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