THE CHARITABLE SECTOR

The non-profit sector differs from the profit-making business in at lease four ways:

1. Law and Regulation

Charities must operate as tax-exempt, tax-deductible entities. They are accorded this treatment under law only as long as they fulfill the social mission for which they were established. Charitable purpose requires that all income of a charity be used in the fulfillment and furtherance of the organizational mission. If a charity's income is greater than its expenses, the law requires that the surplus remain with the charity. Surplus cannot be diverted to private benefit.

2. Governance

Charities derive their authority from a volunteer governing body, usually called a board of directors or board of trustees. The board is the charity's legal authority; board members are charged by law to hold in trust the assets of the charitable corporation. Board members serve voluntarily and without compensation providing governance, policy development, financial security, and stewardship.

3. Voluntary Support

Charitable organizations rely on donations voluntarily given. There is no comparable exchange in the business world. In a commercial transaction, tangible value passes from one party directly to the other for a stated price. In a transaction between a charity and a donor, the value that passes from one to the other is the promise that the service for which the donor implicitly contracted will, in fact, be delivered by the charity.

The service recipient is society, a community or a party unknown (and frequently unidentified) to the donor. The donor's belief that the charity will use the contribution purposefully, effectively, and efficiently for the charitable mission is the foundation of the philanthropic exchange.

4. Motivation

The motivating factor in commercial behavior is personal gain. Because commerce is profit-oriented, employee compensation in the form of commission or other percentage income related to output and productivity is appropriate. Workers seek and accept commercial employment in return for personal profit.

The motivating factor in charitable behavior is social benefit. What may be proper motivation in commerce is inappropriate in the nonprofit sector. There is an inherent conflict of interest between charities founded without intent of profit or private benefit, and employees whose compensation and primary motivation are based on personal financial gain.

(source: Association of Fundraising Professionals, 7/15/2002)