What Is a Non-Stock Corporation?

By Paul Sponaugle , Jarrod Melson Tuesday, July 23, 2019

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 terms "non-stock" and "non-profit," 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.

What Kind of Company Can Be a Non-Profit?

A non-profit (notice we 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 corporationWhat Is the Purpose of a 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 serves little purpose, 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.

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

How Do Non-Stock Corporations Work?

As the name implies, non-stock corporations do not issue stock and therefore have no shareholders. Such corporations must have members rather than shareholders, but the Delaware General Corporation Law (DGCL) allows the directors to serve as the only members. Thus, a non-stock corporation’s membership could be comprised solely of one or more directors who elect themselves to the position.

In addition, a non-stock corporation sponsor can create classes of membership with such differing powers and voting rights as it deems appropriate, including membership status which has no voting rights and no real power.

The board can set the conditions for membership as it sees fit in the Certificate of Incorporation or the bylaws. Some non-stock companies offer memberships to anyone who elects to be a member and pays annual dues; other non-stock companies define the members as a specific group of people. For example, a homeowners' association may require members to be owners of property in a specific neighborhood, for obvious reasons.

Because it intends to register as a non-profit entity with the IRS, certain features of the corporation are determined by IRS requirements. For example, generally, no person may profit from the activities or operations of a non-profit corporation, as would be the case in (and the ultimate goal of) in a general for-profit corporation. However, this does not mean that the people working within the non-profit donate their time -- non-profit companies can pay their staffs salaries and bonuses like any corporation would.

In addition, a non-profit must adopt policies to address situations where a director faces a conflict of interest, as no person can derive a financial or other improper benefit from its work for or association with the non-profit company. 

For official information on tax-exempt status for your organization, refer to IRS Publication 557.

Next: Non-Stock vs Non-Profit Corporation

 

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