Indiana Business Law Blog
The answer to that question is remarkably simple but surprising to many: No one owns a nonprofit corporation. To understand why that is so, let’s compare nonprofit corporations to for-profit or business corporations.
Business Corporations
Imagine you buy 100 shares of common stock in a corporation on the New York Stock Exchange. Congratulations! You’re a shareholder. Your 100 shares of stock give you specific economic and noneconomic rights.
First, the noneconomic rights. You have the right to a voice, one vote for each share of stock, in selecting the directors who are responsible for the overall operation of the company.
The economic rights consist of the right to receive dividends, if there are any. Some companies have never paid a dividend; others have a long history of paying a dividend every quarter. But if the directors of the company decide to pay a dividend this quarter of one dollar per share, you will receive a check for $100.
Although some small corporations restrict the transfer of their stock, shareholders of most large corporations are free to sell their stock to anyone who wants to buy it, either on a stock exchange or in a private sale. Shareholders are also free to give their stock away or leave it to their heirs as part of their estates. Regardless of how the stock is transferred, both the economic and noneconomic rights travel along with the stock. Those rights belong to whomever owns the shares.
For those reasons, the law treats stock in a business corporation as a form of property — intangible property, but property nonetheless — that is owned. By owning the company’s stock, the shareholders, collectively, own a business corporation.
Nonprofit Corporations
Nonprofit corporations are different. They issue no stock and pay no dividends. There are no property rights to a nonprofit corporation. They do not have shareholders, but some have members with noneconomic rights that resemble the noneconomic rights of shareholders. Others have no members. We’ll take a look at membership organizations first.
Nonprofit Corporations with Members
Most nonprofit corporations with members allow anyone to become a member, sometimes upon the payment of dues but often just by applying. Like the shareholders of a business corporation, the members of a nonprofit corporation have the noneconomic right to vote in an election of directors.
Unlike shareholders in business corporations, members of nonprofit corporations generally receive no economic rights or benefits.* And unlike stock in a corporation, a member in a nonprofit corporation cannot transfer the membership to another person.
For those reasons membership in a nonprofit corporation is not considered a property right, and members do not own anything. So even if a nonprofit corporation has members, they do not own the organization.
Nonprofit Corporations without Members
It’s easier to see why no one owns a nonprofit corporation with no members. Like membership organizations, they issue no stock and pay no dividends, so there are no economic rights. The difference is in the noneconomic rights. If there are no members, who selects the directors?
The board of directors of a nonprofit corporation without members is self-perpetuating. The directors elect their own successors, typically at an annual meeting, when they elect a new person (or re-elect the same person) to replace each director whose term is expiring.
So the noneconomic right to vote in an election of directors belongs to the directors themselves, but they do not own the non-membership corporation any more than the members own a membership corporation.
Owning and Controlling Aren’t the Same Thing
No one owns a nonprofit, but who controls it? That’s a different question that we’ll take up in another article.
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*Like most states, Indiana has a category of nonprofit corporations, called mutual benefit corporations, in which the members may receive some benefits with economic value. Country clubs and homeowner associations are common examples. For simplicity, this article does not address mutual benefit corporations, only public benefit corporations.