Non-Distribution Constraint [...]

The Non-Distribution Constraint, as explained by Henry Hansmann, “A nonprofit organization is, in essence, an organization that is barred from distributing its net earnings, if any, to individuals who exercise control over it, such as members, officers, directors, or trustees. By ‘net earnings’ I mean here pure profitsthat is, excess of the amount needed to pay for services rendered to the organization; in general, a nonprofit is free to pay reasonable compensation to any person for labor or capital that he provides, whether or not that person exercises some control over the organization. It should be noted that a nonprofit is barred from earning a profit. Many nonprofits in fact consistently show an annual accounting surplus. It is only the distribution of these profits that is prohibited. Net earnings, if any, must be retained and devoted entirely to financing further production of the services that the organization was formed to provide.” (Hansmann 1980, 835) [link l=https://www.bu.edu/wcp/Papers/Soci/SociZuid.htm]

 

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Hansmann outlined this concept a part of his larger [w l=”Contract Failure Theory”].

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