Nonprofit “ownership” can be a confusing, counterintuitive concept. It can implicate both financial and control issues for stakeholders. Consider the following scenario.
Jack founds Nonprofit Beanstalks with two supportive friends to improve the environment. The first week, Jack contributes $20,000 to launch Nonprofit Beanstalks and otherwise invests extensively through volunteer service as its President, focusing on eco-friendly gardening as the first initiative. One year later, Jack is worn out and grumpy, and Jack’s friends aren’t so friendly to him anymore. Thinking that they can run Nonprofit Beanstalks much better than Jack, they vote him out of office and ask their new friend Jill to take over as its President. Jill is delighted. With her friends’ support, she will carry the organization up the environmental hill through a new clean water project. Jack is furious. He demands repayment of his $20,000 contribution and tells his former friends that they better focus on gardening.
May he get the funds back? And can he insist that Nonprofit Beanstalks return to its roots? No, and no!
No founder, director, or officer of a nonprofit corporation has any ownership interest in the nonprofit. Nor can he or she control the nonprofit corporation after being removed from office. This lack of private ownership and control is the key distinction between nonprofits and private businesses such as sole proprietorships, partnerships, and for-profit corporations,
So, who does own a nonprofit? The answer is “Nobody and everybody!” Unlike these other types of business organizations, a nonprofit is not privately owned by anyone. The organization’s assets are held in trust for the use and benefit of the beneficiaries in accordance with the purposes for which it is organized. The nonprofit’s directors are legally responsible as fiduciaries to ensure that the corporation’s assets and operations are used properly for nonprofit purposes. They are accountable to governmental authorities such as the IRS and state Attorney General offices (as well as to donors and other stakeholders, albeit on a more practical level). This trust concept is central to nonprofit law, and raises important issues for nonprofit leaders.
An example is evident in a recent Nonprofit Quarterly story about the potential sale of a nonprofit hospital in Missoula, Montana. (For the article, click here) According to the article, the nonprofit hospital, “built by local donations and taxpayer-supported bonds, may soon be sold to the for-profit Regional Care Hospital Partners of Brentwood, Tennessee. Some community members are crying foul…” Essentially, they want a stronger voice to determine what will happen to the nonprofit hospital. But the donors can neither get their donations back nor - absent their own board membership - control what happens to the nonprofit hospital. Their influence can only be through community pressure and calls for governmental accountability.
In the case of Jack and Jill, Jack must accept his losses and move on to hopefully greener pastures, perhaps with new friends. In the case of the Montana hospital, the result could be that the nonprofit hospital continues as is, thanks to community pressure. Alternatively, its assets could be transferred to a new nonprofit organization, to start a new era of charitable activities through a different nonprofit. In no event, however, could the nonprofit’s assets simply be given to any private person or divided up among the donor base. Another option, which is sought in the Montana case, is for the nonprofit’s assets to be sold at a fair market value. In such event, a high-quality appraisal will be essential for the board directors to ensure that they have fulfilled their fiduciary duties to protect the organization’s charitable assets. The money from the sale, however, would still have to be put to charitable use, most likely by transferring the funds to another nonprofit organization.
For further information concerning nonprofit governance and related considerations for legal compliance, please contact one of our attorneys at 312.626.1600 or email@example.com, or visit us on the web at www.wagenmaker law.com.