Let’s Solve Problems, Not Fiddle With Tax Status

Reports of the nonprofit sector’s death have been greatly exaggerated. So, too, have assumptions about for-profits’ intrinsic efficiency (and amorality). Along with these has come a flurry of activity designed to make for-profits look more like nonprofits and vice versa.

The drumbeat of self-flagellation about the nonprofit world’s frailty, and the misconception that nonprofits are unable to grow and generally ineffective began to gather momentum back in 2003, when Bill Bradley, Paul Jansen, and Les Silverman —who all worked at McKinsey & Company—noted in the Harvard Business Review that if nonprofit groups just got rid of silly stuff like administrative expenses and fund-raising costs, they’d save gobs of money—$100-billion to be exact.

And that’s just the start. They argued that by following an approved to-do list of “promising best practices,” we’d become more effective at solving social problems. The gist of their argument was that the path to greatness in the nonprofit world was the emulation of the for-profit world.

The critics did seem to be looking through the lens of large, for-profit public companies. They assumed small groups were inefficient and that therefore things would improve if small charities grew, merged or, gulp, died. It seemed that the plan was to line up all nonprofit organizations by height and marry them off, for starters, just to reduce head count. Then a series of mergers would further improve the numbers and neaten the ranks of our weary troops.

It remains a mystery to me why they didn’t recommend the same approach in dealing with for-profit companies. After all, most for-profit companies are also small in size, with around 80 percent generating less than $1-million in annual receipts.

Shouldn’t we also be merging all those tiny fruit vendors, boutique shops, and clam shacks?

Today’s critics continue to pound on the same themes. Take the recent cheerleading for new hybrid business forms. Some new for-profit entities, such as the low-profit, limited liability company, or L3C, are aided by a legal halo that gives them the tax benefits of nonprofit groups even though they operate like businesses. Those groups operate under reduced regulatory oversight and are allowed to receive charitable contributions, foundation grants, and government subsidies. The hope is that they will be able to use for-profit business techniques along with special legal status to fix those pesky social problems.

Well, to that I say, “By all means.”

Maybe these for-profits can start with tackling wide-scale unemployment, since, surprisingly, large for-profits don’t seem to feel responsible for generating jobs, despite record profitability in many parts of corporate America.

Once the new for-profits solve unemployment, they can move on to the simpler tasks: preserving Indian burial relics on tribal lands, staffing shelters for abused women (as cost reimbursement rates are declining), doing disaster-relief work, advocating for gun-owners’ rights, preserving duck habitats, and running houses of worship.

Small? Ineffective? Lack access to capital? Must be because of your tax status.

And it follows, of course, that tax status is the main thing that keeps an enterprise from being effective, well capitalized, and of appropriate scale.

Missing from that discussion is the notion that maybe management skill, market opportunity, reliable and adequate revenue and a scalable business model might be more helpful, whatever the tax status, in achieving scale, accessing capital, and being effective.

The critics may not realize that many more for-profits than nonprofits are unprofitable, ineffective, and lacking capital (if only because there are more of them) and that nonprofit groups already routinely partner with for-profits, create for-profit subsidiaries of their own, and receive financing from and cede market share to for-profits as a matter of course.

In truth, corporate form is a tool, not a business driver, whatever the tax status.

Otherwise, we might be looking at a quick fix for vanquishing the real enemy: the long list of daunting challenges facing society.

Let’s solve problems, not fiddle with tax status while Rome (or Moscow) burns.