Another Theory of Nonprofit Corporations
This Article argues that the distinction between donors and customers is critical, and that the contract 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 contract failure is limited to donors, it can be refined to serve as part of the rationale for donative nonprofits. Refining the concept of contract 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. The first Part of this Article places the discussion in context by outlining the purposes of a nonprofit corporation law. The second Part summarizes the Hansmann, or “contract failure,” theory. The third Part develops an alternative theory and contrasts it with the Hansmann thesis, considering first the donative nonprofits and then the mutual benefit nonprofits.