Select Page

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

Law of Non-profit Corporations Outline

Impact of Volunteer Sector Society

1. Provides society with a large variety of social innovations
2. Provides countervailing definitions of reality, morality, ideologies, perspectives, and leadership resource
3. Sector is not constrained by profit control therefore, innovative, because it is not subject to broad social concerns
4. Sector impacts levels of social integration in society; a “buffering” function
5. Affects preservation of old ideas and values (e.g. history, artifacts, culture)
6. Representation in society of the sense of “mystery, wonder and the sacred”
7. Liberation of the individual in an otherwise constrained paradigm
8. Source of “negative feedback”
9. Support for the economic systems in society and provides crucial social and intellectual linkages
10. Latent resource for goal attainment for societal interests

Why Are Non-Profits Necessary

1. Provides services government or the private sector is unable or unwilling to provide: essentially, non-profits function as a counter majoritarian function to majority ruled govt.
2. Social Innovation- Social risk capital
3. Community focus is tailored specifically for the service needed rather than large govt. programs that can be ineffective and bureaucratically rigid.
4. Efficiency
5. Vehicle for collective action: provides mechanism for civic education and political discourse

Economic Argument
1. Small scale, therefore more efficient
2. Check on market failure
3. Contract failure where purchasers are not the consumers
4. Non-Profits are “gap-fillers” for business and social safety

Basic Laws, forms, etc.
§501 – (c)(3)
§170 – tax deduction for charitable contributions (remember percentage limits on taxable base) à not complete overlap (foreign organizations do not qualify)
Form 1023 – application form (under $5000 and churches need not file)
Form 990 – annual reporting

501(c)(3)
“(3) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”

Introduction (pg.1-22)

– The distinction between NP’s and Corporations is the non-distribution principle, any net profit must be used for public purposes, not private purposes (profit cannot be distributed to members, directors, or employees, only reasonable compensation is permissible)
– Hansmann’s non-distributional constraint: “A nonprofit organization is, in essence, an organization that is barred from distributing its net earnings, if any, to individuals who exercise control over it, such as members, officers, directors, or trustees.”
– Two categories:
o Public serving organizations – public charities and foundations (501c3), social welfare (501c4), 527 political organizations (at least in theory)
o Mutual benefit (member-serving) organizations – formed to further common goals of its members (Labor unions, etc.)
– 501(c)(3) – public serving organizations
o important because §170 makes virtually all contributions deductible
o plus state law tax-deductions (property, sales) lower postal rates
o plus “halo effect”
– Gardner – importance of nonprofits for pluralistic reasons (for new and unpopular ideas) (pg. 4)
– Gaul & Borowski – a huge, unregulated industry (NFL and MPAA are non-profits, hospitals too) where everyone and anyone qualifies for tax-exempt status (approx. 1.2 orgs) (pg. 6)
– Size and scope of nonprofit sector
o Religion – 350,000 congregations
o Health care – biggest in revenue, government is source of much funding
o Education – government/fees/tuition
o Social services – fees/government/charitable foundation
– In England, more charitable trusts than non-profit corporations, because government controlled ‘incorporation’, trusts gave more freedom there
– Rationales for Nonprofit Sector – Lester Salamon: historical, market failure (for non-majority collective needs or information asymmetries), government failure, pluralism/freedom, solidarity (i.e. Unions) (pg. 43)
Classification of nonprofits

Mutual (controlled by patrons)

Entrepreneurial (controlled by self-perpetuating board)

Donative (support from donors)

Mutual donative (Common Cause)

Entrepreneurial donative (art museums)

Commercial (income from fees

Mutual commercial (country clubs)

Entrepreneurial commercial (community hospitals)

– since non-distribution principle exists, NP’s do not have to worry about cutting corners for profits, but they do have to worry about lack of profit incentive à charter protects interest of patrons from the self-interests of those who control organization
– nonprofits needed when market failure occurs due to third party payment (disaster relief) or Public goods (free-rider) of complex personal services (trust needed where patrons can’

d applicable law (Restatement 3rd.)
§ Usually benefit community rather than private individuals
§ Enforcement through the AG rather than the trusts beneficiaries
§ Often used to hold property for charitable purposes
· Assets must be irrevocably dedicated to purposes of the trust
§ Best for private foundations that engage solely in making grants
§ Property held can only be touched in civil action in court of equity if at all
§ Disadvantages
§ greater trustee liability than corporation
§ higher standard of care (negligence, not gross negligence of corporations)
§ Tax disadvantages over corporate tax structures
§ Creation: Created by the declaration of the settlor by conveyance, deed or will (the instrument, to a trustee or by contract by settlor in favor of a trustee (note- change of trustee may require application to a court)
– Non-Profit Corporation (pg.69) – Predominant form of exempt organizations, maintains the corporate form and benefits (artificial entity that can sue, contract, hold property, limited liability), but with non-distributional constraint – can earn a profit as long as it is not distributed to those in control (i.e. members or shareholders)
§ Types of NPC’s
§ Public Benefit Corporations (pg. 74)
· A group serving what may loosely be called a public or charitable purpose, which is to do good work to benefit society or improve the human condition
o Includes 501(c)(3) public charities, including religious, charitable, educational, and other organizations, which can receive tax-deductible contributions AND 501(c)(4) social welfare organizations, which cannot receive tax-deductible contributions
· Standards of care is more than for business corporation since directors control donations and resources for public good
· Many do not have members and membership is not transferable
· Cannot have ownership over membership
· Upon dissolution, assets must be transfer to charitable or similar uses
§ Mutual Benefit Corporations (pg. 74)
· Primarily formed to further the common goals of their members
· Members have broad rights since an economic interest (though still non-distributional) (e.g. can elect directors like shareholders in a corporation)
· Membership interests transferable to crop or 3rd parties.
· Members may receive distribution when corporation dissolves
· Directors’ standard of care is like that of a business corporation