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

Nonprofit Organizations 2014

Prof. Kelley

● Newly appointed commish of IRS

● Read the discussion in book on pg. 6 about the underside of the non-profit sector

○ skeptical of it

○ why do we need it? (tax scam)

○ What are strong reasons we should keep this sector? What function does it serve?

■ pluralism of ideas

■ for-profit sector also has issues

■ high salaries still attract talent

■ market failure issues

■ more good than bad

■ tax benefits

■ social problem solving

○ Discussion:

■ NP sector has “social risk capital” … a small group of people can come together with common purpose to try the idea out

■ Market failure, public goods

■ Contract failure (info asymmetry) →

● e.g. retirement homes; actual purchaser will not know whether the homes will be good etc. Individuals involved cannot distribute the profits legally.

■ Good for democracy

● coming together in small groups with common purpose

■ Arts

■ “Social Risk Capital” – incubation of counter-majoritarian ideas

● What does chartiable/charity mean?

● History of Nonprofit Sector

○ went to corps. → creatures of state law but not regulated by states

○ weird mash of trust law and corporate law because of English/US law.

○ new in non-profit

■ evidence-based practice: no longer good enough for just good intentions

■ blurring of lines between non-profit and for-profit, hybrids, etc.

● laws are not set up to govern blurry orgs

● set up to govern soup kitchens

● chaos ensues

○ “Triple bottom lines” – people, planet, profit

9/8

● TYPES OF NONPROFIT ENTITIES

● Advantages / Disadvantages of different entity choices

○ Unincorporated Association →

■ 2+ ppl with common purpose

■ pro: informality and flexibility… no gov’t approvals necessary to form or dissolve; only needs con. and bylaws if it seeks 501(c)(3)

■ con: still needs con. & bylaws except; joint and several liability; no Ks; no bank acct.; can’t hold property in ass’n’s name

○ Charitable Trust

■ fiduciary relationship re: property from a grantor’s intention

■ holder of property

■ pro: very easily and quickly made; no board meetings or complex structure…. several people could manage it; significant control

■ con: if circumstances change and you want to do something different, you might have to go to the Atty. General to change it (i.e. hard to change the structure); assets irrevocably dedicated to the trust

○ Nonprofit Corporation

■ pros: limited liability; lots of statutes and case law; easier to run a complex business if you have a board of directors; legitimacy

■ cons: more bureaucratic red tape;

■ All states:

● Prohibit payment of dividends

● Most prohibit issuance of stock

● Do not prohibit making of a profit

● Most: payment of reasonable compensation to officers/directors, and non cash benefits to members

■ Differences between states:

● Some allow distribution of assets to members upon dissolution (except charitable orgs)

● Some classify into categories

● Some provide standards of conduct for officers/directors

● Some provide for member derivative actions (NY/CA)

● Details of forming a corporation

○ Certificate of Authority → how to work in other states

○ NC’s corporation law is pretty good and predictable.

○ Steps:

■ mission

■ business plan → where money will come from, prospects for growth, costs, employees, etc., competition

■ name, search to make sure name isn’t taken

● NC → corporations division search function

■ Douglas forms → NC specific forms book

■ EIN # → corps form of SS#

■ Minutes: incorporator → ceremonially hand over power to new board of directors

■ board will vote and adopt policies

■ Membership Corp = different structure

● analog of for-profit shareholders

● anybody who is a member usually is going to have the right to assemble and vote on fundamental questions for the corp., including who will be on Board of Directors

● unless really good reason, don’t do it

● Certificate of Incorporation: includes

○ name of org

○ statement and description of purposes

○ name of agent for service of process

○ names and addresses of the original incorporators / directors

● Bylaws

○ notice requirements for special/annual meetings

○ quorum requirements

○ member tenure

○ election procedures

○ removal/vacancy of director policy

○ number/responsibility of officers

○ fiscal year

○ committees on board

○ indemnification provisions

○ procedures for amendment

● Organizational Meeting:

○ initial board of directors elected

○ officers appointed

○ bylaws approved

○ authorization to open bank account

○ federal tax identification number from IRS, apply for exemption

● Public benefit vs. Mutual benefit

○ Public → (charitable) do good works, benefit society, improve human condition

■ members have no ownership interest

■ assets may not be distributed to benefit members, directors, etc.

■ membership cannot be transferred or sold

■ most have no members, governed by self-perpetuating board of directors

■ generally, more strictly regulated than mutual benefit corps.

○ Mutual benefit → further common goals of their members rather than for profit

■ members may have economic interest in corp.

finition of ‘charitable’ = very broad

○ a function to promote the general welfare (that is not violative of public policy)

○ Restatement of Trusts (Categories of Activities presumed to be Charitable) (nonexclusive)

■ relief of poverty

■ advancement of education

■ advancement of religion

■ promotion of health

■ gov’t / municipal purposes

■ purposes benefiting community

Dissolving Nonprofits and Distributing Assets

● How do I shot dissolve?

○ Draft a plan of dissolution that will be approved by board and members

○ Notice to creditors

○ Payment of all liabilities

○ Distribution of assets to proper recipients

● Then

○ go to Sec. of State’s articles of dissolution

○ file paperwork

○ some states, you need to get atty. general’s office review

● Asset Distribution

○ for the chartered purpose

● IRS 501(c)(3) dissolution requirements

○ organizational test

■ (i.e. NPO must be organized and operated exclusively for charitable or other exempt purposes)

■ requires that on dissolution the assets be distributed

● (1) for an exempt purpose or

● (2) by a court to another NPO for the general purposes for which the dissolved NPO was organized

● Voluntary vs. Involuntary Dissolution

○ Voluntary upon certain events e.g.:

■ bankruptcy

■ disposition of NPO assets

■ failure to act for a specified period

■ loss of all members

■ loss/surrender of corp. charter by subordinate chapter to head corp.

■ duration in charter limited

○ Involuntary by Judicial Order:

■ abandonment of activity

■ insufficient assets to discharge liabililties

■ board deadlock

■ internal dissension by members

■ fraudulent mismanagement / abuse of corp. privilege

■ failure to carry out purpose

■ waste of assets

■ failure to pay creditors

■ violation of statutes, corp. rules re: powers

■ failure to pay appropriate taxes / adhere to filing requirements

○ Federal Bankruptcy Code:

■ NPO CANNOT be forced into involuntary liquidation or reorganization

■ (can voluntarily seek it)

■ Creditors must → applicable state statute