Non Stock Corporation: Everything You Need to Know
A non-stock corporation is a company which does not issue stock shares. Stocks are often considered part of the definition of “corporation,” but stocks themselves aren't a requirement to set up a corporation.3 min read
2. Non-Stock Corporations vs. Non-Profit Organizations
3. Authorized Stock Confusion
4. Creating a Non-Stock Corporation
A non-stock corporation is a company which does not issue stock shares. Stocks are often considered part of the definition of “corporation,” but stocks themselves aren't a requirement to set up a corporation.
Non-stock corporations can be either for-profit or non-profit. By default, a non-profit corporation is a non-stock company because the entity does not pay shareholder dividends, hence the term “non-profit.” Non-profit companies may have members, but the members are not owners, so they don't enjoy financial gains from having a membership.
There are some instances in which a for-profit corporation remains non-stock:
- The company is closely held by a few individuals who have no interests in stocks
- The company is formed for a short-term, single purpose or transaction, such as building a construction project
- The company is formed solely to work with another company on a joint venture
By definition, a closely held corporation is a private company, but it's important to note that private companies can have stock. There are just some situations in which a private company may forgo stock issues. Similarly, a non-stock company can have owners even though those owners don't reap any monetary gains. They do, however, have rights to any proceeds if the company is ever sold.
Many non-profits that are also non-stock corporations usually have members, but these members are not owners in the strictest sense. They don't receive any money received by the company due to its non-profit status. Non-profit corporations may also have a board of directors and paid executives and staff.
Other types of business entities may select non-stock corporation status even though they aren't pursuing non-profit, tax-exempt status. Some of the most common types of non-stock corporations are:
- Labor organizations
- Civic leagues
- Business leagues
- Recreation clubs
- Athletic organizations
- Education organizations
- Municipal corporations
- Mutual insurance companies
Since non-stock companies are separate business entities, the general members and board members have the liability protections as shareholders, directors, and executives of stock corporations.
The biggest reason business owners choose non-stock corporation status is to take advantage of non-profit or tax-exempt status from the IRS. Unfortunately, while the two terms are often used interchangeably, they don't mean the same thing.
Non-Stock Corporations vs. Non-Profit Organizations
In reality, if you form a non-stock or non-profit corporation, you aren't forming a non-profit organization. It's also inaccurate to assume that if a corporation doesn't issue stock that it is automatically eligible for tax exemptions.
The main benefits of creating a non-stock corporation include:
- Limited liability
- Centralized management
To qualify as a non-profit organization, your corporation, fund, foundation, or community chest must be created, organized, and operated for one of these purposes:
- Testing for public safety
- Fostering amateur sports competitions
- Prevention of cruelty to animals or children
Authorized Stock Confusion
Some people confuse non-stock corporations with corporations that don't have any authorized stocks. While it is possible for a stock company to have no authorized stock, this fact doesn't make it a non-stock corporation.
To make matters more confusing, states like Delaware allow stock corporations to file their Articles of Incorporation without authorizing stock shares, which has led to confusion. Some individuals accidentally file the wrong documents, and while the error can be corrected, it costs extra time, money, and headaches.
Basically, a non-stock corporation is a corporation which does not issue shares of stock. It can operate either as a for-profit or non-profit company. In states like Delaware, a non-stock corporation must disclose any non-profit intentions when filing an Articles of Incorporation.
Creating a Non-Stock Corporation
Most states have a non-stock corporate form that corporations can file, which states their intention to seek exemptions as non-profit entities. To qualify, the corporation must not be formed to benefit any shareholders, directors, or members.
This isn't to say that non-stock companies can't make profits; many do make substantial profits, but those profits cannot be distributed to the directors or members. Instead, profits are reinvested into the business to further its purposes.
Some examples of non-stock corporations include:
- Non-profit hospitals
- Research institutions
Non-stock corporations are often created as mutual benefit societies. These entities are organized to benefit clubs, labor organizations, chambers of commerce, and trade associations.
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