Another Theory of Nonprofit Corporations

Abstract

This article considers parts of Professor Henry Hansmann’s rationale for the existence of nonprofits. He sees no reason to distinguish donors and customers, for both in fact enter into an exchange. This article argues that the distinction between donors and customers is critical, and that the failure model is therefore seriously flawed. It distinguishes two types of nonprofit corporations - those structured to satisfy donors' needs (donative nonprofits) and those structured to satisfy customers' needs (mutual benefit nonprofits). This dichotomy suggests a very different nonprofit corporation law than the one urged by Hansmann. Once the concept of failure is limited to donors, it can be refined to serve as part of the rationale for donative nonprofits. Refining the concept of failure reveals, however, that it confuses the analysis of mutual benefit nonprofits, which actually solve a different problem for customers and thus require a different corporate structure.This article places the discussion in context by outlining the purposes of a nonprofit corporation law, summarizes the Hansmann, or contract failure, theory, and develops an alternative theory and contrasts it with the Hansmann thesis, considering first the donative nonprofits and then the mutual benefit nonprofits.