Too many ways to divide donations?

When it comes to charity, are more nonprofits necessarily better? America has always been known for its entrepreneurial spirit. Increasingly, that spirit has been mixed with a desire to help the disadvantaged. The result: a dramatic increase in the number of nonprofits. In fact nearly 500,000 have been created in the past 10 years, bringing the total to 1.5 million organizations. But some nonprofit experts are beginning to wonder if that number does more harm than good.

"The real question is how long will this growth be sustainable? At some point, we'll simply have too many and the funding won't be able to support the numbers," says Paul Light, professor of nonprofit studies at New York University.

Donors find the growth certainly gives them options, but also dilemmas when faced with the decision of whom to support. For example, people looking to support education in Des Moines, Iowa, have 330 nonprofits to choose from, according to a search of nonprofit databases. San Francisco givers who want to help the city's homeless have more than 125 possibilities. Portland, Maine, has more than 450 charities that help children.

"It's the No. 1 complaint I hear from donors, and there is general consensus within the industry that there are too many nonprofits," says Professor Light. "It has already caused enormous competition for funding and has tightened the workforce so significantly that it's nearly a crisis at most human-services organizations."

Many nonprofits have administrative operations that need support, and with so many focused on similar activities, experts are beginning to call for changes.

"It just doesn't make sense to have so many organizations doing the same thing within the same community. What needs to happen is for nonprofits to start thinking about merging or consolidating their operations, but no one is willing to say which ones should do it," says Light.

While overall giving has increased, it's primarily going to the major organizations like the United Way, the American Red Cross, and church groups. In fact, donors gave $248.5 billion last year, a 5 percent jump from 2003, according to the Giving USA Foundation. When accounting for inflation, it's the first increase since 2000. But giving in some key charitable areas like human services and international affairs actually decreased in inflation-adjusted dollars.

The overall increase is robust, says Hank Goldstein, Giving USA's chief executive, but he warns donors that the proliferation of nonprofits has created inefficiencies and duplication. "This really is a cottage industry and not all nonprofits are well-run. For every one nonprofit [that is], you have 10 that aren't."

Mr. Goldstein advises donors to look for nonprofits that follow their mission, operate efficiently, and have a trustworthy board of directors. "Donors should spend some time to get to know their nonprofit and make sure they trust that the organization is going to do what it says," he says.

Not everyone agrees that there are too many charities. "Who's to say when we have too many?" asks Robert Ottenhoff, chief executive of GuideStar, an organization that tracks nonprofits. "The number is a sign of vitality and creativity and that people want to do something about a problem."

But for charities, "the era of assumed virtue is over," Mr. Ottenhoff warns. "Donors have many choices and they're conducting greater due diligence on nonprofits."

To reduce the number of nonprofits, some communities, including Pittsburgh, have offered financial incentives encourage charities to merge. "Unfortunately, nonprofits don't like to be told what to do, and usually it's only the wrong organizations that take advantage of these efforts," Light says.

Even Light suggests that there is room for more charities in certain sectors, especially in areas that care for the poor. "Human-service nonprofits are still needed in some areas, but the new ones really need to shake up the norm or challenge the industry."

Currently, barriers to enter the nonprofit industry are relatively easy to overcome, experts say. "The IRS rarely does more than rubber stamp a nonprofit application," says Ottenhoff.

That lack of oversight by the Internal Revenue Service has alarmed some federal lawmakers, who fear that some groups are gaining nonprofit status to manipulate the tax code or misuse donor dollars. With few regulating this growing group, some wonder if new laws should make earning nonprofit status more difficult. The Senate Finance Committee is now considering whether to make nonprofits reregister every five years. Reaction is mixed, but supporters say the process would help weed out charities that haven't been effective.

"Donors need to be able to trust that a nonprofit is going to do good with their money. That just isn't the case right now," says a senior staff member of the Senate Finance Committee, who spoke on condition of anonymity.

For now, the principal driver for change is likely to be donors, Light says. But ultimately, the economy may decide a nonprofit's fate, according to Goldstein. "The country is living on credit, and that's not sustainable. There may come a time that giving actually decreases and that would have a significant impact on the nonprofit sector."