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History of the Non-Profit Sector Essay

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Updated: May 12th, 2020


Non profit organizations have always been considered as voluntary organizations that are officiated by private contributions. They are also regarded as silent contributors to the welfare of the public as well as the personal interests of individuals in society.

The main difference between non-profit and profit organizations is that profit organizations core obligation is to gross income and reallocate assessable wealth to the workforce as well as the shareholders while non-profit organizations core obligation is to provide self-beneficial and self preservation programs and services.

Consequently it is common to find volunteer human resources as well as volunteer executives who perform various roles without receiving any form of reparation. Charitable organizations, trade unions, public arts organizations as well as several other governments and government agencies all form examples of non-profit organizations which are sometimes referred as not-for-profit organizations.

Due to the self-interest goals perpetuated by these organizations as well as their role in society, most nations choose to exempt NPOs from revenue and property duty since the governments fail to execute or enforce policies proposed by the NPOs.

In essence, non-profit organizations are able to make a profit which is referred to as surplus and calculated at the end of every fiscal year; these earnings are retained as working capital for the internal mechanisms of the organization as well as further expansion plans rather than being distributed as dividend, shares or debentures. In most cases, NPOs use the surplus funds to hire new staff, reward the internal corporate leadership through bonuses and benefits.

The mid- level management staff along with the entire human resource of the NPOs also receive incentives at the end of the year through the surplus funds. This essay aims at discussing the history of non profit organizations as well as the transformations that have taken place in the organizations over the years.

A history of Non profit organizations

According to Kranshinsky (1996), the non profit sector has existed in Europe and the United States since the eighteenth century though the organizations have only recently become prominent and a widely accepted aspect of the western society. The organizations’ initial operation system was strictly for charitable reasons meaning the non profit organizations in the 18th and 19th centuries never carried out business transactions. The non profit organizations of the early period depended entirely on funds donated by the financiers (Morris, 2000).

A survey in America revealed that there were slightly more than 12,000 charitable tax-exempt organizations that had no religious support while currently more than half a million of such organizations exist in America alone(Hammack, 2002).

The department of trade was initially responsible for authorizing non profit organizations on behalf of the government though congress and state legislatures were later given that mandate as well as the power to establish which sort of non-profit organizations meet the requirements to be excused from paying taxes.

In the 1960s, there was a rise in the number of non profit organizations in third world countries as an increasing number of communities were identified as needy either through education, food, clothing or shelter (Hammack, 2002).

As a consequence, the number of NPOs in South America, Africa and Asia almost doubled in a span of less than ten years (Kranshinsky, 1996). In addition, the discovery of fatal untreatable diseases such as AIDS, Ebola, and cancer among other diseases acted as a catalyst for the augmentation of NPOs that sought to research on specific diseases and provide a cure or disease management programs (Morris, 2000).

Affluent members of the public were encouraged to provide support and promote several other non profit organizations (Powell & Steinberg, 2006). The responsibility of NPOs is basically to provide social services and attend to the requirements of a community such poverty, unemployment, and relief. Therefore the increasing number of non profit organizations is an indicator that the number of people that depend on non-profit organizations for aid and relief is greater than before (Morris, 2000).

With reference to Morris (2000), the management and governance of non profit organizations has undergone constant transformation since their inception. Initially, NPOs were not allowed to have members and hence were made up of a self governing board that controlled all the operations of the organizations. The NPOs were permitted to function as trusts hence activities such decision-making by the management, conflicts of interest and self-dealing were strictly prohibited (Kranshinsky, 1996).

The implementation of the American Bar Association’s Model Nonstock Corporation Statute by the United States in the late 20th century expanded the jurisdiction of NPOs as far as permissible activities were concerned. According to Hammack (2002), the most notable change during this period was the modification of the fiduciary standard from one of “trust” to a “business” standard, and hence non profit organizations were permitted to have members basically function similar to for-profit organizations (Powell & Steinberg, 2006).

The change in standard was significant since in actual fact made dissimilarities between nonprofit and for-profit institutions vague enough for the two types of organizations to have almost similar operational systems. Consequently, the legal description of a nonprofit organization has also been stretched out to consist of any activity or entity that does not entail the sharing of surplus profit in the form of dividends (Morris, 2000).

Legislatures have been instrumental in altering the definition as well as the roles, tasks, and authority of nonprofit organizations in an attempt by the government to settle legal expansions with existing social and economic activities (Kranshinsky, 1996).

The late twentieth century brought about fresh perspectives and ideologies that were viewed to have the potential to facilitate NPOs in realizing their corporate objectives more successfully through the application of various structures that were intended for profit organizations (Salamon & Anheier, 1996).

Some of the proposed changes are effective internal management, enhanced accountability for all levels of the organization and performance screen of the various departments or tasks so as to utilize the human and financial resources available(Powell & Steinberg, 2006). Such transformational changes necessitate a change in management and the general operation of the organization leading to the running of NPOs as for-profit organizations (Morris, 2000).

Non profit organization Values

The Non profit organizations have operated under different value systems since their inception though there are two values which seem to stand out through out the history of nonprofits and have been found to be also applicable in the current situation (Morris, 2000). These values are: Justification of public good and utility, and public representation. Discussing the values; will give insight to the historical transition NPOs have undergone as well as understand the fundamental responsibilities of NPOs (Salamon & Anheier, 1996).

Justification of public good and utility

This value according to Drucker deals with providing an outline to the correlation of nonprofit organizations to the requirements and principles of the society (Drucker, 1990). Basically the value entails offering transparency in relation to the functions of the organization, the responsibility of the organization to community in addition to the way the needs of society have changed over time (Hammack, 2002).

In addition, the value directs the leadership of the organization on how to endorse the excellence of the organization to the public as well as the level of association required when relating to sponsors, administration units as well as other influential bodies in order to evenly distribute clout (Salamon & Anheier, 1996). This value essentially provokes the organizational leadership to work as guides to society in order to easily identify and resolve pertinent issues.

The value of public representation

This value is concerned with the subject of diversity and stakeholder management. In addition this value also deals with the individuals and the means liable of classifying relations between nonprofit organizations and the society (Drucker, 1990).

The identity of stakeholders also comes into focus under this value where the individuality and the different perspectives of the stakeholders have to be clear in order to provide guidance and direction to the NPOs (Salamon & Anheier, 1996). Public representation is not the same as factual representation by stakeholders neither is it a representative structure, despite the fact that both positions may be applied by a particular organization (Drucker, 1990).

This value was put in place to provoke the leadership; to insure that the different points of view that exemplify the organization’s community are accessible by the organization and exploration of the perceptions also takes place. Hammack (2002) asserts that the organization should seek to nurture evocative diversity among its members and subjects rather than have an analogous discernment from its members.

Theories regarding the establishment of nonprofit organizations

The theories about the creation of NPOs are based on the conventional perception of a rational choice where commonly available goods and services are the most prominent factor. There are several different theories that attempt to explain the history of non-profit organizations as well as their ability to meet the society’s demand for public goods.

The theory of the (Market / State) Failure is the most outstanding theory and the naissance requirement of this theory is the supposition that the operation of market is imperfect since performing markets have several deficits which prevent the saturation of all the needs in society(Kranshinsky, 1996).

In addition, societies prefer to acquire public goods for free hence the production of public goods is not profitable and consequently there is a shortage of market subjects. Usually the state or the public administration in democratic systems intervene by paying for the goods through the public budget as long as the majority of voters agree to the production of particular public goods(Powell & Steinberg, 2006).

Whereas only a minority agrees, production of public goods ceases leading to the prevalence of numerous unsaturated needs and demands on public goods. Consequently, NPOs start being established to provide services and goods that neither state nor market is able to provide to society.

Theory of Confidence is another hypothesis that argues that the establishment of NPOs is due to failures of the market in creating reliable environment for implementing trade (Morris, 2000). According to Salamon & Anheier (1996), the low circulation of information regarding the quality of goods and services from the supplier breeds mistrust and low confidence on the goods and services leading to contractual failure.

According to Powell & Steinberg (2006), the consumer as a result tends to go for NPOs since they do not operate with the aim of making excessive profit and therefore it is improbable they would try to deceive the consumer. The final supposition is the Welfare State Theory which according to Kranshinsky (1996) significantly alters the scholarly view regarding the importance of NPOs in society. This theory classifies NPOs as pre-modern systems vital for resolving social problems (Drucker, 1990).

NPOs under such circumstances normally arise in conventional society sine its inception, where there is no public administration or the administration is not yet completely developed to function effectively (Powell & Steinberg, 2006).

The industrialization and state social policy, however, brought about several changes that greatly reduced the significance of NPOs since the state and government took on most of the responsibilities previously held by NPOs. It is this development that led scholars to assume that NPOs might gradually fade away especially after the improvement of the public administration.

Deeper scrutiny of this theory by Powell & Steinberg (2006) reveals the implications as well as the reasons of the establishment and incessant subsistence of NPOs in the contemporary modern environment is mainly a common practice rather than the failure of state to perform accordingly through the imperfections identified in the services provided by the state (Morris, 2000).

To the contrast, it is to a certain extent the deficiency of state or else the fact that the duties of the state are still not yet fully effective that has led to the emergence and continuous existence of NPOs (Kranshinsky, 1996).

The final view is that in the fields where the state has already taken a fundamental role, it succeeds in providing for communities and is even more effective than NPOs in affording services (Salamon & Anheier, 1996). Consequently, the expansion of the supporting role of the state and the effectiveness of the state in dispensing its duties is likely to place the state ahead of other organizations in the public eye and hence slowly NPOs will be replaced by the state in the community and public support fields.


The global nonprofit sector altogether has a wide historical facet that has played a critical role in establishing the mandate of NPOs currently in operation. The state and federal laws have changed over time and the amendment of these laws has constantly identified the roles to be played by both nonprofit firms as well as nonprofit organizations and the laws have also determined the type of leadership and membership the organizations will have.

The laws on the other hand have been influenced by factors such as conflicts of individual freedom, the position of the government on NPOs, the position of different religious groups, races, social customs, income groups, gender, as well as the availability and demand of public goods and services.

The clear position however is that the number of NPOs have increased through out history with the total number of nonprofit employees in the U.S. workforce for instance having grown from 0.7% to 1.4% in the early 20th century and from 3% in the mid 20th century to 9% at the turn of the 21st century.

The main reason for such an increase in the staff and capacity of NPOs has been the emerging and expanding public needs through out the world. For instance, education in the early 1900 was not a priority and hence no NPOs were involved in providing education to the community. In addition, the gradual increase in the government’s financial support to the sector, increase in consumer wealth as well as the amendments done on individual rights have helped the NPO sector to secure its role in the society.


Drucker, P. (1990). Managing the Non-Profit Organization: Practices and Principles. New York: HarperCollins.

Hammack, D. (2002). Nonprofit Organizations in American History. American Behavioral Scientist, Vol. 45, No. 11, 1638-1674.

Kranshinsky, M. (1996). Transaction Costs and a Theory of the Nonprofit Organization, In: Rose-Ackerman Susan. The Economics of Nonprofit Institutions. New York: Oxford University Press.

Morris, S. (2000). Defining the Nonprofit Sector: Some Lessons from History. International Journal of Voluntary and Nonprofit Organizations, Vol.11, No. 1, pp. 25-43.

Powell, W. and Steinberg, R. (2006). . Web.

Salamon, L. and Anheier, H. (1996). Social origins of civil society: Explaining the nonprofit sector cross-nationally. Web.

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