Nonprofit Law Resource Library
Question & Answer
Q & A
Nonprofit Governance, Boards & Bylaws
- I believe that some states allow nonprofit organizations to sell shares in their corporation. But surely they can't pay dividends to shareholders, can they? What, then, is the benefit of this stock-based arrangement?
The Internal Revenue Code clearly provides that no part of the earnings of an organization may inure to the benefit of any individual. With the rare exception of certain farmers' cooperatives, tax-exempt organizations may not issue stock.
However, your use of the word "shareholder" may refer to a slightly different concept. As you perhaps know, voting rights and control within nonprofit organizations may be assigned in any number of ways. Most commonly, for instance, governing boards are elected by members of the organization or are comprised of self-electing directors. A few organizations assign "shares," as a percentage of voting rights, to individuals or groups specified in the bylaws.
This usage may still appear in older state statutes (none I am familiar with), but does not refer to the actual ownership of stock. To avoid unnecessary problems with the IRS it is probably best, as you can well imagine, not to describe directors, members, contributors, or others as shareholders.
