A common question for people who are new to the nonprofit world is who “owns” the nonprofit organization. Is it the people who initially organize it? Major donors? Its directors or managers? For those who come from the corporate world, where the interests of owners are often paramount in decision making processes, it can be strange to learn that nonprofits have no owners.
Nonprofit organizations typically are organized either as unincorporated associations or as nonprofit corporations. Associations are the default form of organizations that have been set up by their founders, but haven’t filed the necessary paperwork with the state to become corporations. Nonprofit corporations have taken that further step, submitting articles of incorporation and other forms to the state. There are other important distinctions between these two types of entity, but neither of them have “owners.”
Instead of owners, nonprofits have stakeholders. Stakeholders don’t own the nonprofit, either, and their position relative to the nonprofit is quite different from, say, a for-profit corporation’s shareholders. Stakeholders include everyone who has an interest in the operation of the organization. That includes the nonprofit’s founders and directors, but it also includes donors, employees, volunteers, and beneficiaries. In other words, the realm of potential stakeholders is fluid and open-ended. That is why nonprofits can be thought of as being owned by the public at large.
The lack of an owner has significant consequences for how a nonprofit entity is managed. By definition, of course, a nonprofit is not run to financially benefit any individual. Unlike a for-profit business entity, a nonprofit isn’t an asset that can be sold.
But what about a nonprofit’s members? Aren’t they like shareholders? Well, only in a limited sense. A nonprofit’s members are people who have the legal right to vote for an organization’s directors and for important transactions, like winding up operations or merging with another nonprofit. Members don’t receive financial benefits from the nonprofit and don’t have anything resembling an ownership interest in the organization. They don’t buy their membership, although donors are sometimes given membership rights. (This concept of member is distinct from memberships that are sold to the public, such as annual passes to a museum. Those types of membership don’t typically include voting rights.)
The Church Law Center of California works with churches and secular nonprofit organizations to get them organized and operating. If you are considering forming a nonprofit and you have questions about how the process works, we are happy to help. Call us at (949) 892-1221 or reach out to us through our contact page.