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.
A non-stock corporation is a corporation (either for-profit or non-profit) that does not issue shares of stock. For corporations that do issue stock, the board of directors will define the number and type of shares issued by creating a corporate resolution.
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.
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.
Is a Non-stock Corporation Closely Held?
A closely held corporation is, by definition, a private company, but a private company may still have stock.
Who are the Owners of a Non-stock Corporation?
A non-stock corporation may have owners. Since there are no shares of stock, the owners have no monetary ownership, but they would have the right to a share of the proceeds if the corporation were sold.
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. Non-profits typically have members, and there may be a board of directors of the membership, with paid staff and executives.
Are There Other Types of Non-stock Corporations That are Not Non-Profits?
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 leagues
- labor organizations
- business leagues
- recreational clubs
- other organizations (such as amateur athletic organizations) that unify a common social goal
- educational organizations,
- mutual insurance companies, or
- municipal corporations.
Do Members of a Non-stock Corporation Have Liability Protection?
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 Corporation's 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.