"How Nonprofits Became Tax-Exempt"
From Bloomberg Echoes:
The uproar over allegations of
politically motivated investigations by the
Internal Revenue Service shouldn’t be surprising given
Americans’ long love affair with nonprofits and their strong
disdain of partisanship, especially within bureaucracies.
After independence, and especially after ratification of
the Constitution, Americans began forming businesses, charities
and other associations at unprecedented rates. Unshackled from
British law and the threat of monarchical tyranny, they sought
to invest in long-term stability, and in each other, in ways
that required the establishment of large and lasting
organizations.
To create these institutions, early Americans adapted
corporate laws from Britain. At first, incorporation required
both for-profit and nonprofit organizations to obtain a charter
from state governments. Charters were special laws passed by
state legislatures and signed by governors under the rules of
state constitutions.
Before the Civil War began in early 1861, more than 22,000
businesses and untold numbers of churches, charities,
promotional associations and other nongovernmental organizations
incorporated.
Religious Services
While not all successfully began operations or lasted very
long, business corporations supplied much of the nation’s early
transportation infrastructure, financial services, manufacturing
and mining production, and utilities (water power, potable
water, gas lighting and telegraphs). Similarly, nonprofit
corporations provided early Americans with many religious,
charitable, educational, literary and promotional services.
Special incorporation, however, spawned political
favoritism. New York, for example, denied the Bank of New
York a charter from 1784 until 1791 for purely
partisan reasons: The bank was controlled by Federalists while
the governor and his allies in the legislature were Democrats.
In the early 19th century, politicians also denied the Merchants
Bank of New York a charter for several years. Other
entrepreneurs across the U.S. also complained that their charter
applications were denied for purely partisan reasons.
Luckily for the development of the U.S. economy, early
entrepreneurs stymied by state governments had several other
options. They could charter in another state, as several banks
did in New Jersey when New York proved intransigent. At
some risk, entrepreneurs could also form an unincorporated
joint-stock association and contractually assert the legal
advantages held by duly chartered corporations, including
perpetual succession, entity shielding and defined liability....MORE
