When choosing what form of entity to use to conduct a business, there are many factors and trade-offs to be considered. Plusses and minuses inhere in each choice. The Supreme Court, however, has managed to permit a few lucky business owners to “have it all,” or at least more than their share based on their choice of business entity.
The Court recently held in its Hobby Lobby decision that closely held, for-profit corporations do not have to provide a full range of contraceptives under the Affordable Care Act if their owners have a religious objection. The Court concluded that a closely held, for-profit corporation may exercise religion and be entitled to the benefits of the free exercise clause of the First Amendment and the Religious Freedom Restoration Act.
The decision has engendered much commentary, ranging from the ill effects on a woman’s right to choose an appropriate contraceptive method to the violence done to the most basic principle of corporate law. That principle is the separation of the corporation’s shareholders from the corporation itself.
In Hobby Lobby, the Supreme Court demonstrated a lack of understanding of not only the separation between the shareholders of a corporation and the corporation itself – that the corporation is not its shareholders and the shareholders are not the corporation and neither is held liable for the acts of the other – but also the difference between for-profit and nonprofit corporations. The Court blithely assumed that because certain religious organizations, formed as nonprofit corporations, may be exempt from the mandate to provide insurance coverage for the full range of contraceptives, there was principled reason for assuming that a for-profit corporation, simply because it too is a corporation, is capable of exercising religion and should likewise be exempt. But principled good reason does not exist.
The essential difference between a for-profit corporation and a nonprofit corporation does not lie so much in the profit motive, at least as identified by the Supreme Court, but rather in the fact that for-profit corporations have owners and nonprofit corporations do not. The profit motive in this context is properly understood to be not only the desire to enhance net revenues – both for-profits and nonprofits share that desire – but also consideration as to whom those profits redound. The key inquiry is for what or whom is the corporation working.
Nonprofit corporations have specific purposes and they work to further those purposes without gain, or profit, to any owner. Net revenues benefit the nonprofit’s purposes and mission, not any individual. Indeed, nonprofit corporations, to maintain their tax-exempt status, are prohibited from permitting any of their net earnings to inure to the benefit of any individual and no individual may share in the distribution of the nonprofit’s assets upon its dissolution. Such assets may be distributed only to other nonprofit corporations or the government.
Contrast the nonprofit with the for-profit corporation. For-profit corporations have shareholders – the owners, who may receive distributions and dividends from the corporation as well as its net assets upon dissolution and liquidation. The profit motive, in its narrow sense – the enhancement of net revenues, works to the benefit of the owners of for-profit corporations. For-profit corporations are not compelled to maximize profits in all conceivable ways. Owners of a for-profit may choose not to maximize profits and may cause the corporation to act in ways, such as by installing more extensive and expensive pollution control equipment than required or making donations to charitable endeavors, that potentially result in decreased net revenues. Their ownership, however, remains intact.
This brings us back to the concept of the separation between the shareholders and the for-profit corporation owned by them. There is no such separation concept for nonprofits because there are no shareholders. Hence, the Supreme Court’s fallacy was in analogizing the for-profit corporation to the nonprofit corporation and ignoring the separateness of shareholders and corporate entities simply because the concept of separateness between owners and corporations does not exist in the nonprofit model.
The Supreme Court did not, nor could it, articulate the religious beliefs of Hobby Lobby, Inc. It could state the beliefs only of the corporation’s owners. If the Hobby Lobby owners sell the corporation, what religion is Hobby Lobby then exercising? The only parties exercising religion are the owners. If the corporation is indeed considered capable of exercising religion, it may end up converting and its choice will be that of its new owners, not its own, giving lie to its ability to have its own religious convictions.
The religious beliefs of a nonprofit corporation having a religious purpose are relatively easy to ascertain. They are stated in the purposes and mission of the nonprofit. These beliefs are core to the nonprofit’s purposes and mission. In a sense, the religious organization is exercising religion through its very existence. Hobby Lobby exists to sell arts and crafts supplies and tchotchkes, ultimately for the benefit of its owners.
The mandate of the Affordable Care Act did not impinge on the Hobby Lobby owners’ free exercise of religion. It impinged only on their ability to own a corporation that is unfettered by a specific government regulation they find objectionable. With the Hobby Lobby decision, the Hobby Lobby owners truly managed to have their cake and eat it too. They retain all the benefits of ownership of a corporation while avoiding the corporation’s compliance with a law they individually find offensive. Perhaps they will next seek tax-exempt status?
— Melanie S. Tuttle
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