Rethinking the Nonprofit Model

Written by Douglas Clayton and Calida Jones

I’ve been working with nonprofit cultural and service organizations for decades. And for just as long, I’ve been watching well-intentioned, community-minded people step into leadership and creation roles—only to find that the structure they’re working within holds them back more than it lifts them up. This is about that structure. Not to tear it down, but to understand what it was designed to do, what it actually does, and where it’s breaking under the weight of modern expectations.

The nonprofit model, as we know it, came out of a very specific corner of the U.S. tax code—Section 501(c)(3)—which was formalized in 1954 and expanded in practice during the 1960s. The IRS language says that certain corporations can be tax-exempt if they’re “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes.” That list, by the way, doesn’t even mention arts or culture specifically—most cultural orgs are folded in under the broad “educational” or “charitable” labels.

The core idea was simple: if an organization exists to serve public benefit and no individual profits from it, then it should be exempt from paying taxes—and those who donate to it should be able to deduct their contributions on their own taxes. In exchange, the organization has to follow certain structural rules, starting with the fact that it has no owner. It’s not an LLC. There are no shares. The organization is “owned” by a board of directors, and that board’s job is to make sure the organization stays aligned with its nonprofit purpose.

Now to be clear: people can absolutely use private or public money to support anything they want. You can give directly to an individual. You can invest in a for-profit business or create a partnership, cooperative, or corporation with a charitable mission. Nothing about those choices is illegal or restricted. The only thing that changes is the tax treatment. You may not get a deduction for a personal gift. You might owe gift tax. You might trigger income tax or capital gains depending on how ownership and assets are handled. What the nonprofit model provides is a structured way to avoid those taxes while channeling money into work that meets certain public-benefit criteria.

The theory behind the model is that tax deductibility would encourage people to give more than they otherwise would, and that the ownership restrictions would prevent that money from being misused.

But how much does the tax deduction actually matter? That’s a real question. If you look at the actual tax code what you’ll see is that for many people, especially those giving smaller amounts, the deduction doesn’t make any difference. The standard deduction threshold means that unless you’re giving at a relatively high level and itemizing, your charitable contributions don’t actually reduce your taxes. A lot of folks who make donations all the time never see a financial return or government kickback from their generosity. Their gifts are purely about community and personal values.

At the other end, with large gifts from high-net-worth individuals or some foundations, the deduction is built in—but again, it’s not always the deciding factor. People who operate at that level have lots of ways to manage their taxes—through trusts, estate planning, corporate structuring. The charitable deduction is one of many levers. There's a middle slice, maybe upper-middle to lower-upper income, where it can make a noticeable difference in annual taxes. But even there, it’s rarely the sole motivator.

Overall, various analyses have suggested that the tax deduction structure boosts annual US charitable giving about 25% up from where it would otherwise be - with the vast majority of that coming from the size and timing of top-end major gifts from very high net worth individuals or entities. So there is a positive overall impact, though obviously that impact varies a lot by nonprofit sector, geography, and individual organization. Organizations that are largely funded by grassroots small-dollar donations probably would only see a very minor drop off without the nonprofit tax structure.

There were, and are, other options for incentivizing charitable investments, though. So what else was built into the original nonprofit design? A lot of people have reflected that the nonprofit structure wasn’t just built to enable charitable work - it was designed, above all, to protect money. It does this in two main ways: by restricting individual ownership, and by assigning financial oversight to a volunteer board. Because no one can own a nonprofit or benefit from its surplus the way shareholders do, the structure attempts to ensure that donated funds stay within the organization and are used for public benefit, not private gain. (Though this does not prevent some non-profits from paying very high salaries to their CEOs and other executives.)

This 'protect the money', or 'ensure responsible use of public funds' approach also helps justify the tax deductions granted to donors. If the government is giving people a financial benefit for contributing, the model calls for a safeguard to make sure those funds aren’t being redirected for personal enrichment or informal gifting just for the purposes of tax evasion. So the nonprofit structure ensures that any value created—reputation, revenue, assets, even intellectual property in most cases—is retained by the organization, not by the people who build it or who oversee it.

In practice, many major donors serve on nonprofit boards themselves. On one hand, this reinforces the purpose of the model by creating a kind of internal audit function where they can watch the use of the funds and where they have power to do course corrections. On the other hand, this allows major donors to essentially keep their own personal control over the funds they donate. This has potential ethical concerns, and often results in power dynamics where big donors on the board call the shots even if they don't hold official officer roles. Meanwhile, the rules prevent founders and staff from accumulating wealth through ownership or equity. So in exchange for incentivizing the contribution of funds, the model often sacrifices personal reward, career stability, and long-term equity for the people doing the work while encouraging donors to maintain direct control over the funds they have ostensibly charitably donated.

Foundations and government agencies have a different set of strings - are grants really a charitable investment if they come with explicit use requirements, reporting requirements, and the ability to claw back funds? Or are those really just contracts-for-service that, by focusing on non-profits, also require that the workers not benefit from the fruits of their labor?

Regardless of different frames or interpretations, this model largely succeeds at its original purpose. It encourages the wealthy to make more contributions to civic benefit, and it safeguards funds, at least from the point of view of those donating the money. This structure is widely used and has been for a full generation now. Based on all that time and experience and thousands of operating nonprofits, we have learned that the benefits come with serious trade-offs.

The biggest one is this: when people file to become a nonprofit, they immediately give away ownership. The founder—who might have the idea, the energy, the network, and the creative spark—does not own what they create. The brand, the programs, the assets, the intellectual property—all of it belongs to the organization, which is governed by a board. A board that only owns the assets collectively - when a board member leaves, they don't get any benefit or take anything with them, no matter how much value they have created for the organization either.

This model was never designed to support people trying to build careers or equity through nonprofit work. It was designed to prevent personal benefit. And it works—it prevents founders and staff from building personal wealth through the organization, even if they spend their lives growing it. I recently spoke with a founding artistic director who built a renowned arts organization from the ground up over decades. At retirement, his board honored him with a room named after him and a pat on the back. That same year, one of his board members, who had built a private company over a similar timeframe, sold it for over ten million dollars. The disparity isn’t about who worked harder or who contributed more to the public good, it is just about the ownership structures and how those advantage or disadvantage certain kinds of people.

This has real consequences. Not only are founders walking away from organizations they built with no equity, they’re also often retiring without strong pensions or retirement funds. And the bigger picture is that we’re creating an intergenerational wealth gap. People who dedicate their lives to public benefit through nonprofit work are often unable to pass along wealth to their children and grandchildren. We are effectively building an underclass of people who did the work, who made the impact, and who sacrificed the most - and who walk away with the least.

That’s not the only problem.

Because nonprofits are structured around board governance, the staff doing the daily work, are overseen by a group that often lacks the qualifications to provide effective oversight. The board holds legal responsibility, but that doesn’t mean they know what they’re doing. They may be lawyers or financial professionals, but often not in the relevant areas. And the bigger issue is that there’s no external accountability. Boards choose their own members, set their own rules, and are protected from legal accountability by directors and officers’ insurance. They can walk away when things get difficult, and many do.

Meanwhile, the people who are showing up every day—running programs, balancing budgets, navigating partnerships—are not only often underpaid and under-supported, but also answerable to a board that might not understand or value their work. The power imbalance is real, and it’s reinforced not just structurally, but socially. Board members often hold more wealth and status than staff, and whether intentional or not, that shows up in how decisions are made and whose voice matters.

Sometimes this structure does work well - usually in one of two scenarios.

At the top end, you have flagship institutions with powerful boards—mayors, CEOs, philanthropists—who can actually move big resources and solve big problems. When major funding is cut, they can step in with a check. When opportunity knocks, they can open doors. The trade-offs still exist, but the benefits often outweigh them. Staff in these settings may feel the board’s power, but they also see the results. It feels like a reasonable exchange.

At the other end, in small, community-rooted organizations, boards are often made up of people who are deeply involved in the daily work. They’re not showing up once a quarter—they’re teaching classes, running programs, talking with neighbors. That closeness gives them the context and insight needed to govern responsibly. Their oversight is grounded in lived experience, not abstract meetings.

But most nonprofits aren’t at either extreme. They’re in the increasingly uncomfortable middle. They don’t have mega-donors who can fix problems with a phone call, and they don’t have hyper-local, embedded governance. They don't even have a board necessarily made up of people with relevant experience or expertise. In most cases in the middle, people are recruited for one of two reasons: because they love what the organization does, or because they have financial capacity or connections. But then they are tasked with strategic oversight they’re often unprepared for, and insulated from the consequences of their decisions. That’s a tough structure to build from. And after decades of experience, a lot of staff, community representatives, artists, funders - and even board members themselves - can see this is not an effective structure in many cases.

But, we have created all these funding requirements—especially from foundations and government agencies—that say you must be a nonprofit, and often that you must have a few years of track record in order to receive grants. That locks in the model even when it’s not working. You can’t innovate or pivot easily because the structure itself is requirement - more than purpose, more than impact, more than how much the community you are in needs you.

So when people complain about the nonprofit model, it’s not just because the work is hard or the budgets are tight. It’s because the model is doing exactly what it was designed to do—protect money and prevent personal gain—but that’s no longer aligned with what people want it to do now. We are increasingly seeking and designing models that value expertise, that reward effort, that evolve programs and purpose with community needs. And models that allow essential civic work to build equity and rewards for some of our best people and not erase it.

There are better models available. Hybrid structures. Cooperatives. Social enterprises. Models that acknowledge both the mission and the people carrying it. There are ways to just shift priorities or values - in the ways that some foundations are letting go of the nonprofit requirement to receive funds - that can be game changers as well.

If we want the work of nonprofit organizations to survive and thrive into the future, we will need to reconsider the structures we are requiring, and how those structures are in themselves often in the way of our goals as a society. Let's talk about all the options we have, and start incentivizing people to try them and use them.

Ten Standalone Key Statements that Emphasize Major Points

1. “The nonprofit structure wasn’t just built to enable charitable work—it was designed, above all, to protect money.”
2. “Founders and staff are prevented from building personal wealth through the organization, even if they spend their lives growing it.”
3. “People can absolutely use private or public money to support anything they want—the only thing that changes is the tax treatment.”
4. “Boards choose their own members, set their own rules, and are protected from legal accountability by directors and officers’ insurance.”
5. “In exchange for incentivizing contributions, the model sacrifices personal reward, career stability, and long-term equity for the people doing the work.”
6. “We are effectively building an underclass of people who did the work, who made the impact, and who sacrificed the most—and who walk away with the least.”
7. “The structure works best at the very top or very bottom—but most nonprofits live in the increasingly uncomfortable middle.”
8. “You can’t innovate or pivot easily because the structure itself is the requirement—more than purpose, more than impact.”
9. “It’s doing exactly what it was designed to do—protect money and prevent personal gain—but that’s no longer aligned with what people want it to do now.”
10. “If we want nonprofit work to survive and thrive, we need to reconsider the structures we are requiring, and how those structures are in themselves often in the way of our goals.”