Understanding Ownership for Nonprofit and For-Profit Business
Monday, July 15, 2019
Humans tend to be very stuck on the idea of ownership. We need to know who owns everything, from the homes we visit to the stores we shop in. For traditional businesses, this setup looks a little different than for nonprofits. If you’ve ever wondered who owns a nonprofit, the answers may confuse you.
Essentially, nobody does. If this is confusing, don’t despair--different businesses are owned in different ways, explained below.
The for-profit model
In a for-profit business, it is much easier to identify an owner, even amongst the various types. In a sole proprietorship, one person owns a business. They typically adhere to other standards of business (like licensing), but the person is the business. They’re responsible for debts, liabilities, and income, which is reported on their tax return.
In a general partnership, at least two people own a business, which requires a bit more formality. The business exists separately from the individuals, including on formal documents like tax returns. These types of businesses are taxed as a partnership, not a business.
In a corporation, the business is a legal person. Ownership is vested in the shareholders. Shares of stock are established when the business is founded, and how many you own determines the percentage of the business that you own. The corporation is responsible for liabilities and debts, not the shareholders themselves.
In an LLC, a general partnership combines with the limited liability of a corporation. There are members (not shareholders), and the percentage of ownership corresponds to the investment made in the business.
The nonprofit model
Nonprofits can sometimes be LLCs, but they do not overlap with other for-profit models of ownership. Typically, nonprofits are corporations, which have no owners (shareholders) at all and thus don’t have stock. They’re committed to a cause that falls outside of commercial use, and the rules are different.
A nonprofit might be an unincorporated association, though nonprofit accountants and experts don’t recommend this. Nonprofits may be LLCs or utilize a trust structure. Even in these cases, there are no stocks allowing for ownership, so responsibility becomes that of the board of directors or trustees, who oversee the legalities of an organization.
And, if something is not really owned, it cannot be sold. This means that, in the event of a nonprofit disbanding, assets must be distributed to another 501(c) (3) after debts have been taken care of. Of course, there may be ways around some of the more stringent formalities, but that’s a more complicated discussion.
Nonprofits aren’t owned by anyone, which allows them to operate in different and meaningful ways.