Can Nonprofit Corporations Issue Stock?

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Nonprofit organizations differ from public and private corporations in that they do not exist with the goal of making a profit for distribution to shareholders. Nonprofits are formed for the public good, whether as charities, political groups, or educational, artistic or scientific organizations. They do not issue stock and are controlled by members or boards of directors.

Profits

  • Although nonprofits cannot distribute surplus funds to members or boards of directors (as corporations are entitled to give to stockholders), they can still earn profits, which the Internal Revenue Service strictly controls. This money can only go to serve the organization's mission and can be used for all normal business expenses such as rent, advertising, research and staff salaries. The IRS does not permit any such expenses to be excessive and they must fall within normally accepted parameters for similar organizations.

Bylaws

  • All nonprofit organizations must formulate and adhere to bylaws, which govern both the day-to-day operations and long-term goals. Corporations must also do this, but they are accountable to stockholders, whereas nonprofits report to members and boards of directors, who make all decisions and vote on key initiatives. Stockholders can vote to oust individuals within a corporation's board of directors, but a nonprofit's board is more autonomous and is generally given wider leeway without the pressure to produce quarterly profits that corporations must endure.

Funding

  • A corporation issues stock in return for money from shareholders, who then own the company. Nonprofits receive their financing from fund-raising activities, foundations and government agencies. They do not typically have the monetary scale of corporations and thus must carefully husband their resources through lower salaries, volunteers and low operating expenses. While corporations ideally serve a public benefit by providing needed goods and services, with stockholders putting up the initial money, nonprofits obtain and use their funding solely for the public good.

Taxes

  • Donors and other contributors can receive a tax deduction only if the organization is registered under the IRS code 501(c)(3). They cannot, however, receive any type of dividend as can stockholders in a for-profit corporation. Nonprofits are classified as tax-exempt organizations and use all money to serve their purpose.

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