What Is a Non-Stock Corporation?

By Paul Sponaugle Tuesday, July 23, 2019

what is a non-stock corporation?

These days, the term "non-stock corporation" has essentially become synonymous with the term "non-profit corporation."

But what is a non-stock corporation?

The common use of the non-stock corporation as the vehicle with which to obtain tax-exempt or non-profit status from the IRS has led to an interchangeability of the two terms, but this can be problematic.

The notion that non-stock corporations and non-profit corporations are the same has led many individuals to believe that if you form a non-stock corporation, you are forming a non-profit organization, which is not true.

In addition, individuals assume that as long as the corporation has no stock, it is a non-stock corporation and therefore eligible for tax exemption, which is also not true.

A non-profit (notice I left out the word "corporation") is most commonly an organization that has obtained tax exemption, under section 501(c)(3) of the IRS code, by filing Form 1023.

To qualify, the organization must be a corporation, community chest, fund or foundation (a trust is a fund or foundation and will qualify) that is created, organized and operated exclusively for one or more of the following purposes:

  • Religious
  • Charitable
  • Scientific
  • Testing for public safety
  • Literary
  • Educational
  • Fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment)
  • The prevention of cruelty to children or animals

non-stock corporation

It just so happens that many states, including Delaware, have a type of entity whose articles are designed to facilitate the application for tax exemption.

Can you guess what that entity is called? That’s right, it’s the non-stock corporation.

Do not confuse this with a stock corporation that has no authorized stock.

(Yes, it is possible to have a stock corporation that does not possess authorized stock. Even though it makes no sense, Delaware does allow stock corporations to file Articles of Incorporation without authorizing shares of stock. It is rare but we have seen individuals accidentally file corporations in this manner. This error can be corrected, but it will cost you precious time and money.)

A Delaware non-stock corporation has no capital stock and is required to disclose its non-profit intentions in its Articles of Incorporation at the time of filing.

It is typically but not exclusively used by organizations that plan to apply for tax exemption under section 501(c)(3) of the IRS code. Other applications of the non-stock corporation may include:

  • civic leagues
  • labor organizations
  • business leagues
  • recreational clubs
  • other organizations (such as amateur athletic organizations) that unify a common social goal

These organizations may be eligible for tax exemption under a different section of the IRS code. For more information on tax-exempt status for your organization, refer to IRS Publication 557.

*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.

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