Edited by Bruce A. Seaman and Dennis R. Young
Chapter 4: Capital Formation
Robert J. Yetman Introduction This chapter discusses capital formation by nonprofit organizations. I define capital as the funds gathered and accumulated for the purpose of spending on what are most frequently relatively large projects. These projects, commonly called ‘capital’ projects, could be quite tangible, such as buildings to house the nonprofits’ operations, additional collections for museums, or repayment of existing debt. Alternatively, many projects are less tangible, such as the array of expenditures necessary for a nonprofit to venture into previously undeveloped charitable activities. Whatever the purpose, the central feature is that current funds are needed to move a project forward, and those funds are needed in relatively large amounts over a relatively short period of time. Capital providers are typically thought of as either lenders or stockholders. In this sense, a capital provider is one who asks for something back, either a loan repayment or a proportion of future profits. Lenders to nonprofits are legally entitled to repayment of their loans, along with interest. A provider of donations to a nonprofit is not legally able to claim residual profits of the nonprofit and thus nonprofits cannot legally issue stock, although as will be seen there are some circumstances when nonprofits raise capital through quasi-equity. The issue of nonprofit capital formation has been previously discussed in Tuckman (1993), and readers are directed to that excellent paper. My goal here is to expand on Tuckman’s analysis with a focus on what we have learned since that study. Capital can be supplied...
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