The terms “non-stock” corporation and “non-profit” have become almost interchangeable, however, this is not correct. “Non-stock corporation” refers to a type of legal entity filed with the Secretary of State. A “non-profit” organization refers to a non-stock corporation that has obtained a tax determination letter from the IRS.
Here we sort through these two loaded terms and decipher what they mean, and how they work together.
Is A Non-Stock Corporation a Non-Profit?
A non-stock corporation is not a non-profit by default. Forming a non-stock corporation is just the first step to becoming a non-profit. An organization must have additional filings approved by the IRS to be granted 501(c)(3) tax exempt status.
A non-profit organization does not have any stock by definition. Nonprofits are able to have “members”, however, these members are not beneficial owners. Members in a non-profit do not receive any financial benefit from the organization’s operations.
The terms “non-stock” and “non-profit” are easy to conflate. This is because the incorporation documents of a non-stock corporation often facilitate qualification for tax exempt status. The IRS requires non-stock corporations seeking 501(c)(3) tax status to provide notice of non-profit intent in the company’s incorporation document.
What Is a Non-Stock Corporation?
A non-stock corporation is a type of corporation formed without having any capital stock. Non-stock corporations are separate legal entities that provide limited liability protection for the personal assets of members, directors, and officers.
Non-stock corporations are utilized by both non-profit organizations and for-profit enterprises. For-profit companies typically establish non-stock corporations to fulfill specific transactions or complete short-term projects. For example, a company may use a separate non-stock corporation to commission and build a new office building.
How are Non-Stock Corporations Used?
Various types of organizations also utilize non-stock corporations to further specific goals and purposes under centralized management. These organizations include:
501(c)(6) Non-charitable Organizations
501(c)(6) organizations are formed simply to promote a common business interest amongst a group of people or companies. Examples of these organizations include:
- Business leagues;
- Chambers of commerce;
- Real estate boards;
- Trade boards; and
- Professional football leagues.
An organization granted 501(c)(6) tax status by the IRS is exempt from paying federal taxes, however, it may still be subject to state and local taxes. Contributions made to 501(c)(6) organizations are not considered charitable and are not tax deductible.
501(c)(4) Social Welfare Organizations and Local Associations
501(c)(4) organizations are formed for the purpose of benefiting a broader community or the public at large.
Examples of these types of organizations include :
- Labor Organizations, such as an electrical workers union; and
- Civic Organizations, such as religious and community groups.
501(c)(3) Non-profit organizations
Non-profit organizations with 501(c)(3) public charity or private foundation tax status are often receive exemption from federal, state and local taxes. Donors are able to deduct charitable contributions made to 501(c)(3) organizations on their personal tax return.
What Is a Non-Profit Corporation?
The term “non-profit” refers to an organization that has obtained 501(c)(3) tax exempt status from the IRS. Organizations with 501(c)(3) status are often exempt from federal, state and local taxes, including sales and property taxes. An organization looking to achieve 501(c)(3) status must meet specific qualifications regarding purpose and governance. Then it must file a form 1023 (or the more streamlined version, form 1023 EZ) approved by the IRS to obtain a tax determination letter.
How to Qualify for 501(c)(3) Status
An organization must meet a certain set of criteria in order to qualify for 501(c)(3) tax exempt status. The organization must not operate to financially benefit a private individual. A non-profit organization must be operated for one of the following purposes:
- Public Safety
- Fostering national or international amateur sports competitions (activities cannot involve providing athletic facilities or equipment)
- Prevention of cruelty to children or animals.
How Do Non-Stock Corporations Work?
Owners of non-stock corporations are typically referred to as “members”. Members in a non-stock corporation are not owners in a traditional sense because they do not benefit financially from the company’s operations. The role of members is to elect a board of directors. Many non-stock corporations choose to have “self-sustaining boards”. This means that the members and board of directors are defined as being one and the same.
Can A Non-Stock Corporation Make Profits?
A non-stock corporation is able to generate business profits. However, since the company does not have shareholders, profits cannot be distributed to members. The profits of a non-stock corporation are reinvested back into the company to further its specific purpose.
Directors, officers and staff in a non-profit may be paid by the organization. This is provided that their compensation is not unreasonably high. A non-profit organization is allowed to engage in other for-profit activities. These activities however may not be tax exempt and would be considered as other business income.
Membership in A Non-stock Corporation
Some non-stock corporations make membership conditional on certain criteria being met. For example, a homeowner’s association typically requires that members own property in a particular neighborhood. Membership conditions can be as simple as paying membership dues to the organization.
Non-stock corporations typically have two different classes of members:
- Informal Members – Informal members are admitted into the organization but do not govern its operations. These members typically receive pertinent information about the organization, however, they do not have voting privileges or management responsibilities.
- Formal Members – Formal members actively participate in governance by electing directors. They also have fiduciary duties to make important decisions on the organization’s behalf. These decisions include electing directors and amending the corporation’s bylaws. The board of directors then appoints officers to run the day-to-day operations of the corporation.
How To Form a Delaware Non-Stock Corporation
To form a Delaware non-stock corporation, a Certificate of Incorporation must be filed with the Delaware Secretary of State.
A non-stock corporation formed for the purpose of operating a non-profit is required to include these specific clauses in its Certificate of Incorporation:
1.) “Said corporation is organized exclusively for charitable, religious, educational, and scientific purposes, including, for such purposes, the making of distributions to organizations that qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code.”
2.) “No part of the net earnings of the corporation shall inure to the benefit of, or be distributable to its members, trustees, officers, or other private persons, except that the corporation shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the purposes set forth in Article Third hereof. No substantial part of the activities of the corporation shall be the carrying on of propaganda, or otherwise attempting to influence legislation, and the corporation shall not participate in, or intervene in (including the publishing or distribution of statements) any political campaign on behalf of or in opposition to any candidate for public office. Notwithstanding any other provision of these articles, the corporation shall not carry on any other activities not permitted to be carried on (a) by a corporation exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or (b) by a corporation, contributions to which are deductible under section 170(c)(2) of the Internal Revenue Code, or the corresponding section of any future federal tax code.”
3.) “Upon the dissolution of the corporation, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose. Any such assets not so disposed of shall be disposed of by a Court of Competent Jurisdiction of the county in which the principal office of the corporation is then located, exclusively for such purposes or to such organization or organizations, as said Court shall determine, which are organized and operated exclusively for such purposes.”