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:
• Testing for public safety
• 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
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:
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.
THE AUTHOR OF THIS BLOG ARTICLE IS NOT A LAWYER AND HARVARD BUSINESS SERVICES, INC. IS NOT A LAW FIRM. THE ARTICLE ABOVE IS NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. THIS SHORT ARTICLE IS STRICTLY TO MENTION SOME ASPECTS OF DELAWARE’S CORPORATION LAWS AND/OR LAWS RELATING TO OTHER FORMS OF ENTITIES WHICH YOU MAY NOT BE FAMILIAR WITH. WE RECOMMEND THAT YOU CONSULT WITH A LAWYER BEFORE FORMULATING A STRATEGY WHICH WILL BE SUITABLE FOR YOUR SPECIFIC CASE.