A Brief History: Part I

When one branch of government “transcend[s] its legitimate power,” it is the duty of citizens to refuse compliance until the legitimate branch opines. Though this antagonistic call to action resonates with many headlines in 2025, it first appeared in the Concord Gazette in 1817, and its utterance sparked a watershed moment in the history of nonprofit law in America.

On one side stood a Board of Directors charged with ensuring that money donated to Dartmouth College fulfilled donors’ intent and furthered the College’s mission. On the other was a government, newly controlled by an opposition party, intent on extending its power over an association of private individuals providing a public good.

How did this dispute—and more importantly, its resolution—lead to the creation of roughly 1.8 million tax-exempt organizations operating in the United States today? These organizations employ nearly 12.8 million people (about 10% of non-government workers) and contribute an estimated $1.4 trillion to the U.S. economy (about 5.6% of GDP). What are the foundations of the legal landscape that governs this sector? How did we, as a country, decide to exempt some corporations from taxes? Why allow people to reduce their own tax bills by donating to these organizations? Exploring these questions reveals not only the role nonprofits play in preserving grand ideals like democracy, but also their impact on the neighborhood-level issues that make communities worth living in.

Even before independence, Americans formed associations to tackle problems large and small. Consider the revolutionaries who met in taverns to plot the overthrow of the Crown. In 1835, Alexis de Tocqueville observed that early Americans had a unique knack for coming together to advance the common good:

As soon as several of the inhabitants of the United States have conceived a sentiment or an idea that they want to produce in the world, they seek each other out; and when they have found each other, they unite. From then on, they are no longer isolated men, but a power one sees from afar, whose actions serve as an example; a power that speaks, and to which one listens.

Across Western societies at the time, this was novel. In older, wealthier nations like France and England, influential citizens often stood as the heads of “permanent and obligatory association[s]” composed of dependents forced to cooperate in executing the elites’ designs. But in the United States, government and its free electors shared responsibility for the public good. As de Tocqueville noted, no “political power would ever be in a state to suffice for the innumerable multitude of small undertakings that American citizens execute every day with the aid of an association.” In other words, government cannot meet all the demands of an increasingly complex society; citizens must step up and organize to fill the gaps.

Ironically, after winning independence, many of those same tavern-dwelling revolutionaries were wary of allowing citizens to associate freely—after all, collective action had toppled the King. The framers nevertheless recognized this tension and confronted a central question: how should a pluralistic democracy balance civil society and state power? Too much government control could smother liberty; too little could leave people unable to protect their common interests from private groups when the state failed to oversee corporate entities.

The first attempt at an answer was to appoint political allies to the heads of corporations, granting them government-like privileges in exchange for providing public benefits. This close relationship between state and corporation was thought to secure the common good. The arrangement held for a few decades, when party differences were mild. But as partisanship rose in the early 1800s, states increasingly clashed with corporate boards appointed by former rivals. Both parties came to see that divorcing the state from corporate control was in their interest, lest they find themselves shut out of civil society when political winds shifted. Yet neither side wanted to lead this effort while enjoying the spoils of power.

Enter the Dartmouth College Board of Directors in 1817. Newly elected state politicians sought to control the College but could not oust the Board. Instead, they created a second board to oversee the first and threatened the directors with legal liability if they resisted. Rather than yielding, the Directors penned the op-ed quoted at the outset of this piece, publicly declaring that they would defy those in power and framing their stance as a matter of national importance.

The dispute reached the Supreme Court, where the great orator Daniel Webster argued for Dartmouth that colleges and similar institutions would “become a theatre for the contention of politics” if corporate charters could be altered whenever a new party took office. In a 5–1 decision, Chief Justice John Marshall agreed: a corporation performing a publicly useful activity was no different from a private individual doing the same, and government had only limited ability to interfere with the relationship between private donors and the organizations they supported.

Dartmouth’s victory severed direct state control over corporations in the United States, and just in time. Industrialization, the Civil War, and the end of slavery were on the horizon, bringing social crises of poverty, housing, and deadly working conditions. The first modern nonprofit, the Peabody Education Fund, stepped in to educate formerly enslaved people and poor whites in the postwar South, while other nonprofit entities formed to address the gaps left by a government neither designed nor willing to solve these problems.

In the next installment, we’ll trace the legislative history of modern nonprofit law after industrialization. But as we reflect on the early days of tax-exempt corporations and Dartmouth’s steadfast Board of Directors, we should heed de Tocqueville’s warning:

If men who live in democratic countries had neither the right nor the taste to unite in political goals, their independence would run great risks, but they could preserve their wealth and their enlightenment for a long time; whereas if they did not acquire the practice of associating with each other in ordinary life, civilization itself would be in peril.

This article is for general informational purposes only and does not constitute legal advice. Reading this article does not create an attorney-client relationship. For advice specific to your organization's situation, contact Commonlight Legal LLP.