- Cullman, Alabama


May 16, 2013

COMMENTARY: How Nonprofits Came to Acquire Their Tax-Exempt Status


Most then bided their time and applied for a charter when the political winds were more favorable.

Entrepreneurs also quickly learned to make their charter bids appear nonpartisan. But then legislators began asking for nonpartisan incentives to vote for charters, such as cash, stock and a variety of favors, including in at least one reported case, a favor of an intimate nature. Matters got so bad that in 1812, New York's Democratic governor, Daniel Tompkins, prorogued the legislature in response to widespread accusations that agents of the Bank of America (not the bank of the same name active today), including the state printer and the state treasurer, had exerted "undue influence" on several lawmakers.

Federalists immediately painted Tompkins's suspension of the legislature as an act of partisan interference with business even though his action was legal under New York's first constitution.

Early nonprofits were generally immune from such politics and were rarely cash cows that corrupt legislators could plunder. Swamped with charter applications from churches, libraries, cemeteries and societies for the advancement of beet sugar, silk, viticulture and other entities, state legislatures soon streamlined their chartering processes, ultimately creating general incorporation laws that allowed nonprofits to simply fill out a few forms and pay a small fee. The United States soon became a "nation of joiners," where voluntary associations proliferated and addressed problems that were the province of governments in other countries.

Facing accusations of corruption and favoritism, state governments slowly extended the general incorporation principle to businesses. Although special chartering persisted into the 20th century in some states, by the late 19th century most businesses in most states obtained charters under general incorporation laws (especially those of New Jersey and later Delaware).

By World War I, several hundred thousand business corporations were active in the U.S. A century later, there are millions of business corporations and the nation rightly prides itself on the speed and ease with which businesses can form and incorporate.

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