Understanding Nonprofit Ownership
No one person or group of people can own a nonprofit organization. You don’t see nonprofit shares traded on stock exchanges, and any equity in a nonprofit organization belongs to the organization itself, not to the board of directors or the staff. Nonprofit assets can be sold, but the proceeds of the sale must benefit the organization, not private parties.
If you start a nonprofit and decide at some point in the future that you don’t want to do it anymore, you have to walk away from it and leave the running of the organization to someone else. Or, if the time has come to close the doors for good, any assets the organization owns must be distributed to other nonprofits fulfilling a similar mission.
When nonprofit managers and consultants talk about “ownership” of a nonprofit organization, they’re using the word metaphorically to make the point that board members, staff, clients, and the community have a stake in the organization’s future success and its ability to provide needed programs.
Benefiting the public
People form nonprofit organizations to create a public benefit. In fact, nonprofit corporations are referred to sometimes as public benefit corporations. A nonprofit organization can’t be created to help a particular individual or family, for example. If that was possible, we’d all have our separate nonprofit organizations.
You can start a nonprofit to aid a specific group or class of individuals — everyone suffering from heart disease, for example, or people living below the poverty level — but you can’t create a nonprofit for individual benefit or gain. But just because you’re working for the public’s benefit doesn’t mean that you can’t receive a reasonable salary for your work. And, despite the name “nonprofit,” such an organization can have surplus funds — essentially, a profit — at the end of year. In a for-profit business, the surplus money would be distributed to employees, shareholders, and the board of directors; however, in a nonprofit organization, the surplus funds are held in reserve by the organization and aren’t distributed.
Accounting to the public
People are paying more attention to nonprofit organizations these days. A few examples of excessive salaries reported in the media and concern about how some nonprofits have spent donated funds have prompted donors, legislators, and the general public to ask more questions regarding nonprofit finances and management.
Although nonprofit organizations aren’t public entities like governmental agencies and departments, their tax-exempt status and the fact that contributions are tax-deductible require them to be more accountable to the public than a privately owned business.
At a minimum, federal law requires that nonprofits with annual revenues totaling more than $25,000 must file a report (Form 990) every year with the IRS, summarizing income and expenses and revealing staff and consultant salaries that are more than $50,000. States also have their own reporting requirements, and both state and federal legislatures are considering more extensive nonprofit accountability laws.
Even if your nonprofit has revenues of less than $25,000, you should still consider filing a 990 report so you can share information with potential donors. In addition, filling out a 990 report lets the IRS know that your nonprofit is still alive and kicking.
Federal law also requires nonprofits to make copies of their three most recent 990 reports, as well as their application for tax exemption, which is available for public inspection. State and local laws in your area may require additional disclosures. Posting your 990 reports and other required documents on the Web is an acceptable way to meet disclosure requirements.