CEO deals primarily with program-related
issues and is essential to the success of the organizations,
the CEO's salary is a program expense.
- Second, there are no generally accepted standards for what
levels are acceptable. While some organizations may boast that
they spend only 5 to 6% on overhead; other well-known and very
efficient and effective nonprofits spend 20 to 25% on overhead.
Here are some important factors to consider when evaluating how
well your charitable contributions are used:
- What is the mission of the nonprofit? Some activities are
labor-intensive and require a higher level of staffing than others.
It is also not necessarily more efficient to use volunteers to
provide such services because of the high level of management
and training they would need.
- In what environment does the organization operate? Two organizations
with identical missions might have very different cost structures
if one operates downtown and the other serves a distant suburb.
Examine the overhead costs in relation to the location, number
of people it serves and the manner in which it is delivering
its services.
- How does the organization raise money? Some methods of fundraising
are more expensive than others. In evaluating fund-raising effectiveness,
keep in mind that some activities are not only important for
the money that they raise, but for the education and exposure
they provide.
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What constitutes excessive
pay for chief executives?
In recent years, excessive executive compensation has become an issue for many
nonprofits, because of highly publicized, seemingly excessive nonprofit salaries.
For the most part, compensation of nonprofit executives lags far behind the
compensation of leaders in business and government. The real challenge for
many boards is not how to reign in excessive compensation, but rather how to
find the resources to pay appropriate salaries.
To evaluate the appropriateness of executive compensation, consider
the following:
- the size and complexity of the nonprofit;
- the mission area, geographic location, and financial condition
of the organization;
- the qualifications required for the job; and
- compensation at comparable organizations.
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Can nonprofits lobby?
Public charities, or 501(c)(3) organizations, are allowed to lobby provided
the activity is insubstantial in relation to the overall organization, and
must report their lobbying expenditures to the IRS. The lobbying activities
of social welfare groups, or 501(c)(4) organizations, and trade associations,
or 501(c)(6) organizations, are not similarly restricted. No nonprofit organization
can use funds from government grants or contracts for lobbying activities.
Charitable organizations are not allowed to participate in or
attempt to influence political campaigns; if they do, they risk
losing their tax-exempt status. However, public charities may educate
voters during political campaigns, including getting statements
from candidates, conducting public forums, giving testimony on
party platforms, and providing issue briefings for candidates.
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How can you get information
about nonprofits?
The best source of information is usually the organization itself. Many nonprofits
have websites that have a great deal of information about their programs and
finances.
Most nonprofits also publish an annual report that typically
include a statement of the organization's mission and a summary
of its programs, a list of board members and key staff, and financial
information.
Another source is the IRS Form 990, an annual information form
that most nonprofits must file with the IRS each year. The Form
990 summarizes the organization's finances, lists the salaries
of the highest paid officials, includes the names of board members,
and provides a general snapshot of the organizations. Nonprofits
are required by law to share their 990 forms with members of the
public who ask to see them, and must make the form available during
regular business hours or on the Internet. Journalists also can
request copies of the 990 from the IRS Exempt Organization center
in Ogden, Utah, under the Freedom of Information Act. Nonprofit
organizations with annual revenues of less than $25,000 and religious
congregations are not required to file.
