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 (for more information about inurement, please refer to our post about “Avoiding Conflicts of Interest).
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.