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What is a nonprofit corporation?

A nonprofit corporation, also referred to as a "not for profit" corporation, is a corporation that does not engage in a commercial or business enterprise for financial gain. Nevertheless, such a corporation may make incidental income or profit and thereby acquire a surplus or incidental reserves in carrying out its primary purpose.

A typical nonprofit corporation is normally organized for charitable, civic, religious or other similar benevolent purpose. However, nonprofit corporations are not limited solely to charitable related organizations; they may also include nonprofit business corporations. A good way to determine if a corporation is nonprofit is to ask, "Will the corporation be exploited for monetary gain?" If the corporation is to accept donations which the donors expect to submit to the IRS for tax credit, the corporation must qualify under Section 501(c)(3).

Characteristics of a nonprofit corporation

In a nonprofit corporation, no dividends are paid and no part of the income of the corporation is distributed to its members, officers or directors with the exception of reasonable compensation for services rendered and distributions upon dissolution or liquidation. The motives, methods and operations of a nonprofit corporation are generally set forth in its articles of incorporation.

In Delaware, the applicable provisions of the General Corporation Law apply to nonprofit corporations as well as business corporations. See 8 Del. C. §§ 101, 102. Unlike normal business corporations however, nonprofit corporations are generally tax-exempt organizations. Section 501(c) of the Internal Revenue Code provides a list of requirements that a corporation must meet if it wishes to qualify as a tax-exempt organizations.

What is a nonstock corporation?

A nonstock corporation, similar to a nonprofit corporation, is one that is not organized for financial gain. 18 Am Jur 2d Corporations § 34. Rather, it is organized to provide a particular service to its members under a plan without any profit motive. Id. Nevertheless, members of a nonstock corporation have an interest in corporate property similar to that of stockholders in a regular corporation. Id. See also 8 Del. C. § 215 (voting rights, quorum and proxy requirements for nonstock Delaware Corporations)

Characteristics/ Shareholder Rights

Although it is a corporation, such an entity is similar in many respects to an unincorporated association and the same rules concerning members and their rights apply generally to both. Id. For example, a nonstock corporation is treated as an unincorporated association in determining the rights of its members. 18A Am Jur 2d Corporations § 931. Thus a member of a nonstock corporation may be terminated by expulsion or suspension in accordance with the corporation's articles or bylaws. Id. The power to expel or suspend members should be for good cause and the member should be notified of the charges and provided with a hearing and opportunity to defend. Id. at § 935

While a shareholder cannot technically withdraw from a stock corporation, a member may withdraw, resign or abandon his membership from a nonstock corporation. 18 Am Jur 2d Corporations § 34. Absent any law or rule to the contrary, a member of a nonstock corporation may resign by simply announcing his intention to do so and no acceptance is required. 18A Am Jur 2d Corporations § 931. If the bylaws of a nonstock corporation provide for withdrawal from the corporation, they can impose fair and reasonable terms as a condition for a member's resignation or withdrawal. If a member makes a good faith effort to follow procedures for withdrawal set forth in the bylaws and the corporation fails to do likewise, such withdrawal may nevertheless be effective.

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