Do Nonprofits Have Shareholders?
Nonprofit and for-profit organizations are similar in a lot of ways, which is why there is often a major misconception about nonprofit organizations and how they function as an entity.
Areas, where there are often misunderstandings, are the topics of organizational ownership and the common question: can a nonprofit make money? In this article, we will clear up the question of whether nonprofits have shareholders and how the answer affects the inner workings of NPOs, including what happens with and revenues earned.
Here’s what we’ll cover today:
- Understanding Non-Profit Ownership
- Nonpossession Impacts: Revenue
- Nonpossession Impacts: Management
- Nonpossession Impacts: Closing the Organization
- Nonpossession Impacts: Accountability
- Key Takeaways
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Understanding Non-Profit Ownership
Do nonprofit organizations have shareholders? The answer to that is simple and clear: no.
In fact, no one can claim possession of a nonprofit. They must pass organizational and operational tests in order for the IRS to recognize their tax-exempt status. Because of these requirements, most charitable organizations are formed as non-stock nonprofit corporations or LLC that are ownerless entities.
This is because NPOs are designed to carry out non-commercial actions such as education, charity, religious missions, and other services for beneficiaries, not change goods for money.
Without an owner, they cannot issue stock and have no way to offer dividends. Even the founder has no ownership rights, yet typically serves on the initial board of directors to play a major role in the decision-making process.
Even though the founder may have more acquaintance with the direction and goals of the organization, all board members share the same responsibilities with no one having more power than any other.
David is feeling good about understanding nonprofit shareholders!
What role does lacking ownership play in the overall scheme of nonprofit organizations? There are several elements of day-to-day functioning that are influenced by this distinct difference in the overall structure.
Nonpossession Impacts: Revenue
First, let’s talk about income and how nonprofit organizations make money.
It is possible to develop stores of surplus money from contributions, but the important distinction between NPOs and businesses is that this money is not profit. Although proceeds can be utilized by the organization to pay salaries for staff, the surplus money cannot be distributed to any person in the organization for any other purpose.
Typically, any surplus income is reinvested into the organization. Investing in additional programs, advertising and outreach allows an organization to grow its donor base. Broadening its reach enables it to provide its services to those who need it the most.
It takes a lot of time and effort for an organization to reach the size of the Human Rights Watch or Greenpeace, and it involves a lot of careful planning and wise financial allocation.
Nonpossession Impacts: Management
So, if there are no owners or shareholders, then who is in charge of a nonprofit organization?
These responsibilities are designated to a board of directors, voting membership, or some combination of the two. These groups make important decisions, like the annual budget, and determine strategies to ensure growth and that the organization operates in a legally compliant manner.
The board does have the option of hiring paid staff, but doing so assigns the board members a supervisory role to oversee these employees. These roles make the staff and the board members stakeholders (someone with an interest in the organization) but not shareholders (someone with ownership in the nonprofit).
Nonpossession Impacts: Closing the Organization
If there is no owner for a nonprofit, how can the organization’s assets be sold if the organization were to be closed?
The simple answer is that it can’t. If an organization decides it wants to pull the plug, they have limited options to determine what happens to their assets.
Selling assets when closing can be a bit stressful without any owners!
Generally, they must distribute whatever funds remain after debts to another 501(c)3, but some other types of nonprofits, like 501(c)7 (a majority of which are sports or social clubs like alumni organizations or country clubs) distribute their residuals among their membership base.
Nonpossession Impacts: Accountability
Then who holds nonprofits accountable for their actions?
Nonprofits still have to face liability. They are under careful scrutiny by a few different groups, which make sure that these organizations walk the straight and narrow path:
The General Public
As most nonprofits are on a mission to improve society and drive social change, the general public typically holds them accountable for their actions, keeping a watchful eye on fund allocation, as these are reported publicly.
As they are at the mercy of donations, nonprofits strive to maintain a solid reputation to build credibility with their projects and avidly work to build rapport with the public to encourage recurring donations.
Actions that damage this reputation make it difficult for an NPO to function adequately, so the public is an important overseer that they work to satisfy.
Certain states provide some regulation to NPOs by stipulating specific requirements that they must follow. These conditions may include strictly adhering to nonprofit bank account rules, providing the general public with financial information. For example, reporting funds, the filing of certain reports that provide accountability for transactions, and accounting for how the organization is using its funds to make sure that it is following proper guidelines are all potential stipulations.
Pro tip: Choosing the right bank for your nonprofit can greatly facilitate any exchanges needed between organizations. Picking one that has numerous nonprofits in their portfolio and is at ease withh nonprofit tax regulations can save you a headache down the line.
Having the privilege of tax exemption means that nonprofits have to satisfy certain criteria in order to maintain it, which means the IRS keeps an eye on their finances and ensures that all accounting is accurate and detailed.
A failure to satisfy the IRS can result in an NPO facing steep fines or having their tax-exempt status revoked, so this provides a pretty solid measure of accountability to ensure nonprofits are making accurate reports and using their resources in approved manners.
The 990 report that nonprofits must file is a very detailed, very inclusive record of all of a nonprofit’s accounting, broken down into precise categories with each major donation divided into subcategories to determine the accurate performance of their duties.
In addition, that report is then made public, so all eyes are on how nonprofits conduct themselves.
Most people are used to thinking about a traditional (for profit) business model that includes some type of ownership. Because of that, the idea of an entity existing to collect and allocate funds without an owner may seem odd.
Salma is writing down her own key takeaways!
While management of the two different models can be strikingly similar at times, this leads to many misconceptions about how nonprofit organizations function. It’s important to be able to differentiate between the two models to better understand how nonprofit organizations perform their duties.
So, do nonprofits have shareholders?
Not officially, but as the entire nonprofit model is designed with an eye to public accountability and the state and IRS make sure that these organizations are not abusing the trust that has been placed in them by the communities they serve, in a way, we all can take ownership and do our part to help these charities help others who need their services or the tangible offerings such as food or medicine that they can provide for public benefit.
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