Non-stock corporation explained

A non-stock corporation (or nonstock corporation) is a corporation that does not have owners represented by shares of stock,^[1] in contrast to a joint-stock company. A non-stock corporation typically has members who are the functional equivalent of shareholders in a stock corporation. The members may have the right to vote (and other rights) based on the bylaws of the corporation. Non-stock corporations may also choose to have no members.

The vast majority of not-for-profit corporations are non-stock corporations. (Some states, such as Kansas, allow nonprofits to issue stock.^[2] For example, the Cato Institute is set up this way.^[3]) While rare, it is also possible for a for-profit corporation to be a non-stock corporation.

In many jurisdictions, a nonstock corporation can elect to become a stock corporation if certain conditions are met. For example, the Cato Institute was once a nonstock corporation under Kansas law that elected to become a stock corporation.^[3]

Jurisdictions

United States

In the United States, law in Pennsylvania and Virginia supports the formation and existence of non-stock corporations,^{[4] [5]} as well as other states.

Delaware

In Delaware, nonstock corporations are provisioned for by its General Corporation Law.^[6] According to DGCL, Delaware only allows only the directors to serve as members of a non-stock corporation.^[7]

Kansas

In Kansas, some provisions of the Kansas general corporation code also apply to nonstock corporations, where a nonstock corporation is defined as a "corporation organized under the Kansas general corporation code that is not authorized to issue capital stock."^[8]

Maryland

According to the Maryland Code, the provisions of Maryland General Corporation Law apply to nonstock corporations except in special circumstances.^[9]

Pennsylvania

Title 15, Chapter 21 of the Consolidated States of Pennsylvania provides the laws regarding Pennsylvania nonstock corporations.^[10] Existing stock corporations can elect to become nonstock corporations.

Philippines

In the Philippines, a non-stock corporation may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes and must distribute no part of its income as dividends to its members, trustees, or officers, and any profit obtained as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized.^[11]

Types

For profit

There are different reasons for forming a non-stock, for profit corporation.

• A corporation created solely to act as nominal owner of some property might not need to have shares of stock because all of the directors or members would have been co-owners. For example, owning a safe deposit box in a corporate name: if the corporation is non-stock, the directors of the corporation are not its owners, and thus have no personal ownership of shares of stock of the corporation, and as the safe deposit box is in a corporate name, it is not listed as belonging to the directors either.
• By not filing as a non-profit, it is not necessary to obtain IRS registration and fees. For corporations being operated for short-term purposes, this may be adequate.
• While members of a non-stock corporation are not entitled to dividends, if it is a for-profit corporation, they are entitled to share in the proceeds in the event the corporation is liquidated; this is not available if the corporation is non-profit; if a non-profit is liquidated, all the proceeds must either be donated to another surviving non-profit or escheated to the government.
• In the event of a for-profit corporation being formed for a single business purpose such as a one-shot transaction, i.e. construction of an apartment building, at the end of the transaction (when the apartments are sold) the corporation can be "wound up and dissolved" (liquidated) and the profits paid to the members or directors without deduction. But if it is a stock corporation, it may be necessary to pay taxes on the profits, then pay the benefits as dividends, which are taxable to the recipients. (This problem is often referred to as "double taxation.") A payback of the assets of a corporation would generally be tax-free until all of the original capital invested in the corporation were returned. Thus use of a for profit non-stock could be used to legally avoid certain taxes.
• While stock in a corporation is considered an asset and reportable (and could be seized in the case of a lawsuit or a government confiscation or nationalization), being a member of a corporation or a director is not an asset and thus is not subject to seizure or reporting for asset purposes. Thus it may be used to hide or obscure assets without doing anything illegal.
• Someone is incorporating a business for liability protection, but is not really interested initially in being able to sell the business. A company can always switch from stock to non-stock and vice versa at any time, usually by paying a small fee to change the articles of incorporation, and potentially a stock fee if the corporation changes from non-stock to stock. (Changing from non-profit to for-profit is generally not allowed absent special permission.) Generally the renewal fees on a non-stock corporation can be substantially less than a stock corporation. For example, the fee for incorporating any non-stock or incorporating a stock corporation up to a small number of shares, say 40,000 might be $200, but a year later, at renewal, the renewal fee for a non-stock corporation would be $50, while the stock corporation would have a renewal fee of $50 plus a stock fee of perhaps another $200 or so.
• Some jurisdictions impose a fee for an annual report filed by stock corporations (Maryland, for example, charges $300 a year), and in some states impose this fee on LLCs, but do not impose this fee on non-stock corporations. Generally, most for-profit companies are stock corporations; this thus allows charities and churches to incorporate without paying this fee, as a non-profit is always a non-stock corporation. Note this fee is in addition to the fee charged for the yearly renewal of the corporation's charter.

In many jurisdictions the yearly renewal fees imposed on corporations can be higher than the initial filing fee.

Notes and References

1. Book: Goldmark & White . White and Goldmark on non-stock corporations. Godfrey Goldmark . Frank White . 1913. Baker, Voorhis. New York Public Library. 3.
2. http://www.lawforchange.org/NewsBot.asp?MODE=VIEW&ID=2346
3. News: Cato . 2023-09-23. The Washington Post.
4. Web site: Virginia SCC - Virginia Nonstock Corporations . 2023-07-17 . www.scc.virginia.gov.
5. Web site: Chapter 21. - Title 15 - CORPORATIONS AND UNINCORPORATED ASSOCIATIONS . 2023-07-17 . www.legis.state.pa.us.
6. Web site: Delaware Code Online .
7. Web site: What is a Non-Stock Corporation? | Harvard Business Services .
8. Web site: Statute | Kansas State Legislature .
9. Web site: Laws - Statute Text .
10. Web site: Title 15 .
11. Web site: Republic Act No. 11232 : Revised Corporation Code of the Philippines. Title XI. February 20, 2010. sec.gov.ph.