Key Takeaways:

  • Nonprofits do not have owners. Instead, they are governed by a board of directors and held accountable to the public.
  • Board members control a nonprofit. They oversee operations, make decisions, and ensure the organization adheres to legal and ethical obligations.
  • Nonprofits can earn revenue but must reinvest it into their mission rather than distributing profits to individuals.
  • Legal and financial responsibilities exist. Board members and executives have fiduciary duties to protect the nonprofit’s assets and ensure compliance.
  • Dissolution follows strict rules. If a nonprofit closes, its assets must be distributed to another tax-exempt organization.
  • Nonprofit types vary. Some are public charities, while others operate as private foundations with different funding sources and tax rules.
  • Hybrid models exist. Certain organizations operate as social enterprises or have related for-profit entities while maintaining a nonprofit mission.

A nonprofit ownership structure, unlike a for-profit company, does not include shareholders and does not determine ownership based on a percentage of shares. Determining the ownership of a nonprofit can be complex. In fact, no individual or group can own a nonprofit corporation.

There are rare situations in which a nonprofit corporation can issue stock, and in even fewer cases, individuals may hold that stock. However, these individuals are still not considered owners, even if they control most of the stock. 

When someone refers to the ownership of a nonprofit organization (NPO), it is often used metaphorically to show that the members, clients, employees, and directors of an NPO have a stake in the organization's success to continue to provide needed programs.  

While a nonprofit organization might not have outright ownership, it does have primary control. Control of the organization is often given to the person who has the power to select board members. Because board members have the voting ability to make decisions for the company, the person who appoints them will retain the ultimate authority over the company.

Forming a Nonprofit Organization

There are some vital things to consider when forming a nonprofit organization. Knowing these issues can help make your organization more successful in the future. Things to note include:

  • Your nonprofit corporate statute will be governed by the bylaws of the state in which it was formed.
  • Shares of nonprofit stock are not traded on stock exchanges, and any equity the organization has belongs to the organization.
  • You are allowed to sell off all nonprofit assets, but the profits from the sale must be used to benefit the organization.
  • An NPO cannot pay dividends to shareholders.
  • A nonprofit organization can earn a surplus, but it must be reinvested back into the company.
  • Once a nonprofit is officially incorporated, it becomes a separate entity from its incorporators.
  • The company can be managed by a board or voting members.
  • The founders and board members can perform any duties related to the organization.
  • If a nonprofit organization grows, it can hire employees to run programs while still having the board oversee it.
  • Even though groups and individuals cannot own a nonprofit, they might still be responsible for the legal and ethical duties that come with ownership.

Legal Responsibilities of Nonprofit Board Members

While no one owns a nonprofit, the board of directors carries significant legal and financial responsibilities. Board members are legally obligated to act in the organization’s best interest, which includes:

  • Duty of Care: Making informed and responsible decisions.
  • Duty of Loyalty: Prioritizing the nonprofit’s mission over personal interests.
  • Duty of Obedience: Ensuring compliance with federal and state laws, as well as adhering to the organization’s bylaws.

Failure to uphold these duties can result in personal liability, particularly in cases of financial mismanagement or fraud.

Nonprofit Ownership: Benefiting the Public 

A nonprofit organization is formed with the primary purpose of benefiting the public in some way. This is why NPOs are sometimes referred to as public benefit corporations. Companies can be created to help a class or group of people, such as those suffering from a certain medical condition. You cannot start a nonprofit organization for individual gain or to benefit one specific person or family. 

When creating a nonprofit, you are supposed to be creating it to benefit the public. However, you can still pay yourself a reasonable salary for the work you perform, as long as your ultimate goal is not to profit from the business. You also can make money on your NPO and have a surplus at the end of the year from your efforts. But unlike a for-profit, those funds must go back into the nonprofit's programs and cannot be distributed to any employees or shareholders of the organization.

In recent years, with media exposure and reports of excessive nonprofit employee salaries, there has been concern about the accounting and finances revolving around these organizations. Because a nonprofit has a government-granted tax-exempt status and contributions made to the organization are tax-deductible, it requires more accountability to the public than does a privately held business. 

To help make nonprofits more accountable, they must follow certain guidelines. A nonprofit with revenue above $25,000 will have to file a Form 990 each year to the IRS. This form provides a summary of the organization's income and expenses. This will reveal any staff or consultant income that is higher than $50,000. Even if your NPO does not have a revenue of $25,000, it is still advisable to file a 990 report to let the IRS know you are still operating and to provide donors with information on where their funds are going.

How Nonprofits Generate Revenue

Although nonprofits do not distribute profits to individuals, they can still generate revenue. Common sources of income include:

  • Donations and grants: Funding from individuals, corporations, and foundations.
  • Membership dues: Fees from supporters or industry groups.
  • Program service revenue: Fees charged for services, such as educational programs or medical care.
  • Investment income: Returns on endowments or other financial investments.
  • Fundraising events: Galas, auctions, or charity runs.
  • Social enterprises: Some nonprofits operate businesses that align with their mission, reinvesting proceeds into their programs.

Nonprofits must ensure their revenue-generating activities do not jeopardize their tax-exempt status. Income unrelated to the organization’s mission may be subject to Unrelated Business Income Tax (UBIT).

What Happens If a Nonprofit Dissolves?

When a nonprofit organization ceases operations, it must follow strict legal procedures to dissolve. Key steps include:

  1. Board approval: The board of directors must vote to approve the dissolution.
  2. Debt resolution: Any outstanding debts or liabilities must be settled.
  3. Asset distribution: Remaining assets must be transferred to another nonprofit or charitable entity, per IRS regulations.
  4. State and federal filings: Organizations must notify the IRS and state authorities by filing appropriate dissolution documents.

Because nonprofits benefit from tax-exempt status, they cannot be sold for personal gain. Any residual assets must continue to serve a public benefit.

Frequently Asked Questions

  1. Do nonprofits have owners?
    No, nonprofits do not have owners. They are governed by a board of directors and accountable to the public.
  2. Can a nonprofit make a profit?
    Yes, but any surplus must be reinvested into the organization’s mission rather than distributed to individuals.
  3. Who is financially responsible for a nonprofit?
    The board of directors holds fiduciary responsibility, ensuring financial accountability and compliance.
  4. Can a nonprofit be sold?
    No, a nonprofit cannot be sold. Upon dissolution, its assets must be transferred to another nonprofit.
  5. What happens if a nonprofit engages in improper financial activity?
    The IRS can revoke tax-exempt status, impose penalties, or hold board members personally liable for misconduct.
     

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