Can a Nonprofit Organization Invest in Stock?

by Eric Feigenbaum

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.

Purposes

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.

Tracking

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.

Profits

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.

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