When Nonprofits Compete with Businesses

Two Seattle-based organizations illustrate how the distinction is blurring between charities and businesses. Grist is a popular news blog and Groundwire is a consulting shop that helps organizations build up their online capabilities. Grist competes with every other new media site for eyeballs and advertising dollars while Groundwire has to battle with every other ad agency for new website contracts.

But both have an inherent advantage over other service providers in the field.* Because they have an environmental component to their missions, they are both classified as nonprofits. That means they avoid paying many federal income taxes and can supplement their operating budgets with tax-exempt donations.

First off, it is worth noting that there are disadvantages with establishing an organization as a nonprofit. The group's founders cannot sell or cash out, for example. And it's not necessarily easier to rely on donors rather than just customers.

And finally, I am not accusing either of these groups of doing anything illegal or unethical. Both have to make their cases to the IRS that they should qualify as tax-exempt charities working solely in the public's interest and they've both been approved.

However, I'm not convinced that nonprofits with this level of commercial activity deserve the exact same tax breaks as pure charities. Perhaps it's time for Congress to clarify the rules.

*Disclosures: I've helped an environmental group with a media buy on Grist before. I also own a for-profit online news site as well as a consulting practice that helps environmental groups, among others, develop websites.