Which of the following statements is true about not-for-profit corporations?

• A. They may issue tax-exempt debt
• B. They distribute profits to owners
• C. They have stockholders
• D. They cannot borrow money

Answer: (A)

Not-for-profit organizations commonly finance major projects with tax-exempt debt. When they issue bonds for activities that serve their exempt purposes (such as charitable, educational, or religious work), the interest paid to bondholders is exempt from federal income tax. This tax exemption lowers borrowing costs and makes such debt attractive. They reinvest any earnings back into their mission rather than distributing profits to owners, and there are no stockholders. They can borrow money, so the notion that they cannot is not accurate. This tax-exempt debt option is a defining financing feature for not-for-profits.