Can a Nonprofit Organization Invest Money in a CD?

As the name suggests, a nonprofit organization is organized for some primary purpose other than making money. That purpose is generally defined in the organization's charter. Unless there are specific prohibitions in a nonprofit's charter against any kind of commercial activity, a nonprofit can still invest money profitably and can even engage in commercial activity. A nonprofit, for example, can sell cookies door-to-door, provided the money made has a nonprofit purpose, such as sending children from low-income families to summer camp. In general, a nonprofit can invest in a CD.

Nonprofit charters are articles of incorporation that observe the legal requirements for the particular state in which the nonprofit is incorporated. The articles of incorporation and related documents set forth the organization's purpose, which may range from promoting a classical string quartet to funding medical needs in Africa.

The only general prohibition relating to profits that a nonprofit's charter spells out is that the profits made can't be distributed to the corporation's owners. Many nonprofit charters stipulate that the organization is formed for the specific named primary purpose "and for any other purpose." One of the reasons for this is to make it clear that a nonprofit may engage in other activities, including profitable activity. This includes investments of any kind, including certificates of deposit.

While few nonprofits choose to prohibit investment activities in the articles of incorporation, there is nothing in state law to prevent a nonprofit from doing so. An organization devoted to active acts of charity by its members, for example, could prohibit any activities that might produce a profit. A nonprofit with this prohibition could not invest money in a CD. Doing so would violate its charter, with the probable result that the nonprofit would lose its nonprofit status under state and federal law, and would owe state and federal taxes on the income.

Although nonprofits are organized under state laws of incorporation, they are bound by federal law. These laws exempt them from paying income taxes on the profits of money invested in a CD, but also constrain their use of the profits. Under Federal law, for instance, no one associated with the nonprofit can receive an "undue benefit" from the nonprofit's activities. While corporate officers can invest money in a CD, they can't take a vacation with the profits.