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Nonprofit Organizations
University of North Carolina School of Law
Kelley, Thomas A.

Nonprofit Corporations
Fall 2011
Exam: newspaper issues for exam questions. 2 short essays. 1 long essay. Question on policy consideration: pay attention in class discussions on policy considerations
A.      Theories of having nonprofit sector
1.       Need for sector that binds people together
2.       Social capital: incubating what might be worth.
3.       Market failure: if gov’t needs to do it, need to convince whole public. If by nonprofit, can do it by small coalition of people.
a.       Public goods- e.g. Clean air
4.       Need of place where community can come together in common action
5.       NPO providing safety net
B.      Trends
1.       Increasing professionalism
2.       Increase in number of NPO
3.       Pressure to be self-sustainable
Formation, Dissolution and Restructuring
A.      Profit making
1.       Nonprofit orgs can make profit
2.       Not permitted to distribute to shareholders/insiders
3.       § 501(c)(3): still have to pay property tax (depending on state law), sales tax (depending on state law). Just b/c org is exempt from fed income tax, doesn’t mean that it doesn’t have to pay other taxes.  
B.      For-profit v. Non-profit
1.       Advantages for For-profit
a.       Can get investment, shares
b.      Laws that govern NPO are more burdensome
2.       Advantages for Non-profit
a.       Can start w/o much money
b.      Can get support from- gov’t, private foundations, corporations, individuals who are willing to contribute
C.      Legal forms of NPO
1.       Unincorporated association
1)      Advantages
a.       Informality and flexibility
b.      No gov’t approval needed to form/dissolve
c.       Can get 501(c)(3) fed tax exemption
2)      Disadvantages
a.       No separate legal existence apart from members→ Indiv members may be personally liable- jointly and severally liable
b.      Absent enabling statute, can’ receive / hold property in association’s name
c.       No perpetual duration, can’t contract in its own name or hold title
d.      Banks, creditors…reluctant to do business
3)      Characteristics
a.       For a short while, why not run as this and find physical sponsor? Ask if they would sponsor. If have potential to grow, then transition to incorp.
b.      Revised Uniform Unincorporated Nonprofit Association Act (RUUNAA)
o   Recognizes unincorp. Nonprofit association as legal entity
o   Can hold and dispose property
o   Sue in its own name and be sued
o   Be beneficiary of trust/contract
o   In NC, act empowers them to enter into banking, Ks: gives entity protection. But this is really new, so not comfortable w/ this. Nobody knows if this will work under attack.
2.       Charitable Trust- equity applies. Not law
1)      Definition: fiduciary relationship with respect to property arising from manifestation of grantor’s intention to create it. Trustee is subject to equitable duties. Management by trustee.
a.       No approval needed to form trust
b.      No requirement of identifiable beneficiaries- only definite purpose is needed
2)      Advantages
a.       Ease and swiftness of formation
b.      Whoever gives assets can maintain control (Possibility of continuing control by grantor)- main reasons for choosing this
c.       Admin w/ fewer formalities than corporate form
d.      Can hold property, do K
e.      Fewer housekeeping requirement
f.        Perpetual/indefinite period of existence
3)      Disadvantages
a.       Jointly severally liable
b.      Less flexibility
c.       Fiduciary responsibility for trustee (very high expectation)
4)      Different standards of care
·         Law that applies to trust- equity (fundamental fairness)
o   Equitable maxim- when judges are evaluating, instead of referring to statute, go to equitable maxims. Equity looks at intent, rather than the form. He who seeks equity must do equity. He who comes to equity must come w/ clean hands.
o   Judges are allowed to refer to equity also.
o   Injunction is also equitable power.
·         Law that applies to corp board members- law
3.       Nonprofit Corporations- most prominent form
1)      Advantages
a.       Members not personally liable
b.      Legitimacy: financial institutions, businesses, landlords…are more comfortable
c.       Directors have lower duty of care: lower than trust
d.      Perpetual interest
e.      Great body of law out there- corp case law that can apply
f.        Trend of liberalization of corp law: much flexibility. Courts don’t want to get involved much.
g.       Internal governance more flexible, so easier to react to changed circumstances
h.      Can sue/be sued, contract, hold property in its own name
i.         Centralized management
2)      Disadvantage
a.       More bureaucratic (meeting, bylaw, votes…)
b.      More formalities in creation and dissolution
D.      Mechanics of forming Nonprofit Corporations
1.       Things to think about
a.       Purpose: mission statement (Need to be descriptive on what they do, accomplish).
b.      Business plan: funding, personnel, client base, market analysis, board/organizational structure
c.       Name: see if others have same name. Google search to see that similar regions are using the same name for similar purpose.
d.      Order corporate forms book and seal
e.      File for fed tax identification number (EIM number): SSN for corporation
2.       Drafting articles of incorporation
a.       Name: make sure others don’t have it. Can reserve the name. 
b.      ‘Charitable’ institution: if allowed under 501(c)(3), then yes.
c.       Incorporator: who is empowered by law of incorporating the organization- fill out paperwork…then hand power to board of directors
d.      Membership corp: members are equivalent to shareholders. In most, the only power members are given is to vote for board of director.
·         Unless there’s good reason to form as membership corp, don’t do it. If want, can change later.
e.      Distribution of assets upon dissolution
o   Tax exempt status information (in print-out): what IRS wants for 501(c)(3)- so, just take the form and fill it out, and attach to AOI, then that’s it for AOI.
1)      Purpose of corporation- religious, educational, literary, charitable…etc
2)      Prohibited activities
·         Not let insiders get profits for them/ not engage in substantial lobbying/ not engage in political campaign activity
3)      Distribution upon dissolution
·         When dissolve, assets will stay in charitable stream.
3.       File AOI to secretary of state’s office, and if approved, the

rg: may distribute assets to members upon dissolution or in accordance with such other plan provided for the certificate of incorporation/bylaws
2.       Dissolution requirement under 501(c)(3)
a.       In order to be tax exempt under 501(c)(3), AOI should require that on dissolution the assets must be distributed for exempt purpose or distributed by court to where it would be used to best accomplish what the general purpose was
3.       Procedure for dissolution
a.       Procedure varies depending on state law.
b.      Generally, to dissolve, need resolution by the board and plan of dissolution.
1)      Membership corp: often, have to get vote of majority of members.
2)      Need to be approved by board and members (where remaining assets are going, etc). Usually need 2/3 of votes.
3)      Assets that came into npo w/ restrictions (when donor made inter vivos gift to NPO/specific request): then, in some states, dissolving npo may have legal obligation to make sure those assets get turned over to another npo that will use it for the donor’s purpose.
c.       Requirement of notice to creditors, payment of liabilities and distribution of remaining assets to creditors.
d.      Find articles of dissolution form. Fill out and file w/ secretary of state. Then, done.
4.       Recent situation
a.       These days, NPO dissolving under duress in this bad economy.
b.      May have received grant from for-profit orgs, and not be able to do it. usually, need to negotiate.
G.     Charitable Trust- Cy Pres Doctrine
1.       Definition: when charitable purpose becomes impossible, inexpedient, or impracticable of fulfillment or already accomplished, equity will permit trustee to substitute another charitable object which reasonably approaches the designated purpose as closely as possible.
a.       It’s a saving device that permits court to direct application of charitable trust property to charitable purpose different from that designed in trust instrument
2.       3 requirements of cy pres
a.       Valid trust exists
b.      Settlor’s specific charitable obligation is frustrated, necessitating cy pres modification to carry out the settlor’s wishes
c.       Settler had general charitable intent not restricted to the precise purpose identified in the trust instrument
3.       Charitable purpose
a.       If charitable purpose is frustrated, and no cy pres is available
b.      Then, trust would fail, and assets would revert back to donor’s estate or some other charitable org.
4.       Difficulty in overseeing the outcome
a.       Courts always come out differently in cy pres doctrine, so difficult to predict how it will come out.