You might think that having shares of stock is a part of the definition of a corporation, but stock ownership isn't a requirement for setting up a corporation. Another option is non-stock corporation.
What is a Non-Stock Corporation?
A non-stock corporation is a corporation (either for-profit or non-profit) that does not issue shares of stock. Most non-stock corporations are non-profits, but they don't have to be.
A non-profit corporation is non-stock by definition since the purpose of the non-profit corporation is not to pay shareholder dividends. Non-profit corporations often have members, but these members are not owners and they don't share financially from their membership.
Each state has different laws regarding non-stock corporations. Check your state's division of corporations (usually in the state secretary of state's office) or similar state agency for more information.
A for-profit corporation may be non-stock for several reasons:
- The corporation may be closely held (owned by only a few individuals} who have no interest in selling shares
- The corporation may be formed for a single, short-term purpose or a specific transaction. For example, the corporation may be formed to build an office building or another construction project
- The corporation may be formed solely for the purpose of working with another company or individual for a joint venture
Who are the Owners of a Non-stock Corporation?
A non-stock corporation may have owners, who are usually described as members. When you form a non-stock corporation, you must designate the conditions of membership and describe different types of membership.
Non-profits set up as non-stock corporations typically have members, but these individuals are not owners in the sense that they receive a share of any money received by the non-profit.There may be a board of directors of the membership, with paid staff and executives.
What Types of Corporations are Non-Stock?
Other types of organizations may decide to set up a non-stock corporation, even though they don't want to claim tax-exempt status as a non-profit. Some other common types of non-stock corporations are:
- civic organizations
- charitable or fraternal organizations
- religious organizations
How Non-Stock Corporation Membership Works
Most non-stock corporations are non-profits, and many have members. Most membership organizations are
501(c)6 organizations: business leagues, chambers of commerce, real estate boards, boards of trade, and professional football leagues
501(c)(4) organizations: social welfare organizations, including civic leagues and local associations of employees, homeowners associations and volunteer fire companies
Membership can be informal, with members receiving information and resources, but with no say in the running or governing of the organization. Formal membership gives members the right to participate in the governing of the organization. This might include electing board members, approving changes to the bylaws, and making major decisions for the organization.
Because the non-stock corporation is a separate entity, board members and general members have the same liability protection as shareholders, executives, and directors of stock corporations.
Forming a Non-stock Corporation in a State - An Example
Virginia allows the formation of a non-stock corporation. Under this state's law, the corporation may not distribute dividends or income, except as "reasonable compensation" or upon the dissolution or liquidation of the corporation.
To form this non-stock corporation, Articles of Incorporation must be filed with the Virginia State Corporations Commission. The corporation may have members and may designate classes of membership and rights/benefits to each class of members, including voting rights.
Under Virginia law, the non-stock corporation is run by its board of directors, which appoints officers of the corporation.
Non-Stock Corporations in Other States
Delaware allows non-stock corporations, which are separate from non-profit corporations. This business type doesn't allow capital stock and it asks for conditions of membership, as stated in the by-laws of the corporation.
Connecticut also allows non-stock corporations for non-profits. the corporation has several options for membership:
- No members
- members who aren't entitled to vote
- One class of members
- Multiple classes of members