Not only can nonprofit organizations invest in stocks, but many often do as a key part of their efforts to increase the funds they have available to give away. As long as a nonprofit’s investing doesn’t directly benefit board members or employees or cross other legal lines, having an investment portfolio can be a good thing for these types of organizations.
Understanding how nonprofits can buy and sell stock will help your organization maximize its ability to increase the money it has to fulfill its mission.
What Is a Nonprofit?
A nonprofit is an organization with a mission to help a group or cause without benefiting individual board members or employees as a key goal. Some nonprofits, such as trade associations, help certain professions and professionals. Others perform charitable, religious or research activities.
Nonprofits are first incorporated at the state level, then decide whether they want to earn 501(c)(3) federal tax-exempt status with the IRS.
Read More: Purpose of Unitizing Endowment Funds
Can Nonprofits Make Profits?
Yes, nonprofits can make more than they spend each year. However, that can’t be their goal. Additionally, if a nonprofit starts making and keeping large profits, the state or the IRS might revoke the organization’s nonprofit status.
Some nonprofits make profits that they put into an endowment, which is a fund that has so much money that it earns enough interest, or return on its investment, that the nonprofit can give away large amounts of money each year just by using its annual earnings.
Colleges, for example, create endowments that fund student scholarships. Some colleges have endowments worth billions of dollars, which generate millions of earnings each year they can use toward their mission. The principal from an endowment isn't spent – only the interest it earns.
Read More: The IRS & Charitable Tax Deductions
Nonprofits and Stocks
If a nonprofit wants to maximize its revenue generation, it can’t let its excess cash sit in a low-interest checking or savings account, or put it in a low-interest certificate of deposit or bond. Many nonprofits put their excess cash into a money market or mutual fund or purchase individual stocks. Some nonprofits accept stock as donations from corporations.
It’s perfectly legal for nonprofits to buy and sell stocks if it helps generate revenue the nonprofit can spend pursuing its mission. No board member or employee can benefit from the purchase or sale of stocks, however. That means that a nonprofit can’t buy stock in a board member’s company to help prop up the board member’s company.
Board members must not use their knowledge of their nonprofit’s activities to buy or sell stocks – this can be considered insider trading and may violate federal U.S. Securities and Exchange Commission laws. They also cannot give insider information to friends, families or anyone else who might profit from this knowledge.
Reporting Stock Purchases and Sales
Nonprofits must file tax returns each year. Those that have 501(c)(3) status file a form 990 that is available to the public for inspection. Nonprofit organizations list their income, expenses and assets on their annual returns.
This includes stock purchases and the performance of funds, pensions or stock purchases. A form 990 contains detailed information the public can use to determine if a nonprofit is one that acts in a manner a potential donor, member or partner feels comfortable with. There are also nonprofit organization lists that can help potential donors decide where to donate their money.
Steve Milano has written more than 1,000 pieces of personal finance and frugal living articles for dozens of websites, including Motley Fool, Zacks, Bankrate, Quickbooks, SmartyCents, Knew Money, Don't Waste Your Money and Credit Card Ideas, as well as his own websites.