Musings from an Old Soul: No One Owns a Nonprofit Corporation

This is the first of a series of “Musings from an Old Soul” blog posts about basic nonprofit formation and operational issues.

I was innocently adding Splenda to my Ethiopian coffee when he uninvitedly took a seat and said, “I want to start my own nonprofit. Can you help with that?”  [I’m thinking:  “Oh boy, here we go.”] I say: “So tell me more.” He says, “I want to start my own nonprofit to help senior citizens reduce energy costs through energy efficient home improvements and replacement appliances.  I ask, “Do you have any prior experience doing this, or running a business or working with nonprofits?”  “No,” he said, “I just helped grandma install insulation, replace light bulbs, and get a new refrigerator and her electricity bill went down $100 a month.  She’s giving me $25.00 a month to say ‘thank you’.  I figure if I start my own nonprofit I could do the same thing for other senior citizens and turn it into a full-time job for me at the same time.  I am really excited about this. I am going to call it Geri-Energy Solutions.”   [I’m thinking: “This is going to get interesting really fast.”]  I say: “That sounds really interesting. Here is one of the first things that I think you should  consider:”

Nobody owns a Nonprofit Charitable Organization

Generally, nobody “owns” their own nonprofit.  You can own a for-profit company that is not making any money, and is therefore effectively a “nonprofit” (making no profit)- but if what you want is a nonprofit 501(c)3 public benefit corporation, it is important to understand that you cannot legally own it.  When most people think of “nonprofits” they think of “nonprofit public benefit corporations” or “public charities.” Habitat for Humanity, Inc., Big Brothers Big Sisters, Inc., and the American Cancer Society are good examples of public charities. Charitable organizations operating legitimately exist for “public benefit” and not for the interests of one or more private individuals.  Technically, public charities are “public trust” organizations, meaning that they are granted the right to exist by states for the benefit of the public and are subject to a variety of restrictions to ensure that they are operating in a manner that advances the public purpose for which they were established.  These organizations may also be recognized as exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code if the IRS determines that their purposes, proposed or actual activities, and revenue models meet certain criteria. For example, unlike a private company, charitable organizations must insure that their net earnings are used to advance their charitable purpose, as opposed to being distributed to private individuals as dividends or distributions of “profit.”

“So you mean I can start this organization, but I can’t own it and I can’t ‘profit’ from it, my prospective client asked.  “Exactly,” I said. “But there is a way to do this legitimately and be fairly compensated for your efforts.” “Well, how I do that?” he anxiously inquired.  I smiled.  “For that,” I said, “you are going to have to schedule an appointment.”