New Year, New Nonprofits: How Understanding Their Birth Helps Create a More Vibrant Sector

In 2022, we can look forward to having another 50,000 to 60,000 nonprofits joining the sector! We must emphasize that this number underestimates what we may call “new” nonprofits or “start-up” nonprofits because a lot of new and small “nonprofit” activities can fly under the radar and may never rise up in any administrative records. If we look at how many organizations received the tax-exempt status, which is only a narrow definition of what counts as new nonprofits, there were around 68,000 organizations that obtained their 501(c)(3) status in 2020.

These nonprofits are likely to be small operations with revenues less than $100,000. As the current nonprofit density ranges tell us, these new nonprofits will be distributed across American communities. They represent exciting opportunities to serve their communities and strengthen the sector. Unfortunately, we can also expect many nonprofits to close this year. With most discussions of nonprofit management focusing on large, established organizations, we can do more to help small and young nonprofits – the majority of the sector – become more sustainable, given today’s challenges.

Building capacity and sustainability for small nonprofits cannot be the sole responsibility of individual nonprofits; it requires collaboration to create a vibrant nonprofit sector. The value of increased sustainability goes beyond the sector’s significant economic contributions, as nonprofits play a large part in keeping government and private industry accountable and responsive. Nonprofits operating alongside their private sector counterparts can provide a check against exploitative business practices, while nonprofits holding the government accountable can lead to higher quality services and more attention to marginalized communities.

We know from existing studies that local areas with larger and more diverse populations have more nonprofits. Studies also showed that we will find more nonprofits when there is greater government spending. Existing studies also provide insights into community factors that could bolster the nonprofit sector. However, we are still left with limited knowledge regarding how some community factors influence nonprofits at different stages in their life cycle, especially at the beginning of their life cycle and at the end.

While new nonprofits are constantly created, the rates of nonprofit entry and exit vary widely across geographies and time. These rates determine whether nonprofit density is expanding or contracting in a community. Although many scholars have explored the factors associated with how many nonprofits per capita in different local areas, we have relatively limited knowledge about the life cycle of nonprofits and the factors that contribute to the growth of nascent nonprofit organizations. Having a better understanding of the factors that matter to those nonprofits at the beginning of their lifecycle can help smaller and newer nonprofits to grow and be sustainable. Similarly, knowing what matters to keep some faltering nonprofits to stay alive can save many invaluable nonprofit programs that communities benefit from.

The limited knowledge is partly attributable to challenges in identifying “nascent” nonprofit organizations, or young, recently formed organizations. Current nonprofit studies tend to rely on IRS forms-based data, but that approach is not perfect. Nonprofit organizations include all entities that form voluntarily, operate without distributing profits to stakeholders, and exist without clear lines of ownership or accountability. IRS registration is not a requirement to be a nonprofit, although an organization’s tax-exempt status has been frequently used as the basis to identify nonprofit organizations. Many nonprofits come to exist well before they file an IRS form. This creates significant shortcomings because nascent nonprofit organizations exist at several stages before filing for tax-exempt status, and therefore not fully captured in the IRS dataset. As such, simply relying on IRS form data limits our capacity to understand the beginning life cycle of nonprofit organizations. Further, there are variations in the way the closure or exit of a nonprofit can be measured, when it can be measured at all.

A group of nonprofit scholars, including myself and former Independent Sector Visiting Scholar Lewis Faulk, are working to expand the knowledge around the nonprofit lifecycle. We have recently started a project to develop coherent methodologies to understand and measure the “entry” of nonprofits. Our research team will create a rolling Panel of Newly Formed Nonprofits (referred to as PNFP data) to capture the broader dynamics of the nonprofit sector and the impact these dynamics have on the sector’s vitality. That means we will be able to follow these newly formed nonprofit organizations in the years to come to identify various community factors that influence their survival and growth rates. The findings of this exciting project will help us design better policies and programs that could increase the survival rates of new and small nonprofit organizations.

The reference to the 68,000 organizations in the first paragraph is based on former Independent Sector Visiting Scholar Lewis Faulk’s calculation using the most recent IRS Business Master File (updated December 2021). Read Mirae Kim’s blog from October 26, 2021, “Understanding the Challenges, Opportunities, and Impact of the Nonprofit Sector.” 

Types: All
Global Topics: Civil Society, Data, Nonprofit Health, Voices for Good
Policy Issues: Nonprofit Operations