Key Takeaways

  • A non-stock corporation is a legal entity that does not issue stock and is often used by non-profit organizations.
  • These corporations may be structured as either non-profit or for-profit, though the latter is less common.
  • Members or directors in a non-stock corporation typically do not receive profit distributions but may have voting rights.
  • Non stock corporation examples include private schools, trade associations, and mutual benefit organizations.
  • The formation and legal treatment of non-stock corporations vary by state, especially in Delaware.
  • This structure provides liability protection without stock ownership and is ideal for organizations focused on mission over profit.

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

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.

Real-World Non Stock Corporation Examples

Non stock corporations are common in sectors where mission-driven goals outweigh the pursuit of profit. These entities do not issue stock and instead operate under a member or director governance model.

Examples of non-stock corporations include:

  • Charitable Organizations: Nonprofits like Habitat for Humanity or local community centers often form as non-stock corporations to reinvest all revenue into their mission.
  • Educational Institutions: Private schools and academic research institutions frequently use this structure to qualify for grants and donations.
  • Religious Institutions: Churches and religious outreach programs benefit from this model due to its compatibility with IRS 501(c)(3) status.
  • Trade Associations: These include chambers of commerce, business leagues, and professional societies, which often function as mutual benefit non-stock corporations.
  • Mutual Insurance Companies: These are structured as non-stock corporations to provide insurance to members rather than generate shareholder returns.
  • Homeowners' Associations: HOAs are frequently formed as non-stock corporations to manage common property and enforce community rules.

Each example demonstrates the flexibility of the non-stock model for organizations that value governance and community benefit over stockholder equity.

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:

  • Charitable
  • Religious
  • Literacy
  • Scientific
  • Educational
  • Testing for public safety
  • Fostering amateur sports competitions
  • Prevention of cruelty to animals or children

For-Profit Non Stock Corporations

While most non-stock corporations are non-profit, it is possible to form a for-profit non-stock corporation. This is less common but serves specific business goals.

Why would a for-profit entity choose a non-stock structure?

  • Closely Held Ownership: The founders may not wish to issue stock or bring in outside investors.
  • Joint Ventures: Entities formed for a single project or venture may opt for a simplified structure without stock.
  • Reinvestment Model: Some businesses prefer reinvesting earnings into operations rather than distributing profits.

Although these corporations do not issue stock, they can still earn revenue and pay salaries. However, they must disclose their for-profit intent to maintain transparency, particularly in states like Delaware, where clear delineation is required during incorporation.

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
  • Schools

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.

Governance and Membership Structure

Unlike stock corporations, which are governed by shareholders, non-stock corporations are typically controlled by members or a board of directors. The governance structure can vary based on whether the organization is a public benefit, mutual benefit, or religious corporation.

Key roles and governance features:

  • Board of Directors: Responsible for major decisions and strategic oversight.
  • Members: May be individuals or organizations with voting rights, depending on the bylaws.
  • Officers: Handle daily operations and may include roles like president, treasurer, and secretary.

Members of a non-stock corporation do not own the corporation or receive profits. However, they do play a key role in governance and decision-making.

State-Specific Rules for Non Stock Corporations

The formation process and legal treatment of non-stock corporations vary by state. For instance, Delaware, a popular state for incorporation, offers clear statutory frameworks for both stock and non-stock corporations.

Considerations by state:

  • Delaware: Requires a statement of non-stock status and the nature of membership or governance structure in the Certificate of Incorporation.
  • California: Has strict rules for public benefit corporations and additional disclosures.
  • Texas and Florida: Allow flexible structures for civic and mutual benefit organizations.

Before forming a non-stock corporation, it is essential to understand the state-specific compliance requirements. Consulting a legal professional can help avoid delays or misfilings.

Frequently Asked Questions

  1. What is a non-stock corporation?
    A non-stock corporation is a legal entity that does not issue shares of stock. It can be either for-profit or non-profit and is governed by members or directors.
  2. Can a non-stock corporation make a profit?
    Yes, especially for-profit non-stock corporations. However, profits are typically reinvested into the organization rather than distributed to shareholders.
  3. What’s a common non stock corporation example?
    Examples include private schools, religious organizations, chambers of commerce, and mutual insurance companies.
  4. Is a non-stock corporation the same as a non-profit?
    Not necessarily. While most non-profits are non-stock corporations, not all non-stock corporations are non-profit. For-profit entities can also choose this structure.
  5. How do I form a non-stock corporation?
    You must file Articles of Incorporation with the state, clearly indicating the non-stock status and organizational purpose. For legal assistance, you can find experienced attorneys on UpCounsel.

If you need help forming a non-stock corporation, post your job 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.