A major misconception about nonprofit organizations concerns ownership of a nonprofit. No one person or group of people can own a nonprofit organization.
Ownership is the major difference between a for-profit business and a nonprofit organization. For-profit businesses can be privately owned and can distribute earnings to employees or shareholders. But nonprofit organizations do not have private owners and they do not issue stock or pay dividends. And while nonprofit organizations can earn a surplus, that income must be reinvested in the nonprofit organization — possibly to benefit or expand programs according to the charitable mission. But that income cannot be distributed to persons.
If there is no owner, who manages and controls a nonprofit?
Once incorporated, the newly created nonprofit organization is a separate legal entity from its incorporators, directors, officers, and employees. The nonprofit corporation owns assets of the business and is entitled to receive the revenue from its operation.
Many nonprofits are managed by boards; others may be managed by voting members. When a nonprofit first begins operating, the board members, along with the founder(s), may perform many of the tasks of the organization. As the nonprofit grows, the board may begin hiring staff members to develop and lead programs as the board and/or voting members continue to oversee the organization.
But none of these individuals or groups have any ownership rights in the organization. And while they don’t own the nonprofit, they do have significant legal and ethical duties that cannot be delegated to others. Learn more about directors’ duties.
What about the founder? Doesn’t the founder of a nonprofit own it?
No. The founder does not own the nonprofit.
Certainly, starting a nonprofit organization takes considerable time, effort, and money. And the founder may feel closer to the mission and the programs than anyone else. But that founder does not have any ownership rights in the nonprofit.
Often times the founder will serve on the initial board of directors, which manages the nonprofit. The board safeguards the public’s interest to ensure that the organization operates in accordance with its mission and the purpose for which it was granted tax-exempt status and protects the assets of the nonprofit.
As a member of the board of directors, a founder has the same responsibilities as other board members. While a founder may feel closer to the organization that she helped to form, a founder has no ownership rights regarding the nonprofit corporation.
To whom is the the nonprofit accountable?
The organization is accountable to many constituencies.
- The General Public. Nonprofits are created to provide a charitable purpose to the public good, whether as charities, educational programs, churches or religious groups, or scientific or artistic organizations.
- State Agencies. Nonprofits must also comply with certain regulations in the states in which they operate. These may also require public disclosure of specific documents or the filing of certain reports.
- The IRS. Certain tax-exempt entities follow rules set by the IRS to keep their tax-exempt status.
Can a nonprofit be sold?
No. A nonprofit cannot be sold to another individual or organization. Additionally, the assets acquired by a nonprofit were acquired with the understanding that they will be used to further the mission of that organization. If a nonprofit decides to cease operations, the organization must settle all debts and distribute all of the nonprofit’s remaining assets to another nonprofit corporation before it can be dissolved.
It should be noted that some states do allow nonprofit corporations to issue stock and own stocks. This is not common and it is not discussed above. Contact us for state-specific inquiries.
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The Cullinane Law Group works exclusively with the nonprofit tax-exempt sector: new nonprofits, foundations, religious groups, and social entrepreneurs throughout the United States who seek to create positive change. Contact us today to learn how we can help your organization.