For an organization to be nonprofit in America, it must be a nonprofit corporation. Although nonprofit corporations cannot have owners or generate profit for investors, they have the same ability as other corporations to own property, including securities and other investments. Unlike a for-profit corporation, a nonprofit must take careful account of what it does with investment returns, ensuring they are used to reinvest in the corporation and its socially beneficial programs.
Nonprofits are given tax-exempt status because they perform socially beneficial functions including charity, education, religious practice, health care, research, social activism and community events. To fulfill their purposes, they need resources -- including money. Therefore, nonprofits can engage in legal means to earn money, including investments.
Directors and officers of nonprofit organizations must be able to show the Internal Revenue Service and state tax boards how they use their revenues. This includes the proceeds from the sale of stock and dividends. Nonprofit leaders must track revenues and ensure they go toward legitimate expenses and programs in keeping with their organization's mission.
Dividends and profits from stock sales must remain with a nonprofit. Nonprofits cannot pass along investment proceeds to directors or officers, as this constitutes a violation of federal law. Both the IRS and state governments prohibit using a nonprofit as a means to hide assets, disguise transactions or evade taxes. Directors and officers must conduct all transactions and business in the legitimate interests of their nonprofits.
Conflicts of Interest
A nonprofit corporation may cross legal and ethical boundaries if it invests in ways that personally benefit directors and officers. For example, if a director of a nonprofit is a major shareholder, director or executive of a publicly traded company and the nonprofit invests heavily in her company, it poses a conflict of interest. The director is using the nonprofit to support his for-profit interests and bolster stock prices. Depending on the circumstances, such an action could also constitute insider trading if the director has the nonprofit invest at an opportune moment based on personal knowledge of coming events that affect stock price. Ethics and the law require nonprofit directors to act in the interest of their organizations, not themselves.
- Commonfund Institute: Principles of Nonprofit Investment Management
- Nonprofit Risk Management Center: The Care and Feeding of a Healthy Organization
- Internal Revenue Service (IRS). "Publication 557," Page 3. Accessed Aug. 26, 2020.
- National Center for Charitable Statistics. "The Nonprofit Sector in Brief." Accessed Aug. 26, 2020.
- Internal Revenue Service (IRS). "Publication 526: Charitable Contributions," Page 3. Accessed Aug. 26, 2020.
- Internal Revenue Service (IRS). "Form 1023 and 1023-EZ: Amount of User Fee." Accessed Aug. 26, 2020.
- Harvard Business Review. "Should Your Business Be Nonprofit or For-Profit?" Accessed Aug. 26, 2020.
Eric Feigenbaum started his career in print journalism, becoming editor-in-chief of "The Daily" of the University of Washington during college and afterward working at two major newspapers. He later did many print and Web projects including re-brandings for major companies and catalog production.