Key Takeaways

  • A for-profit business cannot own a nonprofit in the traditional sense, as nonprofits cannot be privately owned.
  • However, for-profit companies can form, support, or control nonprofit entities if they maintain strict legal separation.
  • Nonprofit organizations must serve the public interest and reinvest all profits into their mission.
  • A for-profit company may set up a nonprofit arm, such as a charitable foundation, as long as governance and finances remain distinct.
  • Common pitfalls include conflicts of interest, improper financial benefit to the for-profit, and issues with IRS compliance.
  • Legal counsel is essential when navigating for-profit and nonprofit affiliations to avoid tax-exempt status risks or penalties.

Can a corporation own a non profit business? In the United States, the answer is "no" because no one actually “owns” a nonprofit organization. Confusion about ownership may stem from the fact that nonprofit corporations exist.

Who Really Owns a Nonprofit?

One of the biggest misconceptions surrounding nonprofits concerns who owns them. No individual or group of people owns a nonprofit. However, the concept can be hard for some to understand since the real answer about ownership is that “no one, yet everyone” “owns” the organization.

Typically, a board of directors oversees a nonprofit, and paid employees work in the organization.

In some instances, a nonprofit can be associated with a for-profit corporation. For example, some members of a nonprofit's board may also serve on the board of directors for the for-profit business. This still isn't ownership, simply common control.

Ownership is the biggest difference between nonprofits and for-profit businesses.

For-profit businesses can distribute earnings to shareholders and employees. They can also be privately owned.

Nonprofit organizations, on the other hand, have no private owners and don't pay dividends or issue stock. If a nonprofit earns a surplus, that money has to be reinvested in the company, not distributed to individuals. A surplus can be used to expand programs, for example.

How Can a For-Profit Legally Work With a Nonprofit?

Although a for-profit business cannot technically own a nonprofit, it can form or closely collaborate with one under certain conditions. For example, a business might launch a nonprofit to further a charitable mission that aligns with its corporate values. In these cases, the nonprofit must remain an independent entity, both legally and financially.

The for-profit company may:

  • Create a separate nonprofit legal entity, such as a 501(c)(3).
  • Provide seed funding or ongoing donations to support the nonprofit’s work.
  • Have shared personnel or board members, provided no one receives improper financial benefit.
  • Use the nonprofit arm to enhance its corporate social responsibility profile.

It’s important to establish:

  • Separate governance: Each entity must have its own board of directors.
  • Distinct finances: No commingling of funds or resources is allowed.
  • Independent purpose: The nonprofit must serve a public benefit, not the private interests of the company.

Failure to maintain these separations could jeopardize the nonprofit’s tax-exempt status or trigger IRS penalties.

About Nonprofit Corporations

Nonprofit corporations are the most popular business structure for nonprofits. This differs from typical for-profit corporations or S corps, as those types of corporations have shareholders, or owners.

Nonprofit corporations have no owners; instead, they have stakeholders. Stakeholders aren't owners. Rather, they have a stake in the organization's success. Stakeholders can be members in the nonprofit or simply beneficiaries of its activities. Stakeholders don't personally profit from the business.

Nonprofit corporations are designed to carry out a purpose that serves the public good, such as the following:

  • Educational
  • Charitable
  • Religious
  • Scientific

The people who start a nonprofit don't own it because it's a public entity that actually belongs to the public.

The board of directors in a nonprofit is responsible for running the organization for the stakeholders. If a nonprofit shuts down, or dissolves, the board of directors must distribute all of the organization's assets to another nonprofit after settling all debts.

It's not possible to sell a nonprofit corporation. Any assets that it acquires are to be used to further the organization's mission.

Structures for Aligning For-Profit and Nonprofit Entities

There are several ways a for-profit can lawfully engage with a nonprofit, each with different implications:

  1. Separate Entities With Shared Leadership:
    A for-profit company and nonprofit may share board members or executives. This model is common but requires strong policies to manage conflicts of interest.
  2. Corporate Foundations:
    A for-profit may establish a private foundation funded by company profits. These typically focus on grantmaking and must adhere to IRS rules for charitable contributions and self-dealing.
  3. Fiscal Sponsorships:
    Sometimes, a nonprofit may sponsor an initiative of a for-profit as long as the project advances the nonprofit’s mission. This relationship must be carefully documented.
  4. Cause-Related Marketing Campaigns:
    A for-profit might partner with a nonprofit on a promotional campaign (e.g., donating a portion of proceeds). Transparency and compliance with state charitable solicitation laws are essential.
  5. Low-Profit Limited Liability Companies (L3Cs):
    While not technically nonprofits, L3Cs are hybrid entities designed to prioritize mission over profit, offering another structure for social entrepreneurship.

In all cases, the nonprofit must act independently and further a charitable purpose, not just serve as a marketing or financial vehicle for the business.

Management and Accountability of Nonprofits

Boards manage many nonprofit organizations, but voting members may manage some as well. When a nonprofit first starts, founders and board members may perform many of the necessary tasks of the organization. As the organization grows, board members may start hiring staff to develop and lead programs. Voting members and/or the board will continue to oversee operations.

Still, none of these groups or individuals has ownership rights in the nonprofit. Although they don't own it, they do have key ethical and legal duties that they can't delegate to others.

It takes a lot of money, time, and effort to start a nonprofit. The founder may have a deep, personal interest in the mission and programs, but he or she still has no ownership rights, despite close ties to the organization.

A founder often serves on the initial board of directors. When a founder serves on the board of directors, he or she has the same responsibilities as other members of the board.

The board looks out for the public's interest in managing the nonprofit by making sure it operates in accordance with its purpose and mission. Members work to protect the organization's tax-exempt status and assets.

Nonprofit organizations are accountable to the following:

  • The public-at-large: Nonprofits are meant to serve the public good through various forms, such as charities, religious groups, churches, educational programs, artistic organizations, or scientific organizations.
  • State agencies: Nonprofit organizations must comply with certain state regulations, which may require filing certain reports or publicly disclosing certain documents.
  • The IRS: In order to keep their tax-exempt status, some nonprofits must adhere to certain rules set forth by the government.

Nonprofits are designed to serve the public, and as such, don't have actual owners. This includes nonprofit corporations, which must meet certain criteria to remain exempt from taxes.

Legal Risks and Best Practices for For-Profit Involvement

For-profits seeking to work closely with or support a nonprofit must be cautious of legal and ethical pitfalls. Common risks include:

  • Private Inurement: If the nonprofit's resources are used to improperly benefit the for-profit, the nonprofit may lose its tax-exempt status.
  • Excess Benefit Transactions: The IRS may impose penalties if individuals connected to the for-profit receive compensation or perks from the nonprofit beyond fair market value.
  • IRS Scrutiny: Closely aligned entities may face audits to ensure operational independence.
  • Public Perception: The integrity of the nonprofit may be questioned if it appears too closely tied to a for-profit's self-interest.

Best practices include:

  • Drafting detailed bylaws and operating agreements to outline roles and safeguards.
  • Conducting conflict-of-interest reviews for board members serving both organizations.
  • Keeping meticulous records to demonstrate separate operations and finances.
  • Consulting with legal and tax advisors before establishing any joint ventures or partnerships.

If you're considering forming or affiliating with a nonprofit as part of your business strategy, an attorney can help you navigate the legal complexities and ensure compliance with IRS and state regulations. You can find experienced legal help through UpCounsel’s network of top-rated attorneys.

Frequently Asked Questions

  • Can a for-profit own a nonprofit?
    No. A nonprofit cannot be owned by a for-profit or any individual or entity. However, a for-profit can form or work closely with a nonprofit as long as they remain legally separate.
  • Can a for-profit fund a nonprofit?
    Yes. A for-profit can donate money, staff time, or resources to a nonprofit, but cannot control its operations or finances.
  • Can a nonprofit support a for-profit business?
    Only if doing so aligns with the nonprofit’s mission and does not result in private benefit. Transactions must be at fair market value and properly documented.
  • What are corporate foundations?
    Corporate foundations are nonprofit entities created and funded by a business to manage its charitable giving. They operate separately and must follow 501(c)(3) regulations.
  • What legal help is recommended when forming both entities?
    Working with an attorney ensures compliance with tax and nonprofit laws, helps avoid conflicts of interest, and protects both entities from legal risks. UpCounsel can connect you with trusted nonprofit and corporate law attorneys.

If you need help with nonprofit organizations, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.