Why Do Nonprofits Fail? A Quantitative Study of Form 990 Information in the Years Preceding Closure

Nonprofit organizations are an important piece of the community and economy in the United States. Each year, nonprofit organizations close their doors and stop providing services to the community. While there are large amounts of literature around financial health and vulnerability and governance best practices of nonprofit organizations, few of the studies have ever looked specifically at failed organizations. In general, the end stages of the life cycle of nonprofit organizations have not been well studied and are not well understood. This study draws on resource dependency theory and institutional theory to identify financial and governance factors that may serve as indicators of failure for nonprofit organizations by looking at organizations that are known to have ceased operations. This study identifies nonprofit organizations that have failed and then assess their financial and governance information, as reported in the IRS Form 990 prior to closure. The organizational metrics are both compared to successful organizations of similar size and category and then assessed for deterioration in the final years of operation. Ultimately, increasing revenue concentration appears to be a strong indicator of failure for nonprofit organizations. Other factors including level of administrative costs, reporting of unrelated business income or significant programmatic changes are also significant in the understanding of why failed nonprofits are different from successful nonprofits in general and in the final years of the organization’s life cycle. This unique study offers one of the first empirical analysis of failed nonprofit organizations. To date, few studies have looked at failed organizations beyond individual case studies. This research confirms some of the current literature around financial vulnerability and governance issues