Nonprofit Membership Class: Intentions Matter

If you have an entrepreneurial spirit and you're interested in helping people, you can start a nonprofit organization. A nonprofit organization is one that works for the public good rather than for profits (like a typical private business). Generally speaking, non-profits receive tax-exempt status from federal and state governments, as long as they meet certain conditions.

Nonprofit organizations can be incorporated or unincorporated. Incorporating a nonprofit organization can provide various benefits, including limiting personal liability. This article gives an overview of nonprofit corporations, including the concept of voting rights. 

What Is a Nonprofit Corporation?

A nonprofit corporation is one that carries out a literary, religious, scientific, educational, or charitable purpose. The biggest difference between a traditional for-profit corporation and a nonprofit corporation is that a nonprofit is not required to pay state or federal income taxes on profits made from business activities related to the corporation's purpose. The tax exemption for nonprofit corporation is in place to encourage these types of organizations to continue their work in benefiting society. Other than the tax exemption, a nonprofit corporation is just like a traditional corporation – it is required to observe corporate formalities and the directors, officers, and members enjoy limited personal liability.

Nonprofit corporations must comply with certain rules in order to keep their nonprofit tax status. First of all, the nonprofit cannot receive substantial profits from activities that are unrelated to the nonprofit's purpose, and any such profits are subject to income tax. Another restriction placed on nonprofit corporations is that they are not allowed to make monetary contributions to political campaigns and can only be involved in a limited amount of political lobbying. Finally, although directors, officers, and members are allowed to receive a reasonable salary and reimbursement for expenses, the nonprofit corporation can't distribute its profits to them.

Voting Rights in a Corporation

It's understandable that the founders of a corporation would want to maintain control of the corporation. Due to the typical structure of a corporation, the best way to keep control is to maintain voting rights. Generally speaking, the shareholders and directors both have voting rights. In the normal course of a corporation, shareholders vote for directors once a year, before and during the annual shareholder meeting. Shareholders also vote for various proposals put forth by the board of directors.

When it comes to nonprofit membership, there isn't any law that prevents giving the voting membership class to the founders when they start out. However, nonprofit membership can be a delicate issue. If you are attempting to take away voting power from members that currently have that power, those members will most likely object. If those members that had voting rights stripped away challenge in court, they may prevail.

Getting Legal Help

If you are considering taking away voting rights from current members in order to keep the nonprofit in the control of the original members, you should probably consult with a local business and commercial attorney about laws related to nonprofit membership before making any binding decisions.

For more information and resources related to this topic, you can visit FindLaw's section on Incorporation and Legal Structures.

Next Steps

Contact a qualified business organizations attorney to help you choose the best formation for your business.

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