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Law Educator, Esq.
Law Educator, Esq., Attorney
Category: Business Law
Satisfied Customers: 91939
Experience:  All corporate law, including non-profits and charitable fraternal organizations.
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501(c)(7)/IL NFP with IL Land Trust guy here. In doing my

Resolved Question:

501(c)(7)/IL NFP with IL Land Trust guy here. In doing my research on social and recreation clubs, one recurring theme is that individuals are not to have an ownership interest in their organization. The original General Not for Profit Corporation Act in Illinois passed on July 17, 1943, prohibits the issuance of shares and distributing dividends to members reflecting the non-ownership directive. In a previous dialogue you responded: “It would make perfect sense. To issue shares would be to create an ownership interest in the organization which is counter to the purpose of an NFP.” That said, why is an individual ownership interest contrary to the purpose of an NFP? From what I can discern, non-ownership is responsive to the federal statute provision of “Inurement Prohibited.” Here is the earliest form of the statute I could find, “no part of the net earnings of which inures to the benefit of any private shareholder . . . 47 Stat. 193 (1932). Is this where the non-ownership imperative comes from?
Submitted: 4 years ago.
Category: Business Law
Expert:  Law Educator, Esq. replied 4 years ago.
An individual ownership interest is prohibited in an NFP because the organization is to have a charitable purpose and upon dissolution of an NFP all remaining assets are to go to that purpose. If there are individual shareholders then upon dissolution the shareholders would obtain the assets, counter to the law on NFP's. Also, if you have individual shareholders, they could claim dividends or sell shares which would be counter to the purpose of the NFP which states that all proceeds must go to the stated purpose.

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Customer: replied 4 years ago.
What is to happen to the corporate assets, then, in the case of the dissolution of a NFP social club, as it is not a charitable organization, yet allowed tax-exempt status under 501(c)(7) and the laws of the state it is chartered?
Expert:  Law Educator, Esq. replied 4 years ago.
The corporate assets are to be given to the charitable purpose of the organization upon dissolution and if the charitable purpose no longer exists then it is to go to another non-profit entity with a charitable purpose as a donation, it cannot go to any private individual.
Law Educator, Esq., Attorney
Category: Business Law
Satisfied Customers: 91939
Experience: All corporate law, including non-profits and charitable fraternal organizations.
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Law Educator, Esq.
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All corporate law, including non-profits and charitable fraternal organizations.