Who Really Owns a Nonprofit?

The concept of who owns a nonprofit organization can be hard for some to grasp, especially given that the answer is, “No one…and everyone!”  We encounter this confusion with new clients on a fairly regular basis.  And, given people’s understanding of how basic business operates, it is understandable.  In order to fully appreciate the concept of “non-ownership”, it is helpful to first talk about the various types of business entities.  Then, we’ll look at organizational purpose.  By the end of the article, it should make a lot more sense.

There are several different types of business entities.  For-profit companies make up most of them.  Here are a few (there are others)…all of these have an owner or owners:

Sole Proprietorship: One person who conducts business for profit.  The sole owner assumes complete responsibility for all liabilities and debts of the business.

General Partnership: Two or more individuals as co-owners of a for-profit business.

Corporation (for-profit): The corporation itself assumes all liabilities and debts of the Corporation.  A corporation is owned by shareholders.  A shareholder enjoys protection from the corporation’s debts and liabilities.

S-Corporation: A corporation may seek to obtain “S Corporation” status for federal income tax purposes.  The income of an S Corporation is taxed only once: at the employee or shareholder level.

Limited Liability Company: An LLC is a formal association which combines the advantage of a corporation’s limited liability and the flexibility and single taxation of a general partnership.  An LLC has members rather than shareholders.

With the exception of the LLC, the business entities listed above cannot be used for nonprofit organizations.  Even the use of an LLC is extremely rare; all nonprofit LLC members must be recognized 501(c)(3) organizations, not people or other entity types.  The most popular business entity for nonprofits is the nonprofit corporation.  This type of corporation is different from a typical for-profit corporation or S-Corporation.  Those have shareholders (owners).  A nonprofit corporation has no owners whatsoever, only stakeholders.  A stakeholder is not an owner, but rather someone who has a stake in the successful operation of the organization.  Stakeholders could be members of the nonprofit, or even beneficiaries of the nonprofit’s activities.  One thing stakeholders have in common:  they have no legal ability to profit personally…hence, nonprofit.  A nonprofit corporation is formed to carry out a public purpose, whether that be religious, educational, charitable, scientific or whatever.  It is prohibited from acting in a manner that results in private inurement (profit) to individuals.

How can that be?  Someone has to own it, right?  No, not really.  The nonprofit organization is not “owned” by the person or persons that started it.  It is a public organization that belongs to the public at-large.  The parties responsible to operate the organization for the stakeholders are the members of the board of directors.

Also, a nonprofit corporation cannot be sold.  It is simply not possible.  If a nonprofit corporation were to “close down”, or dissolve, the board of directors of the nonprofit must distribute all of the nonprofit’s assets to another nonprofit corporation after all debts have been settled.

“No one…and everyone!”  Hopefully now, it is much clearer what we mean.

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

This Post Has 18 Comments

  1. Elder Max Simmons

    {Organization Name Hidden} is a non profit 501(c)(3) Public Charity , we have two years of successful operation behind us. My question is when we apply for credit the grantors almost always look past the corporation entity legal status and requires personal liability from a officer of the Corporation. Is this legal in the state of Georgia?

    1. Greg McRay, EA

      Most likely, yes. It is very common for lenders to require principals of for-profits and nonprofits to “co-sign” for a loan. This is done because the organization itself either is under-collateralized or has insufficient credit history…or both. Given the current lending climate, expect those demands to increase, not decrease.

  2. Cheryl

    So is it possible to start a non profit to help create jobs and do a service to the community.

    1. Greg McRay, EA

      That’s a really broad question, but, in principle, yes. There are lots of 501(c)(3) nonprofits which have as their purpose economic development, job training, etc. The key is making sure that the organization’s activities do not directly benefit for-profit companies, but rather job seekers and/or the community at large.

  3. Linda L

    My Dad and I have invested our lives savings and are working to start a non-profit Adult Daycare Facility. Dad owns the building and the land outright, and I was wondering if it would be smart to keep that in his name and have the business rent from him? That way, since we’re putting everything we have into this, he will still have something left. What are the pro’s and con’s about this, besides saving on property taxes? If we end up disolving some day and the building was part of the non-profit, would they also sell that and give it to another charity?
    Thanks for the help!

    1. Greg McRay, EA

      Hi, Linda…

      It is interesting that you use the term invested. This is a tricky thing you are suggesting. If you go forward with making the facility nonprofit (presumably 501(c)(3)), then neither you nor your father will “own” it. It is technically possible to have the nonprofit rent the physical facility, but then you have potential conflict of interest problems if you all are running the program and owning the property. I guess I’m failing to see what you are investing in. It certainly isn’t the program, because you cannot profit from that. If it is rental income, the lack of arms-length dealing will be a problem.

      I strongly counsel you to get some professional help before you go much further. There are some serious landmines where you are headed. Given the amount of personal money you are talking about, I would hate to see you all get in over your heads. Our office offers time-based consultation for just this type of situation. Just give our office a ring.

      Good luck to you!

  4. John

    I am a member of a board that runs a 501c3 housing project. It has been in existance for 35 years. The board wants to sell it. Where do the proceeds go? Can we take a consulting fee? We have never been compensated.

    1. Greg McRay, EA

      n all candor, there is no way to answer a question of this complexity in a few sentences. I highly recommend that you contact us and reserve some consulting time to discuss your plans. You have way too much at stake.

  5. Ellis Carter

    Nice post. This is a poorly understood concept that really needs more attention. Thanks for highlighting it. Have also blogged about this topic at http://bit.ly/a377mo

  6. J Hasten

    I am wondering what the difference is between a foundation and a non-profit corporation. I want to file for a non-profit and I will be calling ya’ll for some help. I have some money that I would like to use to get started in a Ministry of Helps. I know this is probably a dumb question but I was just wondering the difference.
    Thanks for your time.

    1. Greg McRay, EA

      Not a dumb question at all. In fact, we answer similar questions almost daily. Many nonprofits call themselves a “foundation” when in fact they are not…at least not technically. In IRS terminology, a foundation is a specific type of 501c3 nonprofit, one that usually has no active programs. True foundations typically raise money to fund the work of 501c3 “charities” that conduct actual programs. And to further confuse the matter, a nonprofit corporation is the business entity type that most foundations and charities choose to adopt. You will learn much more about how this all works once you get started with us.

  7. Randall

    Does a Volunteer Fire Department with 501(c)(3) designation and getting a majority of funding through a local government entity meet the definition of “public charity”? Or is another term more appropriate? Some claim to be a “private” organization but that is an ambiguous term. Any thoughts on that?

    1. Greg McRay

      I agree that calling a VFD a public charity sounds a bit strange. But, by technical definition, that is correct.

      1. Randall

        There is a dispute between a local government and a volunteer fire department over the “ownership” issue. State law says nonprofits can’t issue stock. Local government claims “taxpayers” own it. The board of directors claim they own it. I say they’re both wrong and it seems you do, too.

        The directors control and run the operation. Government provides funding for that operation for the public benefit. Unless that funding is “earmarked” – as in some government grants – it goes toward the general fund and applied within the discretion of the board and management. So long as they’re meeting their general goals, they’ve met their obligation as to application of funds.

        While it plays to the public in a philosophical sense to claim taxpayers own it, it makes no sense at all in actual practice. Taxpayers fund many things over which they have no direct say. An independent corporation of any description is just that. While the hand that feeds you implies a close relationship, there is still that dividing line over who controls what. In this case, a local politician wants to have a line-item veto over how funds are applied in day-to-day operations, claiming he can “save the taxpayers money”. In effect, he wants to manage the corporation. Naturally, the directors dispute his authority to that. I believe funding has been severly curtailed as a result.

        Just like to hear your comments and perhaps get some reference to authoritative sources that might clarify the situation.

        1. Greg McRay

          Your comments are dead-on, Randall. Saying “the taxpayers own it” is a great turn-of-phrase, but it is essentially meaningless. Local government doesn’t own it, either. If it exists as an IRS recognized, 501c3, charitable entity, then it is an independent corporation governed by a board of directors and accountable to the state under corporate law and to the federal government under IRC 501c3. Any “control” ceded to another body or agency would have to be approved by the board in accordance with the bylaws. Any such agreement should necessarily be contractual in nature and revokable by the board. Reference IRS Publication 557 for all the nitty-gritty.

          Sounds politically messy…

          1. Randall

            Would there also be some legal concerns to allowing a “proxy” to assert substantial authority over the nonprofit? Seems like by failing to maintain an arms-length independent status could risk losing either corporate status or 501(c)(3) status. And might that proxy be held liable for actions of the nonprofit if there was de facto control by the proxy?

            I’ll look into that publication for more detail. I have some ideas how this ought to be resolved to the satisfaction of both parties but I’d appreciate just an outline of what you feel would be reasonable. Bear in mind, the funder has legitimate concerns as to where the money is going. The corporation has concerns over someone effectively taking over the business.

          2. Randall

            Another question. Given the scope of an organization being limited to one county with population about 30,000, what would you recommend in terms of satisfying “accountability” to the public at large? Is Form 990 usually sufficient? As a matter of public relations, what more could be done to demonstrate to the public what they get for their dollar? Thanks for any help.

  8. lois

    In my opinion, i (being part of the board) would suggest that the president appoint a committee chairman to gather a committee to deal with the issue…

    I also feel your By-Laws holds the answer, or should… if it doesnt, better speak to the by laws committee chair..

    I have been the by laws committee chair for our non profit for over 10 yrs. a very important position to hold (in my opinion)

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