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CREATING A NON-PROFIT CORPORATION

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MICHAEL LYNN GABRIEL

ATTORNEY AT LAW

B.S., J.D., M.S.M., DIP. (Tax), LL.M. (Tax)


TABLE OF CONTENTS

INTRODUCTION

This book is one of a series of legal books that has been written to address the needs of the average person. Each volume of the series is designed with the intent of serving as a guide and tool with which to help the reader cut through legal jargon and better understand and appreciate the reader's rights under the law.

As a self-help "HOW TO" book for forming a typical non-profit corporation, this work covers the basic problems are to be faced by individuals attempting to form a non-profit corporation. It covers, in detail, the steps and procedures necessary to be taken in order to get a federal and state tax exemption for the corporation.

This book covers the initial set up of the incorporation and the actions thereafter. Incorporation is basically easy if taken in an orderly approach and nothing fancy is sought to be done. The steps are outlined in the order that they should be considered and acted upon. If the reader has any doubts upon how something should be done, an attorney should be consulted on that issue. Even with a consultation with an attorney, it should still be cheaper for the reader to incorporation himself. Normally, an attorney is paid between $500.00 to $2,000.00 to do a normal incorporation. Therefore, if needed, a person can consult with an attorney while doing the work himself and still save money. In fact, many questions that a person may have over the procedure ofincorporation can be answered with a simple phone call to the State's Department of Corporation or Securities.

It may seem overwhelming or intimidating to incorporate a non-profit corporation without going to an attorney but it should not be so. It does take time to prepare the documents and make the various decisions for the corporation such as management, fiscal year and purpose. However, the book lays out and explains in detail the steps to be followed. Also the book contains sample Articles, Minutes, By-Laws, and Membership Certificates for most states. These items could be used in most states should the incorporator choose not to purchase a corporate kit for the state in question, which usually runs about $50.00.

A corporation exists when the Articles of Incorporation are filed and the membership certificates issued. So the basic steps needed to incorporate are filing of the Articles of Incorporation and then issuance of the membership certificates. When those steps are accomplished, the incorporation is complete. By carefully using this book, those steps can easily be taken.

GOOD LUCK


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CHAPTER ONE

COMMONLY ASKED QUESTIONS

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There are primarily three ways that people can carry on any non-profit activity. People can work together in an unincorporated association, a non-profit trust or a non-profit corporation. There are different tax considerations and legal consequences involved in each form of operation.

The main advantage that a non-profit corporation has a non-profit trust or association is that the member is not personally liable for the debts of the corporation or the actions of the employees. In an unincorporated association, if an associate or employee does an act in scope of their employment that injures another person, then each of the members of the association may, depending on state law, become personally liable to pay for the resulting damages. A non-profit trust can be created in all states. Such a trust, however, carries with it its own special limitations on management and generally too cumbersome for use by a small group. In addition, there is still the question of personal liability of the directors or trustees of a non-profit trust for the actions undertaken by employees or other directors or trustees.The risk of personal liability for belonging to an unincorporated association, especially if an officer or director, and the complicated management of non-profit trust are prime reasons for incorporating as a non-profit corporation.

After a non-profit corporation is formed, the yearly requirements for meetings and record keeping are not much more than required for any other non-corporate business. I have answered all of the general questions usually asked by a person considering incorporation. It might take longer to read this chapter than it would to actually incorporate. Incorporation is easy and I often refer to it as a one time insurance policy because it terminates personal liability against the shareholders.

1. WHAT IS A CORPORATION?

A corporation is an artificially created entity in conformity with a particular state's law. As a distinct legal entity, a corporation is considered to be separate and apart from all of the people who own, control or operate it.

A corporation holds most of the rights of a legal person. As such, a corporation is capable of validly executing contracts, incurring debts, holding title to both real and personal property and paying taxes.

The attractiveness of corporations stems from the very fact that they are held to be separate legal entities from its owners, the shareholders, which gives them unique advantages over both sole proprietorships and partnerships.

2. WHAT IS A NON-PROFIT CORPORATION?

A special type of corporation is a non-profit corporation. The primarily purpose of such a corporation is not to make money but instead to provide some type of beneficial service to the public, hence the name, nonprofit. The non-profit corporation is formed by one or more persons for the benefit of the public, the mutual benefit of its members or for religious purposes. Most non-profit corporations are formed for religious, charitable, literary, scientific or educational purposes.

Stock is not issued in a non-profit corporation nor are profits from the corporation, if any, distributed to the members. Most non-profit corporations are required by state law to transfer their assets to another non-profit corporation upon dissolution of

the corporation or to give the assets to the State. A non-profit corporation is usually organized to obtain an exemption from state or federal taxes on its operations. A non-profit corporation is not automatically exempt from federal taxation. A non-profit corporation must file an application with the I.R.S. for tax exempt status and have the application approved.

Except for the profit motive, a non-profit corporation operates the same as any other corporation. While stock is not issued in a non-profit corporation, memberships can be issued. Nonprofit corporations can sue in court, acquire property and do anything not inconsistent with its stated non-profit status.

3. WHAT ARE CORPORATE POWERS?

Corporate power is the authority given to the corporation to conduct its business. Such corporate authority is granted by both the statutory law in the states where the corporation was formed along with specific grants of authority to the corporation in its Articles of Incorporation.

The Articles of Incorporation for a corporation must state the purpose for which it was incorporated. For a non-profit corporation, the Articles it must state what religious, charitable, literary, scientific or educational purpose it hopes to accomplish. The Articles for a for-profit corporation usually state that it is being incorporated to conduct any legal business in the state.

Under most state laws, a corporation is given certain powers in order to operate:

With the above powers, a corporation is able to act and do nearly everything that an individual or partnership can do.

4. WHO IS AN INCORPORATOR?

An incorporator is the person who signed and filed the Articles of Incorporation with the Secretary of State. It is the filing of the Articles that is the first and most important stepin forming a corporation.

Incorporators are the founders of a corporation. Incorporators adopt the initial by-laws for the corporation and appoint the first set of directors. After the directors are appointed, the incorporators resign and turn the management of the corporation over to them.

Incorporators, along with other persons, can also be promoters of the corporation. Promoters make the initial arrangements for the money, property, and whatever else is needed to establish the corporation. A corporation is not liable for any pre-formation contract executed by any promoter unless the contract is later ratified by the board of directors or the benefit of the contract is accepted by the corporation. However, the promoter may be personally liable for any pre-incorporation contract that he executes unless it is spelled out that the contract is only to become effective when the corporation is actually formed and the contract is ratified by the corporate board of directors. Usually, there is not a problem with pre-formation contracts because the incorporator is also the main or sole shareholder of the corporation and thus controls the corporation.

Articles of Incorporation that can be used in the individual states are set forth in the CHAPTER ARTICLES.

5. WHO ARE DIRECTORS?

Directors are people elected by the members of a non-profit corporation to manage the corporation. The board of directors is the term referring to all of the directors. Directors are not required to be members of the corporation although they usually are members in the non-profit corporation.

Decisions concerning the management of the corporation are made by a majority vote of the directors. The board of directors appoint the officers of the corporation who run the day to day business of the corporation. The officers implement the wider plans and future visions of the board.

Directors are permitted reasonable compensation for their services. In small corporations, the directors usually serve for free since they are usually shareholders and are protecting their investments.

6. WHAT DUTIES ARE OWED BY A DIRECTOR TO A CORPORATION?

A director owes to a corporation a duty of loyalty. A director can not usurp a corporate benefit, that is take for himself a benefit that could go to the corporation. In short, a director owes to the corporation the right of first refusal on any business opportunities that the director becomes aware that could affect the corporation. For example, if the corporation is in the paving business, a director could not form a competing paving business and solicit business from the corporation's existing clients.

When a director has a personal interest on a matter before the board, the director is only allowed to vote on it if:

A director is not personally liable for the debts of the corporation. A director can not be sued, by shareholders, for losses incurred as a result of the director's actions or decisions provided that they were undertaken in a reasonable and prudent manner.

7. WHO ARE OFFICERS?

The officers are the persons appointed by the board of directors to carry out the corporation's day to day business. The exact responsibility and authority of each officer is set out in the By-laws as adopted by the incorporator and as amended by the board of directors.

Normally, the corporate slate of officers consists of the president or chief executive officer, the vice president, treasurer and secretary. The officers do not have the authority to engage in major business transactions since these are entirely within the province of the board of directors.

As agents of the corporation, officers have the authority to bind the corporation by their actions. As such, the officers execute contracts for the corporation and likewise can subject the corporation to liability for damages arising from their negligent or intentional acts committed on the corporation's behalf.

As with directors, corporate officers are not personally liable for the debts of the corporation. Corporate officers remain, as individuals, personally liable for any torts, civil wrongs, that they commit. For example, if the President of the corporation gets involved in an auto accident while traveling on corporate business both the president and the corporation can be sued for damages. On the other hand if the President signs a contract for the corporation, then only the corporation can be sued for any breach of the contract.

8. WHO ARE MEMBERS?

Members are not the owners of the corporation. Members own membership certificates in the corporation and thus have the right to vote in the election of corporate directors. Members are not personally liable for the debts of the corporation.

Members, in addition to electing the directors, also are required to vote for the following acts:

In addition to the above, members can unilaterally hold a meeting to:

There must be an annual member's meeting each year in order for the shareholders to review and approve or reject the actions of the board of directors for the previous year. The members also will re-elect or replace the directors for another year.

Members are given just one vote per member. A member can own only one membership certificate. A majority of those members voting is needed to carry the resolution, the matter voted upon.

9. WHAT IS MEANT BY THE LIMITED LIABILITY OF A CORPORATION?

The main advantage of a corporation, be it a profit or non-profit corporation, is the limited liability that it provides its shareholders or members. As a corporation, the most that its members, can lose in a lawsuit against the corporation is the assets that they contributed to the corporation.

This limited liability for corporate shareholders is vastly different from an unincorporated association where the associates may be found to be totally liable for all debts of the association. In such an instance, the creditors of the association can seek and attach every dollar and piece of property that each associate owns in order to settle a judgment against the association. Such personal attachment to satisfy corporate debts can not be done against the assets of a member.

It is to cut off this unlimited liability that non-profit corporations are formed so as to pursue charitable or public purpose goals. Few people would ever participate in an organization for the public good, if by doing so, they risked losing everything that they have earned or will earn in the future.

10. HOW ARE CORPORATE PROFITS TAXED?

A non-profit corporation will not be subject for taxes on its income derived from its normal activities, if it applies and receives a federal and state tax exemption. Chapter 8, Tax Exemptions, covers in detail how a tax emption is obtained. A non-profit corporation will only have to pay taxes on its unrelated business income. Under the Internal Revenue Code, unrelated business income is that income derived by a non-profit corporationwhich has not connection with and thus is unrelated to purposes for which the tax exemption was granted. All unrelated business income is taxed under regular corporate tax rules and regular corporate tax rates apply to that unrelated business income.

11. HOW LONG DOES A CORPORATION LAST?

A corporation is normally said to have perpetual existence. In other words, a corporation will legally exist forever unless it is dissolved or terminated under state law. The fact that a non-profit corporation continues onward regardless of the death of its members, is what gives the corporation its stability. Most people are reluctant to participate in or deal with a charitable or public service entity which is not a corporation and thus may terminate upon the sudden death of any member. The stability of a corporation derives from its continuity of existence beyond that of its shareholders.

12. WHAT IS THE COST FORMING A NON-PROFIT CORPORATION?

Costs for incorporating a non-profit corporation vary somewhat from state to state. In California, the costs for filing the Articles of Incorporation and the minimum franchise tax fee is about a $115 (There is also an $800 franchise tax fee which is refunded upon the corporation receiving a California State Tax Exemption). In Nevada, the fee is just $25 plus another $10 for the statement of Registered Agent. In addition, the corporate books, which include the minute books, membership book and the corporate seal, costs between $75.00 to $125.00. The attorney fees, if one is used, is normally around $800.00 to $1,000.00 in California.

The cost for applying for the Federal Tax exemption is $375.Most states will automatically grant a state tax exemption once the Federal Tax Exemption is obtained.

The cost of incorporation should be looked upon as a one time insurance premium. Once the non-profit corporation, the members are protected from individual liability from then forward for the actions of corporation or its employees. Peace of mind is an important consideration in addition to cost when deciding to incorporate.

13. HOW LARGE A SALARY CAN A CORPORATION PAY A MEMBER?

It is legal for a corporation to hire a member. The reasonable salary paid to a member, for the value of work actually performed is deductible by the corporation as normal salary and is not considered as illegal self-dealing.

In a non-profit corporation, the members are not permitted to share in the profits of the corporation. This is the fundamental difference between a non-profit corporation and a for profit corporation. If the I.R.S. were to find that a member was paid excessively for the work that was actually done then the corporation could lose its tax-exempt status.

14. WHAT ARE THE TAX DIFFERENCES BETWEEN AN ASSOCIATION AND

A NON-PROFIT CORPORATION?

An association is an unincorporated group of individuals or entities which usually engage in non-profit activities. An association, because it is not incorporated will not be given tax-exempt status under the law. As such, the association will be taxed on the income that it derives using corporate tax rates. The association is taxed as corporate tax rates even though it isaccomplishing goals and purposes that would entitle it to a tax exemption if it were a non-profit corporation. Associates of an association may also become personally liable for the debts and obligations incurred by the association under state law. Many states consider association the same as partnerships and thus apply partnership liability rules. Because of its informal nature, an association does not have to keep minutes, hold regular meetings or comply with the requirements which a corporation must meet.

A non-profit corporation protects its members from liability for the debts and obligations of the corporation. A non-profit corporation can also apply for a federal state tax exemption for income derived from activities that qualify for tax exemption. A non-profit corp[oration is required to keep minutes, hold annual meetings of members and directors and keep complete records.

15. WHAT ARE MEMBERSHIP CERTIFICATES?

Membership certificates can not be thought of as the ownership interests in a non-profit corporation. Members of the non-profit corporation are given membership certificates to reflect their membership. Members do not own the non-profit corporation and have no right to share in the profits of the corporation. By the virtue of their being members and owning a membership certificate, the members can vote on the management of the non-profit corporation pursuant to the terms of the By-Laws.

16. WHAT IS DISSOLUTION OF A NON-PROFIT CORPORATION?

Dissolution of a corporation is the termination of the corporation and is, in fact, its legal death. Dissolution usually occurs upon any of the following:

After dissolution has been approved or ordered, the corporation must stop doing business except to the extent necessary to wind up the affairs of the corporation. When resolution to dissolve is adopted or ordered, the corporation is required to file a certificate of dissolution with the secretary of state where it was incorporated.

17. HOW ARE THE PROCEEDS FROM A DISSOLUTION DISTRIBUTED?

After a corporation has been dissolved and its assets liquidated, the distribution is made to the extent of corporate assets as follows:

Since members in a non-profit corporation do not share in the profits of the corporation, upon dissolution the assets of the non-profit corporation must be turned over to another tax-exempt entity. Such assets can be turned over to the United States Government if no other state or local tax exempt entity wants them.

18. WHAT IS A CORPORATE KIT?

Many companies sell the start up materials, called a corporate kit, for a newly incorporated non-profit corporation. The incorporator contacts such a company and requests the standard corporate kit for the state in question, say Kansas. The incorporator gives the company the name of the corporation, its date of incorporation and the number of shares of stock to be issued. The supplier takes this information and prepares the corporate kit. The complete corporate kit includes:

A corporate kit generally costs between $50,00 and $75.00 andis quite a bargain for the degree of work contained in it and the peace of mind obtained in using it.

18. WHAT ARE BY-LAWS?

By-laws are the rules for the general day to day management and operation of the corporation. The by-laws are adopted by the incorporator and thereafter can be amended by a majority vote of the members.

By-laws are an attempt to cover the many areas of potential conflict within a corporation and the delegation of duties and responsibilities. A copy of By-laws for use in most states follows in the BY-Laws chapter. By-laws can be general in nature or more closely tailored to the needs and desires of the members. Most By-laws will contain or mention most of the issues covered in the By-laws Chapter.

By-laws are not set in concrete. Members can alter or amend the By-laws by simply having a properly conducted meeting to do so. The purpose of By-laws is to set up the procedure for the daily administration and management of the corporation. As such, it is understood that as the corporation grows and develops the Bylaws may have to be amended to keep pace with the new requirements of the corporation.

19. WHAT IS THE FIRST MEETING OF DIRECTORS?

The First Meeting of Directors is the first time that a corporation really and truly exists. After the Articles of Incorporation are filed, a corporation technically exists on paper. It does not exist in fact until membership certificates are issued along with the appointment of officers and directors to act for thecorporation.

The incorporator calls the first meeting of directors. At the meeting, the incorporator appoints the first set of directors, adopts the By-laws and then resigns as incorporator. The By-laws adopted by the incorporator require that written notice be given to the directors of a meeting before any action can be undertaken. The notice requirement to directors for a meeting is contained all By-laws. For the First Meeting of Directors to continue, the directors sign a waiver of notice agreeing to waive the required written notice and to proceed forward with the meeting. Following the Minutes Chapter is a waiver of notice of a corporation for its First Meeting of Directors.

After the waiver is signed, the directors then take over the meeting. The directors propose, consider and then adopt resolutions on such diverse matters as the tax year, opening a bank account, choosing a membership certificate and adopting the corporate seal. The directors then elect the officers of the corporation. Finally and most importantly, the directors issue membership certificates to the members. When the membership certificates are issued, the incorporation is complete.

20. WHAT IS AN ANNUAL STATEMENT OF OFFICERS?

Virtually every state requires a nonprofit corporation incorporated under its laws to annually file with the Secretary of State a list of its officers and directors. Most importantly the corporation is required to name the person appointed to receive personal service of documents for the corporation in the state.

Also, and perhaps most important in the state's view, is thefact that this list of officers and directors must be accompanied by a fee usually between $5.00 and $50.00. This list of officers and directors is open to the public. Anyone wishing to sue a corporation can request a copy from the Secretary of State to determine the name and address of the agent for service of process.

21. MUST A CORPORATION FILE A FICTITIOUS NAME STATEMENT?

All states require that if any corporation does business under a name other than the exact corporate name in its Articles of Incorporation, then the corporation must file a fictitious business name statement. The purpose behind requiring the filing of a fictitious name statement is to give notice to the world as to who actually is running the business. Usually the filing is in the county clerk's office where the business is being conducted under the fictitious name. If the corporation does business under a fictitious name in several counties then the filing must be in every county where it does business.

22. WHAT IS A FEDERAL IDENTIFICATION NUMBER?

Any employer is familiar with the Federal Identification Number since all employers are required to have one. Once a non-profit corporation is incorporated, the corporation needs a number because the corporation becomes an employer.

A Federal I.D. number is obtained by filing Form SS-4 with the I.R.S.. The corporation should file for the I.D. number as soon as possible after the Articles are filed. If the corporation wishes to receive a federal tax exemption, then the Form SS-4 must be filed with the application for tax exemption if it was not filed earlier.

END OF CHAPTER PREVIEW


CHAPTER TWO

STEPS FOR INCORPORATION

I. INTRODUCTION

There is no mystery or difficulty in forming a nonprofit corporation. In its simplest sense, a corporation of any type is merely a license to do business in a particular manner. In that sense the articles of incorporation should be considered an application that becomes the license when filed by the secretary of state. In fact in legal parlance a corporation is considered as having been "licensed to do business" once the articles are filed. In a few states the term "articles of incorporation" is not used but instead it is entitled a "certificate of incorporation" or a "charter of incorporation." In any event, whatever a state calls the formation document, they all require the same basic information.

The act of incorporating a nonprofit business is simple. All it entails is the filing of the articles of incorporation and the subsequent issuance of membership certificates. The actual act of incorporating is no more than having the articles file-stamped in the secretary of state's office (this can also be accomplished by mail). There are many companies that provide corporate kits which include basic articles, minutes and bylaws specifically designed for use in just one state. The usual cost is between $50 and $100. Unfortunately, the corporate kit does not address the many issues or provide the information containedin this book for issues occurring after the incorporation. This book goes beyond and provides guidance and advice on considerations that arise in forming any corporation. The articles contained in this book are a starting point for any incorporation. Before filing any articles the reader should decide any additional provisions wanted in the articles. In addition, the reader should read those provisions in the state's corporation code (available in most public libraries) to ensure the state law has not changed. A reader of this book may purchase a corporate kit for a particular state to supplement this book.

This book is designed to provide the user with a detailed analysis of the problems, issues and procedures faced in the formation of any nonprofit corporation, particular by those of a small local nonprofit organization. There are many choices that an incorporator must face in forming a nonprofit corporation. Those choices can be difficult given the many options available and the particular concerns of each business. Neither this book nor any book can replace the cold, practical consideration of the actual person forming the corporation. That person knows the purpose behind the incorporation and how the corporation will be operated. This book will steer the incorporator to those provisions and issues of concern and their most practical use.

This book is intended to be used for the creation small or local nonprofit corporations. It allows small groups of individuals to create a nonprofit corporation to accomplishlocal charitable, educational, community safety or ecological concerns with as little expense as possible. For purposes of this book, a large nonprofit corporation is one that has many chapters throughout a state or the country. While there is no difference in the formation of a large or small nonprofit corporation, the applications for federal and state tax exemptions are more complicated for the larger one. In addition, the bylaws are more complex to accommodate the concerns and rights of members from all the chapters.

This book is for use by those individuals who seek to incorporate a single nonprofit corporation which will not have chapters with as little expense as possible. Whether the reader actually employs the articles, minutes, bylaws, resolutions and agreements in this book is not as important as providing him with the information contained here so he can make informed decisions.

II. PROCEDURE

The steps for incorporating a nonprofit corporation are simple: file the articles of incorporation and issue the membership certificates. In arriving at this result, the corporation will go through the following steps:

A. CHOOSE A CORPORATE NAME

All corporations must have a name that denotes it is a corporation and not a partnership or sole-proprietorship. As such, the name usually must contain the word "Incorporated," "Corporation" or "Limited." The name must not mislead the public into believing it is an agent of the federal or stategovernment. The name of the corporation must not mention or suggest involvement in a regulated or licensed field unless the corporation has that license.

In practice the main concern is whether the proposed name is so similar to an existing corporation's name as to mislead the public. No state will permit two corporations to have the same name or names so similar that they are confusing.

To avoid the possibility of having the articles rejected because of similarity to the name of an existing corporation, the incorporator should conduct a name search with the secretary of state's office. If the name is not already reserved or in use, it can be reserved for a fee, usually $3 to $10, for 60 days or longer. The search can be done by mailing a request with the proposed name and a check for the search to the secretary of state. Telephone the secretary of state's office to determine the amount of the check and where to send it. A search through the secretary of state's office will take perhaps 30 days. There are attorney service firms near the state capitol that will do the name search and reservation within two days for about $30. From these firms can also usually be purchased a corporate kit for use in the state, if desired.

If the corporation will be doing business in other states, it must be aware that it may have to operate under a fictitious name if the corporate name is substantially similar to an existing business in any of those states.

A corporate name does not have to be reserved. If theincorporator feels the chosen name is unique, he can simply submit the articles for filing. If the corporate name is unique, the articles will be accepted. If a similar name has already been taken, the secretary of state will reject the articles. If it is discovered later that the articles were mistakenly filed and that a corporation with a similar name already existed, the secretary of state will require an amendment to be filed changing the name to one that is not similar to an existing corporation, or the secretary of state will cancel the incorporation.

B. PREPARING AND FILING ARTICLES

After the corporate name is reserved, the incorporator then prepares and files the articles of incorporation. This book contains a detailed chapter for preparing the articles. Each state has it own requirements for the contents of the articles. This book provides a general set of articles sufficient for most states. The reader should nonetheless familiarize himself with the particular corporation law of the state where the corporation will be formed.

The articles contained in this book are skeleton articles. They may be retyped with additional provisions added. Moreover, a particular state may require provisions added to the articles to conform to changes in state law.

After the articles are prepared, they are filed with the secretary of state's office. Most states require the articles to be file in triplicate and all originally signed by theincorporator. Therefore, four or more copies should be filed so the corporation will receive a conformed, file-stamped copy. The filing can be made by mail; it will take 30 to 60 days for return. The alternative is to use an attorney service firm to file the articles. Such a firm usually takes only a week to get the articles returned and charges about $50 for the service. The advantage of using an attorney service firm is that any necessary corrections can be made faster.

At the time that the articles are filed, the incorporator must pay the filing fee and the yearly franchise fee for the corporation. The fee for formation of a nonprofit corporation is much less than that of a profit-making corporation. In Nevada, for instance, the fee is only $35 which includes $10 for the resident agent form. Telephone the secretary of state's office to obtain the correct amount of the fees. An attorney service firm also will know the amount of fees.

C. ISSUANCE OF MEMBERSHIP CERTIFICATES

After the articles are filed, the corporation exists in a defacto mode. That means the corporation exists on paper only. Until membership certificates are issued it does not exist at law (de jure). It is the fact that the nonprofit corporation has outstanding membership certificates in the hands of its members that is the defining characteristic of a nonprofit corporation.

Once the articles are filed, the incorporator calls a special meeting of directors. In most states, the initial directors are named in the articles. In other states, theincorporator appoints the first directors at the meeting.

At the first special meeting, the bylaws are adopted by the corporation. This is an important step because adoption of the bylaws creates the officer positions of the corporation and governs daily operations. The officers of the corporation are then appointed.

The most important matter of business at the first meeting of directors is the issuance of membership certificates. When the membership certificates are issued to those persons or entities which are to become the nonprofit corporations' members, the incorporation is complete. The chapter entitled "First Meeting of Directors" amply covers the first meeting.

D. AFTER FIRST MEETING OF DIRECTORS

After the first meeting of directors, the corporation is fully formed. The matters undertaken thereafter are general housekeeping chores. They deal with filing the respective state notices of tax exemption, filing or publishing the articles, filing a fictitious name statement if necessary, and establishing the proper accounting procedures. These matters are discussed in the chapter "Afterwards: Post Incorporation Acts."


CHAPTER THREE

ADVANTAGES OF INCORPORATING

Once people decide to get together to conduct nonprofit activities, the next consideration should be whether or not to incorporate. Almost always there will be some person who will feel that the organization is too small and its operations too personal to need incorporation. Such were the arguments that were presented to the Aviation Association of a small Nevada county shortly after it was formed. The significant advantages of incorporation as a nonprofit corporation were discussed. In the end it was approved to incorporate the association and seek a federal tax exemption.

A corporation is an artificial entity created in conformity with a particular state's law. As a distinct legal entity, a corporation is considered to be separate and apart from all of the people who own, control or operate it. A corporation holds most of the rights of a legal person. A corporation is able to execute contracts, incur debts, hold title to both real and personal property and pay taxes. The attractiveness of corporations stems from the very fact that they are held to be separate legal entities from the owners (the shareholders). This gives them unique advantages over both sole proprietorships and partnerships.

A nonprofit corporation is a special type of corporation with its own body of law. The primary purpose of such a corporation is to provide some type of beneficial service to the public and notto make money, hence the name "nonprofit." A nonprofit corporation is formed by one or more persons for the benefit of the public, for the mutual benefit of its members or for religious objectives. Most nonprofit corporations are formed for religious, charitable, literary, scientific or educational purposes.

Stock is not issued in a nonprofit corporation, nor are any profits from the corporation distributed to the members. Most nonprofit corporations are required by state law to transfer their assets to another nonprofit corporation or give the assets to the state upon dissolution. A nonprofit corporation is usually organized to obtain an exemption from state or federal taxes on its operations. A nonprofit corporation is not automatically exempt from federal taxation. A nonprofit corporation must file an application with the IRS for tax exempt status and have the application approved.

The following arguments support of incorporation of any non-profit entity. These arguments apply to any group which is considering engaging in nonprofit activities.

I. LIMITED LIABILITY FOR ITS MEMBERS

The main advantage that a nonprofit corporation has over an unincorporated association is that a member is not personally liable for the debts of the corporation or the actions of the employees. In an unincorporated association, if an associate or employee does an act in the scope of employment that injures another person, each member of the association may (depending on state law) become personally liable to pay for the resultingdamages.

A few states apply the partnership liability rules to unincorporated associations. These states find that all members of an unincorporated association are liable for the payment of all debts of and all judgments against the association. In these states the liability is absolute, and it makes no difference whether the member agreed to the incurring of the debt or even knew about it. As long as the person was a member of the association, the member is responsible for payment of all debts and liabilities of the association.

Most states, however, do not apply the absolute partnership liability rule to an association. These states will find a member liable for the debts of or judgments against the association only if the member had consented to the action which resulted in the debt or judgment. This limitation of liability for an association is not as great a protection as it seems. The courts of these states have held that if a member consents to an action being taken by a fellow member or employee, that member is responsible for all damages resulting from that person's conduct in performing that action. This is known the theory of Respondeat Superior under the state's agency and partnership law. If a member agrees to the association pursuing a certain endeavor or course of conduct, that member will be personally liable for the debts incurred by the association in that pursuit. The member will have to be on record opposing the conduct to avoid such liability. Corollary: A member who initially opposed the association's conduct will be foundliable for resulting damages if he subsequently ratified the conduct by either word or deed.

The main advantage of a corporation, whether a profit or nonprofit corporation, over an association is the assured limited liability it provides its shareholders or members. As a corporation, the most that its members can lose in a lawsuit against the corporation is the assets they contributed to the corporation. This limited liability for corporate shareholders is vastly different from an unincorporated association where the associates may be found to be totally liable for all debts. The creditors of the association can seek and attach every dollar and piece of property that each associate owns to settle a judgment. Such personal attachment to satisfy corporate debts cannot be done against the assets of a member of a nonprofit corporation.

Few people would ever participate in an organization for the public good if they risked losing everything they had earned or will earn. At the meeting of the Aviation Association of Douglas County, the members were asked if they owned a house, a car, a plane, a pension plan or if they were employed. They were asked to look around the room, and they were told that under state law each one was personally liable for payment of any association debt or judgment which occurred from a act or policy to which he agreed. They were reminded that they had not worked all of their adult life to become a benevolent insurance company for other people's actions. They were told that every state has enacted a nonprofit corporation law to permit people like themselves to get togetherand operate for charitable purposes without incurring personal liability. When all was considered, the Aviation Association voted unanimously to seek nonprofit corporate status. Even those persons who were initially opposed voted for the incorporation. Yet the other advantages of incorporating had not even been discussed.

It is the risk of personal liability by belonging to an unincorporated association (especially as an officer or director) that is the prime reason behind incorporating as a nonprofit corporation.

II. FEDERAL TAX EXEMPTION

The second advantage of incorporating is that a nonprofit corporation usually can qualify to receive federal and state tax exemptions that an unincorporated association usually cannot receive. A qualified nonprofit corporation which obtains federal and state tax exemptions will not have to pay any taxes on the income that is derived from its related business activities. By not having to pay taxes, the corporation will have 30% to 40% more in income to apply towards its exempt goals.

In addition, contributions to most tax-exempt nonprofit organizations are tax deductible: see section 501(c)(3) organizations for which this book is designed. This means that a person or entity making contributions to such an organization will be permitted to deduct the value of the contribution on the donor income tax return. It is very beneficial for a nonprofit corporation to receive a 501(c)(3) tax exemption rather than an exemption under the other 501(c) subsections. Once anorganization receives a 501(c)(3) tax exemption, all contributions to it are tax deductible. Tax deductibility of contributions is a prime incentive for donors to make contributions to an organization.

A 501(c)(3) tax exemption is the most desired status. It is advantageous for a nonprofit organization to have a 501(c)(3) tax exemption because contributions to the organization are tax deductible by the donor. A contribution to a tax-exempt organization that is not tax deductible cannot be used to reduce the donor's federal income tax: the contribution is made in after-tax dollars. Most donors want the tax advantage of being able to include a portion of their contributions on their income tax return as a deduction. More money is contributed to an organization if the contributions are tax deductible.

Another advantage of receiving a federal tax exemption is that gifts made to the organization after the death of the donor are deducted dollar-for-dollar from the gross estate of the donor. Federal tax law requires that all estates over $600,000 that pass to someone other than the donor's spouse be taxed on a progressive scale which reaches 55%. Gifts to a 501(c)(3) organization reduce the gross estate of the donor for tax purposes.

III. FINANCIAL GRANTS AND DONATIONS

An advantage of nonprofit corporations over unincorporated associations is the availability of federal and state grants. Both federal and state governments have many agencies which will bestow grants to qualified nonprofit corporations. Such grants are notusually available to unincorporated associations. Information for state grants can be difficult to obtain unless the state publishes a list of such grants. If such a list is not published, information on state grants can be obtained from state legislators.

It is much easier to get information on federal grants. The U.S. Printing Office, Washington, D.C. publishes the Catalog of Federal Domestic Assistance which lists every federal agency which gives grants. These grants are almost always limited to nonprofit corporations or other governmental agencies. A few of the grants from federal programs for which a nonprofit corporation formed through the use of this book might be interested are:

Grants are given to develop new knowledge for the treatment and diagnosis of drug abuse and intravenous related AIDS. Annual funds available: $191,205,000.

Grants are given to develop new knowledge for DNA sequences of the genomes for humans for use in developing treatment for genetic diseases. Annual funds available: $78,000,000.

Grants are given to develop new knowledge for the treatment and diagnosis of cancer. Annual funds available: $286,888,000.

Another related program is CANCER DETECTION AND DIAGNOSIS AND RESEARCH to help identify cancer early enough to use the latest treatments. Annual funds for this program: $75,000,000.

Grants to support the development of rural health research centers to provide an information base and a policy analysis on rural health issues. Annual funds available: $1,800,000.

Grants to support research into and to improve treatment methods of mental illness and behavioral disorders. Annual funds available: $257,000,000.

Grants are available to promote the understanding of how chemical and physical agents cause diseases. Annual funds available: $65,000,000.

Grants are available to develop non-nuclear energy technologyby promoting promising energy-related inventions. Annual funds available: $5,700,000.

Grants are available to research energy conservation technologies into the areas of buildings, industry and transportation. Annual funds available: $2,000,000.

Grants are available for projects designed to support the various arts. DESIGN ARTS ($3,686,000), DANCE ($8,500,000), LITERATURE ($4,435,000), MEDIA ($11,700,000), THEATER ($9,600,000), VISUAL ARTS ($5,300,000), FOLK ARTS ($2,800,000).

In addition to receiving grants, nonprofit corporations can receive donations and loans of personal property from government agencies and other nonprofit corporations. Some of the programs which are available to eligible nonprofit corporations are:

The Smithsonian Institute Traveling Exhibition Service works with local nonprofit organizations to sponsor between 80 and 100 exhibits each year throughout the United States. Over half of the exhibits are in rural counties.

Free books can be obtained from the Library of Congress. The Library of Congress first offers books for sale. Books which are not sold can then be given or sold to nonprofit corporations.

Nonprofit groups may apply for surplus commodities held by the Agricultural Department. Such commodities include flour, oils, milk and cheese. A nonprofit corporation which runs a food bank or food kitchen can qualify for such commodities.

A nonprofit corporation which provides housing for the homeless may lease or be deeded title to unused federal real property to aid in its operations. A list of available property can be obtained by calling 1-800-927-7588. The publication "Obtaining Federal Property for the Homeless: Questions and Answers about Federal Property Programs" can be obtained from the above agency.

The General Services Administration (GSA) donates property to nonprofit organizations which has not been sold. Such property is usually sold for 2% of its value plus a handling fee. The property handled by the GSA can be anything that the federal government owns. The nonprofit organization will make a request for property that will aid its exempt purposes.

All of the above programs and many others not mentioned are available to nonprofit corporations. To access such programs, the corporation must contact the agency administering the program andask for the appropriate application and information. Most agencies are very happy to reply because the more interest they have, the more money they can seek from Congress and the bigger they can grow.

IV. CONCLUSION

If two or more individuals wish to engage in a nonprofit activity, they should incorporate. Every state has enacted a nonprofit corporation act to protect individuals engaged in nonprofit activity from the personal liability for the debts of the organization in which they are involved. This protection is not available to individuals engaged in an unincorporated association even though it exists for nonprofit purposes. For this reason if no other the organization should incorporate.

In addition to the limited liability for its members, a nonprofit corporation has a significant tax advantage over an unincorporated association if it gets a federal tax exemption under section 501(c)(3) of the Internal Revenue Code. Contributions to such a nonprofit corporation are tax deductible to the donor. The tax deductibility is a great incentive for donors to contribute to a nonprofit corporation rather than an unincorporated association to which such contributions are not deductible.

Finally, a nonprofit corporation is able to tap into a wide variety of state and federal programs which are not available to unincorporated associations. Such programs may result in the corporation having access to funds or property which are not available to unincorporated associations.

Based upon the foregoing discussion, it is generally in the best interest of any group intending to operate for nonprofit purposes to become a nonprofit corporation and to seek federal and state tax exemptions.


CHAPTER 4

TAX EXEMPTIONS

I. INTRODUCTION

One of the most important reasons for forming a nonprofit corporation to conduct nonprofit activities is because a nonprofit corporation usually can receive federal and state tax exemptions while an unincorporated association usually cannot receive them. A qualified nonprofit corporation which obtains federal and state tax exemptions will not have to pay any taxes on the income that is derived from its related business activities. By not having to pay taxes, the corporation will have 30% to 40% more income to apply towards its exempt goals. For example, assume that an unincorporated association operates an art museum earning $100,000 per year after expenses. Since it does not have a nonprofit federal exemption, it will have to pay approximately $28,000 in taxes. On the other hand, an art museum that is a nonprofit corporation, with a federal tax exemption, would not pay any federal taxes for its exempt activities.

Another significant reason for seeking a federal tax exemption is that contributions to section 501(c)(3) tax exempt nonprofit organizations (those for which this book is designed) are tax deductible to the donor. This means that a person or entity making contributions to such an organization will be permitted to deduct the value of the contribution from reported income on the donor's tax return. It is very beneficial for a nonprofit corporation toreceive a 501(c)(3) tax exemption instead of an exemption under the other 501(c) subsections. Once an organization receives a 501(c)(3) tax exemption, all contributions to it are tax deductible. Tax deductibility of contributions is a prime incentive for donors to make contributions to an organization. Example: John Smith wishes to give $150,000 to charity. If Smith gives it to an unincorporated association, he will not get a tax deduction. Instead, if Smith gives it to a tax section 501(c)(3) organization (defined below) the contribution will be deductible. Smith is in a 33% tax bracket. He will save $50,000 on his taxes: his actual cost of the gift is $100,000, and the charity gets $150,000. The donor to a 501(c)(3) nonprofit corporation receives a premium for the contribution in the amount he can deduct from his taxable income. As a result, donors are more willing to make their contributions to an organization when the donor will be able to deduct the value of the contributions and thus reduce his tax liability.

Another aspect of an organization having a federal tax exemption is that gifts made to the organization after the death of the donor are deducted dollar for dollar from the gross estate of the donor. Federal tax law requires all estates over $600,000 that pass to someone other than the donor's spouse be taxed on a progressive scale that reaches 55%. Gifts to a 501(c)(3) organization reduce the gross estate of the donor for tax purposes. For example, assume that John Smith, a widower, has an estate of $2,100,000. Smith's last will gave $1,000,000 to a local homelessshelter which is a nonprofit corporation with a federal tax exemption. Smith's estate is then reduced to $1,100,000. The taxable estate is $500,000 ($1,100,000 minus the $600,000 unified credit). The state tax is $155,800 If the gift had not been made the taxable estate would have been $1,500,000. The estate tax would have been $555,800.

A nonprofit corporation also can receive a state exemption from taxes. Many states will not require any forms to be filed to get a state tax exemption because they grant such exemptions automatically to nonprofit corporations. Other states will grant the exemption only after the corporation receives the federal tax exemption and will then retroactively apply the tax exemption.

After receipt of the state tax exemption, the corporation should contact the local county tax agency to determine if any forms must be completed to be exempt from local real property and personal property taxes. Such exemptions are automatically granted once the organization receives the state income tax exemption. The State's Laws chapter lists the taxing agency for each state that governs the granting of state tax exemptions.

There are two types of tax exempt organizations: those to which contributions are deductible and those to which contributions are not deductible. This book can be used to incorporate a nonprofit corporation. In applying for tax exemption, this book is geared to those nonprofit corporations to which contributions will be deductible by the donor. The reason for this is that nearly all nonprofit corporations which receive a tax exemption qualify as asection 501(c)(3) organization and thus contributions to them are deductible. This book will discuss in a general way those special tax-exempt corporations to which contributions will not be deductible, and it will detail how to complete a tax exemption application and discuss other aspects of the donor-deductible-contribution nonprofit corporation.

II. 501(c) TAX EXEMPT ORGANIZATION, CONTRIBUTIONS NOT

DEDUCTIBLE BY THE DONOR

A. GENERAL

Under the Internal Revenue Code certain specifically defined nonprofit organizations are permitted to receive a federal tax exemption. However the tax law does not allow contributions made to these designated nonprofit organizations to be deductible by the donor on his tax return. These nonprofit organizations are treated differently than the majority of nonprofit corporations formed under section 501(c)(3) (discussed below) that are not only tax deductible but contributions to them are deductible by the donors. These organizations must complete IRS FORM 1024 to receive a tax exemption. Form 1024 is similar to FORM 1023 used by nonprofit corporations seeking an exemption under section 501(c)(3). An organization that must file FORM 1024 can review how FORM 1023 is completed in this book and use it for reference. Such an organization should also review IRS publication 557 "Tax-exempt Status for Your Organization" before completing the tax exemption application. FORM 1024 and Publication 557 can be obtained free from the IRS by calling 1-800-TAX FORM.

B. 501(c) NON-DEDUCTIBLE CORPORATE DONATIONS

The following are those special tax corporation for which contributions usually will not be deductible:

A nonprofit corporation which is formed to accomplish any of the above purpose will receive a federal tax exemption. Contributions to such a corporation, however, will usually not be deductible. This rule is not hard and fast. It is possible for a non-501(c)(3) corporation (one of the above) to establish a fund from which it will conduct only activities that would otherwise satisfy 501(c)(3) purposes. Contributions to this special fund will be tax deductible. The rules for establishing this separate 501(c)(3) fund are covered in Publication 557.

III. 501 (c)(3) TAX EXEMPT CORPORATION, CONTRIBUTIONS

DEDUCTIBLE BY THE DONOR

A. PURPOSES

Only contributions to a nonprofit corporation that received a federal tax exemption under IRC section 501(c)(3) will be deductible to the donor. A 501(c)(3) tax exemption is the most desirable form in the IRS inventory. It is advantageous for a nonprofit organization to have a 501(c)(3) tax exemption because its permits deductions to the organization to be tax deductible by the donor. A contribution to a tax exempt organization which is not tax deductible cannot be used by the donor to reduce his federal income tax: the contribution is made in after-tax dollars. Most donors want the tax advantage of being able to deduct a portion of their contributions from their personal reportable income on their income tax return. Moreover, more money can be contributed to the organization if the contributions are deductible.

Section 501(c)(3) organizations are nonprofit corporations which are formed exclusively to accomplish one or more of the following purposes:

A nonprofit corporation that is formed exclusively to pursue one or more of the above purposes will receive a federal tax exemption under section 501(c)(3). It is relatively easy for a tax exempt organization to qualify for 501(c)(3) tax exempt status. An important aspect to remember is that whatever activity is undertaken, its function must be to achieve or further one or more of the stated purposes:

1. RELIGIOUS PURPOSES.

A religious tax-exempt organization under section 501(c)(3) includes both formalized churches and the auxiliaries. The IRS does not question tenets of faith as long as they are not against the law. As long as the activities of the organization foster religious worship or advance a religious purpose or belief, the organization will be found to have a religious purpose and qualify for a 501(c)(3) tax exemption.

Nearly any activity which furthers the advancement of religion will satisfy the religious purposes test. It is not uncommon for such an activity to satisfy a charitable or educational purpose while satisfying a religious purpose as well. For example, assume that a religious organization operates a soup kitchen for the destitute. It would qualify for a 501(c)(3) tax exemption both as a religious organization and as a charitable organization. Publishing a newsletter to promote religious belief or interests has been held to promote religion and qualify for a 501(c)(3) tax exemption.

An organization has the option of applying for a 501(c)(3) tax exemption as either a church or a religious organization. If the organization qualifies as a church, it will receive automatic public charity status. An automatic public charity does not have to meet public support standards in order to maintain its tax exemption. All other 501(c)(3) organizations must maintain a minimum of public support to continue to receive their public charity status (as discussed below). To be considered a church, theIRS and the courts will closely examine the operation of the organization. Any organization seeking church status will be required to complete a special IRS schedule which, among other matters, will investigate the following:

Most of us tend to know if an organization really qualifies as a church or is just a religiously affiliated organization. From a practical standpoint, both types of organization will get a tax exemption. The religiously affiliated organization, however, will have to be concerned with satisfying the public support requirement for maintaining the tax exemption.

2. CHARITABLE PURPOSES.

It is under the charitable purpose requirement that nearly all 501(c)(3) organizations qualify for their tax exemption. The reason for this is that the word charitable is broadly defined to encompass anything that is "beneficial to the public interest." Most nonprofit corporations have activities that satisfy an educational, literary or scientific purpose that will usually also satisfy a charitable purpose.

A charity exists to benefit the public. The public is defined as being an indefinite number of persons rather than defined individuals. A charity can exist to aid a particular group as long as the group is open and the persons to receive the benefit are not specifically identified. For example, assume that a nonprofit organization formed to aid the homeless in a city has a charitable purpose; an organization to aid specially named homeless persons. Such a nonprofit organization will not have a charitable purposefor tax purposes.

"Charitable purpose" is, as stated above, broadly defined. A charitable purpose is anything that aids the public. Examples of charitable purposes have been:

A charity is permitted to make money from its activities. It is just not permitted to distribute the money earned to any shareholder or member. The profits of the charity must be used to achieve or further the charitable purpose for which the nonprofit corporation was formed.

3. SCIENTIFIC, EDUCATION AND LITERARY PURPOSES.

The other remaining purposes for the 501(c)(3) tax exemption overlap so much that the definition of "charitable purpose" must be included. The test is whether the public is benefited by the activity performed by the nonprofit corporation. Scientific research to find a cure for a disease or add to human knowledge qualifies for a tax exemption as both a scientific and charitable purpose. In applying for a tax exemption under any of these purposes, the application should be broadly drawn to highlight the charitable aspect of the activity as well.

The above five purposes are the only ones for which a 501(c)(3) tax exempt nonprofit corporation can be formed. A tax exempt corporation cannot mix 501(c)(3) purposes with any of the other 501(c) subsections discussed above. If it does, the corporation will still be tax exempt, but it will be tax exempt under the other 501(c) subsection and not section 501(c)(3). Example: A 501(c)(3) organization also performs functions as a civic league. It may lose its 501(c)(3) status and be treated asa 501(c)(4) nonprofit corporation.

There are two types of 501(c)(3) tax exempt organizations: the public charity and the private foundation. The differences between the two types are in the percentage of contributions which a donor may deduct on his income tax return and operating limitations. The differences are discussed in detail below.

B. TYPES OF 501(c)(3) ORGANIZATIONS

1. PUBLIC CHARITIES

Of the two types of 501(c)(3) organizations, the best one to be is a public charity. The advantages of a public charity over a private foundations are:

These advantages make it desirable for a nonprofit corporation to be classified as a public charity rather than a private foundation. The Congress, however, is concerned with collecting as much tax revenue as possible. More tax revenue will be collected if a 501(c)(3) organization is treated as a private foundation. For this reason, Congress has decreed that a 501(c)(3) tax exempt organization will be classified as a private foundation unless it can prove that it is a public charity.

In order for a 501(c)(3) organization to prove that it is entitled to public charity status, it must pass one of three tests. The three tests which determine if a 501(c)(3) tax-exempt organization should be classified as public charity are:

a. THE AUTOMATIC CHARITY TEST

Some lucky 501(c)(3) organizations are automatically classified as public charities and do not have to pass either of the two following tests. Nonprofit corporations that qualify for public charity status have as their main purpose the operation of

While it is desirable for a 501(c)(3) organization to be classified as a public charity, few such organizations qualify. An organization which does not meet the public charity requirement may still be classified as a public charity if it passes either of the two public support tests defined below.

b. PUBLIC SUPPORT TEST

A 501(c)(3) tax-exempt corporation will be classified as a public charity if:

In determining public support membership, fees and dues are treated as public support as long as the members do not receive a benefit in exchange for them. As long as the fees and dues are solely to acquire and maintain membership, they are counted as public support. If the fees and dues are used to purchase a benefit from the organization (such as use of it facilities) they are not considered public support. The defining point is whether the member receives anything of value for the fees or dues.

Investment income is not considered public support but is considered in calculating the corporation's total support. Hence, an organization with large investment income may have problemssatisfying the public support percentages. In the same vein, income derived from unrelated business activities (those not furthering the exempt purpose of the organization) is not counted as public support but is counted towards total support.

Income derived from the sale of assets or from the performing of tax exempt activities is not counted in any way. Such income is not counted either for total support or public support of the corporation. Income derived from performing exempt activities includes admission fees for public events and fees charged for hosting seminars or for selling merchandise related to the corporation's exempt purposes.

(i) LIMITATIONS ON PUBLIC CONTRIBUTIONS TEST

As with most government tests, there are always qualifiers. In calculating total support, all funds that the corporation receives during the four-year period are included. When calculating the public support percentage, however, there are limitations on the amounts of contributions from certain individuals which can be considered.

In determining the percentage of public support, there is a limitation on the amount that an individual, trust or corporation contributes to the nonprofit corporation that can be counted toward public support. The total amount of contributions from any individual, trust or corporation for any four-year period which will be counted towards a nonprofit corporation's public support cannot exceed 2% of the corporation's total support. This limitation only applies to contributions from the public. There is no limitation on the amount of contributions from government agencies or other public supported organizations that can be included in calculating total public support. For example, assume that ABC nonprofit corporation received $100,000 in total support over four years. $60,000 came from government grants and $40,000 from the public. George Smith contributed $20,000. In calculating total public support, the $60,000 from government sources is counted in total, the $20,000 from other public sources is also counted in total. Smith's contribution is limited to $4,000 (2%of the total $100,000). The total public support is $84,000 (84%). Since public support percent is over 33%, the organization qualifies as a public charity.

On the other hand if ABC nonprofit corporation received $1,000,000 in total support over four years with $300,000 coming from three people each and $100,000 from a fourth person, the limitation on contributions from each individual would be 2% of $1,000,000 or $20,000. The total public support would be $80,000. The corporation would fail this test because public support would be only 8%.

As with any rule, there are exceptions to the 2% limitation on public contributions when calculating support. If the contribution takes the form of an unusual contribution, it will not be counted either for public support or total support. An unusual grant is considered to be one that:

If an organization is found to have received an unusual grant, the value of the grant will not be considered in determining the percentage of public support. It is to the advantage of an organization to strive to maintain a level of public support so that it will meet the required minimum standards.

(ii) ATTRACTION OF PUBLIC SUPPORT TEST

If the corporation cannot meet the 33% minimum of public support, it will still be classified as a public charity if it has at least 10% public support and satisfies an IRS requirement of attracting public support.

In determining if an organization has been attracting public support, the IRS evaluates several separate factors, none of whichare determinative in itself. The IRS looks at:

If an organization is able to pass this test, it will be classified as a public charity. If the corporation is unable to pass this test, it may still achieve public charity status if it passes the General Support Test below.

A 501(c)(3) tax exempt corporation will be classified as a public charity if it passes the general support test. Under this test, the corporation will be a public charity if:

In place of the 2% limitation used in the public support test, this test has a limitation of $5,000 or 1% of total support that can be received from individuals, corporations or entities for the performance of any tax exempt activity. This limitation applies only to performance of tax exempt activities, it does not apply to contributions, membership fees or grants to the organization that are not receipts or payments for the performance of tax exempt activities. For example assume that ABC Orchestra nonprofit corporation holds a charitable auction to buy new instruments. The corporation earned $250,000 for the year. At the auction, it sold John Smith a violin for $50,000. The greater of $5,000 or 1% of $250,000 (which is $2,500) will be counted as the public support from John Smith.

Grants are not subject to the $5,000-or-1% limitation if they are not for the performance of tax-exempt activities; the person or entity making the grant does not expect to receive any personal benefit from the performance of the tax-exempt activity. This issue most often arises where a tax-exempt entity is given a grant which is specifically dedicated for use in conducting tax-exempt activities that somehow benefits the donor. Thus the grant is for performance of tax-exempt activities and is therefore subject to the $5,000-or-1% limitation. For example, assume that a farmer gives to a nonprofit scientific research corporation specifically for use to develop bug-resistant crops. The grant is subject to the limitations. As with the public support test, when the grant is found to be unusual, it is excluded from both the total support and public support calculations for the general support test.

The general support test is the test by which most 501(c)(3) organizations will receive their public charity designation. This test is most useful for self-sustaining organizations which must rely upon themselves to survive.

c. CONCLUSION

If a 501(c)(3) tax-exempt corporation cannot pass any of the above three tests, it will be classified as a private foundation and treated accordingly. Even if a tax-exempt corporation cannot become a public charity, becoming a private foundation still delivers strong advantages.

2. PRIVATE FOUNDATIONS

A tax-exempt organization formed under IRC section 501(c)(3) will be either a public charity or a private foundation. If the organization fails to meet any of the three tests for a public charity, it will be classified as a private foundation. If a private foundation is going to be a private operating foundation (one that performs activities or provides services rather than merely distributing funds to other tax-exempt organizations), it is required to meet its own special income test and one of the three following tests: an assets test, an endowments test or a support test. It is assumed that the nonprofit corporation being formed will seek public charity status. If a private foundation is being created, the instructions for completing Form 1023 are still valid, but Publication 557 should be read prior to completing the application.

The IRS assumes that all 501(c)(3) organizations are private foundations unless they can prove by their applications that they are entitled to public charity status. Unless the tax-exempt organization applies for public charity status (submits Form 1023) within 15 months of formation (or within any granted extension) it will be classified as a private foundation even though it would otherwise qualify as a public charity.

The main difference between a public charity and a private foundation is who runs it and where does it get its money. A public charity must receive a minimum amount of support from the general public or governmental agencies. In addition, public charities must have boards which are open to the public. By comparison, private foundations do not have fixed minimums for public or government support. In addition, the boards for privatefoundations are often closed to input from the public. Private foundations often are established by wealthy families, (Ford Foundation, Rockefeller Foundation) etc. and are often controlled by members of that family. The funds for many private foundations come mostly from endowments provided by the creators of the foundation and subsequent investment income.

Because private foundations usually have a close relationship with its founders, Congress has imposed special operating restrictions on them. The purpose of these restrictions is to assure that private foundations are not used to give any special tax benefits to their creators. These limitations are covered in IRS Publication 578, TAX INFORMATION FOR PRIVATE FOUNDATIONS AND FOUNDATION MANAGERS, and are as follows:

In order for a nonprofit corporation to receive a tax exemption as a private foundation, the articles of incorporation for the organization must meet the following provisions:

The Articles of Incorporation contained in this book include these provisions. Hence if the IRS finds the corporation does not qualify as a public charity but does qualify as a private foundation, the tax exemption as a private foundation could then be issued. Without such provisions, the tax exemption would be denied, and the corporation would have to amend the articles to get the private foundation tax exemption.

IV. LIMITATIONS ON HOW 501(C)(3) TAX-EXEMPT CORPORATIONS OPERATE

There are certain limitations on the operation of 501(c)(3) corporations that apply whether or not they are public charities or private foundations.

There is a unique limitation on how a 501(c)(3) organization can operate. A corporation might offer to sell to the public or offer services to the public which could be obtained free from the federal government or for a nominal fee. If it does, section 6711 requires the corporation to include a statement in its offering materials (or otherwise inform the client) that such information or services can be obtained for free or at a nominal charge from the government. Failure to disclose this information will subject the corporation to fine. This matter is discussed in detail in Publication 557.

A 501(c)(3) organization is forbidden from substantially engaging in activities that are not related to furthering the tax exempt purposes for which the organization was formed. It is recognized most nonprofit organization must engage in some unrelated business activities to raise money to survive. The prohibition applies only where a disproportionate amount of the organization's time, energy and resources are used in unrelated business activities and the tax-exempt purposes suffer.

A 501(c)(3) organization is prohibited from being formed or operated in such a way as to bestow special benefits on particular individuals rather than the public at large. Specifically, to prevent this benefit of private persons or entities, a 501(c)(3) corporation is:

A 501(c)(3) tax-exempt organization is permitted to pay reasonable salaries to its directors, salaries and employees without violating the prohibition. Such salaries and payments are permitted as long as the above persons substantially engage in activities to further the exempt purposes of the organization.

V. APPLICATION

To get a tax exemption as a 501(c)(3) entity, a nonprofit corporation must file a Form 1023 along with several other forms. The application and all accompanying forms will be sent to the Internal Revenue office where Form 8718 is to be sent.

In addition to Form 1023, the corporation must apply for a federal identification number if it had not done so previously. An identification number is obtained by filing a Form SS-4. Following this chapter is a blank Form SS-4 and its instructions.

Few things from the government are free, and that includes filing for tax exempt status. Every organization applying for a tax exemption must file Form 8718 "USER FEE FOR EXEMPTION DETERMINATION LETTER." This form is simple to complete. A new organization that expects to average less than $10,000 per year for the next four years will check that box on the form and submit a check in the amount of $150. If the organization expects to earn more than $10,000 per year, it checks the next box and pays $465. If the organization pays the $150 and actually averages more than $10,000 for the next four years, the IRS will bill it for an additional $315.

A. PART I. IDENTIFICATION OF THE APPLICANT

The first part of Form 1023 is the easiest to complete. This section is simply a statement of the basic information regardingthe corporation.

Line 1 (a-d) lists the name and address of the corporation.

Line 2 lists the identification number of the corporation. If the corporation has not yet received one, it should write "applied for" and attach Form SS-4 to the application.

Line 3 is the name and phone number of the person the IRS is to contact if they have questions.

Line 4 requires listing the date for closing of the corporation's fiscal year. Most corporations use a calendar year for their fiscal year so the date would be December 31.

Line 5 requires listing the date the articles of incorporation were filed.

Line 6 requires the corporation to fill in a maximum of three activity codes that best describe the activity of the corporation. The codes are on the last page of Form 1023. A corporation should use three codes to make their statement of activity as broad as possible.

Line 7 applies to special tax-exempt organizations and usually will be left blank. Section 501(e) organizations are those that will perform cooperative services to hospitals. Section 501(f) organizations are those performing collective investment services for educational organizations. Section 501(k) applies to child-care organizations. Such organizations will qualify for 501(c)(3) exemption if they meet special requirements which are set forth under "Child Care Centers" in Publication 557.

Line 8 requires the organization to state if this application is its first. Some organizations will have had their first application denied, and they have reorganized so they can reapply. If such is the case, a letter of explanation should accompany the application.

On Line 9 the corporation must state whether it will be required to file a Form 990. Most 501(c)(3) organizations will have to file a Form 990. Form 557 lists the few organizations (which are usually automatic public charities) that will not have to file a Form 990.

Line 10 requires the corporation to state if it previously filed a tax return. This is important because if the corporation has been in existence for more than 15 months prior to filing the application and did not revive an extension, it might be barred from receiving a public charity status.

Line 11 requires the organization to state whether it is a corporation, trust or association. If the organization is a nonprofit corporation, which it would be if it uses the forms in this book, it must also attach copies of its articles of incorporation and bylaws.

B. PART II. ACTIVITIES AND OPERATIONAL INFORMATION

The answers to this section must be completed. If the space given for the answers is not sufficient, separate pages should be attached to explain further. An example of the form of attachments:

"Attachment for Part 1. Line 2.

Additional sources of the corporation's income will be:"

The point to remember is that the IRS will assume nothing. If the information is incomplete or hard to understand, the application will be denied. Time and care should be taken in completing the application to avoid having to redo it later.

Line 1. The information herein is probably the most important of the entire application. For that reason, this information should be carefully drafted by the person with the most information and understanding on the proposed operations of the corporation. The corporation is required in this section to provide information that proves that the corporation will engage in tax-exempt purposes. Information that specifically defines the corporation's purposes must be stated. A restatement of the corporation's purposes as stated in its articles of incorporation is insufficient. There must be specific statements about what the corporation intends to do. Example: An organization is being formed to promote the musical arts. The corporation should state something to the effect that it will hold concerts open to the public. The proceeds of the concerts will be used to fund concerts and to employ local musicians.

The proposed activities of the corporation must be stated with particularity. This includes when the activities will be held, where they will be held, what they will be and who will be performing them. A point to remember: Public charities will need to receive a minimum percentage of public support. The application must therefore be written so that the IRS will understand that the minimum requirement of public support will be met. If it is not made clear that the required minimum of support is met, the organization may be classified as a private foundation.

Line 2 requires a listing of all current and projected sources of funding. The entity should rely most often on membership fees and dues. Government grants and receipts from performance of tax-exempt activities should also be stressed. The importance of unrelated business income and investment income (income from activities which do not further the tax-exempt purposes such as a museum or running a hotel) should not be overly stressed. Remember a public charity must have a minimum percentage of public support; hence all sources of public support should be stated.

Line 3 requires the fund-raising activities of the organization to be stated. Most new corporations will not have decided how they will proceed to raise moneys. That is usually an advantage. The corporation can state that most of its fund raising will come from membership and dues, which is public support. The corporation can also state that once it gets its tax exempt status, it will apply for government grants to help promote its tax-exempt purposes. The corporation seeking public charity status should stress that it will continue to have an aggressive membership recruiting activity. Another fund-raising activity which should be stressed is the performance of the tax-exempt activity. For example, assume that a museum states that many of its fund-raising activities will be special art shows at which it charges the public small admission fees.

Line 4 requires a listing of the corporation's officers and directors. If any are public officials, they must be identified. The IRS likes to see public officials serving as officers or directors. The IRS views them as proof of public support. The IRS also requires that if any of the officers or directors of the corporation become engaged in self-dealing with the corporation, their relationship will be disclosed. There are severe penalties for disqualified persons engaging in self-dealing with a private foundation. Such relationships must be disclosed to the IRS.

Lines 5, 6, 7 and 10 involve the disclosing of any relationship with another organization. Most nonprofit corporations are not controlled by another corporation or accountable to anotherorganization. Thus most corporations seeking tax exemption will mark "no" to these questions. Any "yes" answers must be explained with particularity.

Line 8 requires that the corporation state what assets are used in performing its exempt function. Example, a nonprofit museum states its real property and its art inventory. If the activity is entirely performed by volunteers, the answer is "none" with an explanation as to why it is none.

Line 9 requires an answer of whether or not it will be funded by a tax-exempt bond offering. The answer is almost always "no." Generally, only nonprofit organizations intimately related to a government unit will qualify for such bond financing; that is not the ordinary nonprofit corporation.

Line 11 requires information about whether the corporation is a membership organization. If so, the subparts a, b and c must be answered. The only issue of concern is 11(c) where any benefits for membership must be stated. Remember dues received in exchange for benefits other than voting rights are not considered public support. Most corporations should write "beyond voting rights, the members receive no special benefits in exchange for their dues; see corporate bylaws."

Line 12(a) requires the organization to state whether or not it will charge the public for providing services, benefits or products. This is entirely permissible. It is understood that nonprofit corporations need to make money in order to pay their expenses. As such, the corporation must explain how the charges will be calculated and attach any fee schedule.

Line 12(b) requires the corporation to state whether or not its benefits, services or products will be restricted to specific individuals. The usual answer is "no." Discrimination that is too narrow could prevent the granting of tax exemption. Limitation to a specific group is permissible when the group is large and related to the specific purpose of the organization. Examples: helping the homeless, abused children or the elderly.

Line 13 requires the corporation to state whether or not itwill be influencing legislation. The answer should almost always be "no." Any "yes" answer could jeopardize the tax exemption. Generally, 501(c)(3) organizations are forbidden from engaging in political activities. Any such organization which does so could lose its tax-exempt status. A discussion of the limitation of political activities is set forth in Publication 557.

Line 14's response should follow that one given in line 13. A 501(c)(3) corporation is not permitted to participate in political campaigns. Such participation is limited to providing nonpartisan voter education. Most organizations should refrain from all political campaigns and attempts to legislate or first consult a tax attorney. Generally, such activities will invalidate a tax exemption.

C. PART III. TECHNICAL REQUIREMENTS

Line 1 requires the corporation to state if it is filing the application within 15 months. If "yes" (as it should be), go to line 8.

Lines 2 through 7 apply to an organization that files for a tax exemption under section 501(c)(3) more than 15 months after formation. By completing these lines, the organization is attempting to get relief from the rule that the excessive delay in filing requires the corporation to be limited to private foundation status, even if it otherwise qualifies as a public charity.

Line 8 requires the corporation to state whether or not it is a public foundation. If the answer is "no" (because it is seeking public charity status), the corporation skips to line 10. If the answer is "yes," the corporation goes to line 9.

Line 9 requires that the corporation must state whether or not it is a private operating foundation (one that conducts exempt activities as opposed to one which merely distributes money to other exempt organizations). The corporation then goes to Part 4.

Line 10 requires a corporation seeking to be a private foundation to check which of the boxes best fits why it should be so classified. If the organization is seeking public charity status (church, school, hospital, medical research organization, orsupport organization) for other tax-exempt organizations, it must complete special schedules A, B, C or D, respectively. Most 501(c)(3) organizations are not formed for such purposes and do not have to complete any additional schedules in order to receive tax exempt status as a public charity.

Line 10, box h is for organizations which qualify under the public support test.

Line 10, box i pertains to those organizations which satisfy the general support test.

Line 10, box j applies to those organizations which believe they qualify under either the public support or general support test but are unsure which one. By checking this box, the organization leaves it to the IRS to apply both tests and grant the exemption if either test is met.

If boxes a through f are marked, the corporation then goes to question 15. If box g is marked, the corporation goes to Line 12. If either box h, i or j is marked, the corporation goes to Line 11.

Line 11 requires the organization to state whether or not it is seeking a definitive ruling or an advance ruling. A definitive ruling is a final statement of whether the corporation qualifies henceforth as a public charity or as a private foundation. To receive a definitive statement, the corporation must have been in existence for at least eight months and have received sufficient support during that time for the IRS to make its decision. Generally, a new corporation will not have enough support for several years for the IRS to issue a definitive ruling. In such an event, the IRS will issue an advance ruling, even though a definitive ruling had been requested. The definitive ruling will only be issued when the IRS has sufficient information to make a determination on the organization's status.

An advance ruling is a temporary ruling by the IRS of whether the corporation qualifies as a private foundation or a public charity. Any new corporation in existence for less than eight months before filing for the application is limited and can only request the advance ruling. The IRS usually only grants advanceruling unless the organization has a great many financial records. Therefore, most organizations should simply apply for the advance ruling. The IRS will look at the submitted financial information. Then it usually grants an advance ruling for a public charity when it appears that the anticipated sources of support qualify the corporation as a public charity. At the end of a 5-year period, the IRS will review the financial records of the corporation. If the public support over this period satisfies either of the public charity support tests, the corporation will receive a definitive ruling to that effect. If the public support received by the corporation fails both of the public support tests, the corporation will be classified as a private foundation and have to pay a 2% excise tax on its investment income for those years. The advance ruling is sought by submitting Form 872-C.

Line 12 requires that any unusual grants be disclosed at this time. The purpose of disclosing unusual grants is such grants are not used in calculating total or public support under the support tests for public charities.

Line 13 is completed only by a corporation that is seeking a definitive ruling under the public support test. If the corporation is seeking an advance ruling instead (which most corporations should seek), this line is left blank.

Line 14 is completed by a corporation which is only seeking a definitive ruling under the general support test. If the corporation is seeking an advance ruling instead (which most corporations should seek), this line is left blank.

On Line 15 each question must be answered with a truthful "yes" or "no" concerning the applicant. If any question is answered "yes," the appropriate schedule must also be attached. Generally, most nonprofit corporations which will be formed using this book will answer "no" to all of the questions. The possible exception would be a nonprofit corporation that is going to act as a private operating foundation. Such a corporation will have to complete Schedule E.

D. PART IV. FINANCIAL DATA

Part 4 of Form 1023 provides the financial data from which the IRS will make its determination of whether or not the corporation should receive a tax exemption. There will be no hard financial data for the newly formed corporations. The corporation can submit projected financial data, and the IRS will base its determination on that data.

Instructions for completing Part 4 are covered in Form 1023. The point to remember in completing Part 4 is that although the information is an estimate, it must be reasonable. If reasonable, the IRS will base a determination upon this information.

Another point to bear in mind when completing this application is that if the organization is not shown to meet the minimum support standards for a public charity, the application to receive a tax exemption as a public charity will be denied. Should denial occur, the group should consider a plan to increase projected fund-raising activities to meet the minimums or plan to apply for tax exemption as a private operating foundation. Obtain IRS Publication 558 from the IRS by calling 1-800-TAX FORM.

VI. FORMS AND INSTRUCTION

Instruction manuals with inclusive forms entitled Publication 557 "Tax Exempt Status for Your Organization" and Package 1023 "Application for Recognition for Exemption" are available from the U. S. Government Printing Office in Washington, D. C. or through the IRS. Forms that follow herein are:

1.Form 8718 "User Fee for Exempt Organization Determination Letter Request"

2.Form SS-4 "Application for Employer Identification Number"


CHAPTER 5

ARTICLES OF INCORPORATION

I. DEFINITION

It is the filing the articles of incorporation forms the corporation. No corporation can exist without filing articles. The articles are filed with the secretary of state of the state in which the corporation is being formed. Out-of-state corporations (called foreign corporations) are also required to register with the secretary of state so their operations can be monitored.

Each state has its own requirements concerning the contents of the articles of incorporation for a corporation formed under its laws. The articles of incorporation used in this book are designed to meet the requirements of all states. If the articles are rejected in a particular state because of some recent change, the user will be told what provision needs to be changed, and the change will be easy to incorporate in the articles which can then be refiled.

The purpose of this book is to aid the user in forming a nonprofit corporation inexpensively. The normal cost of attorney fees for an incorporation is from $500 to several thousand dollars. Therefore, even if some minor retyping or additions to the articles are needed, the cost savings makes it worthwhile.

II. CONTENTS

The articles of a corporation can contain anything the corporation wants that does not violate state law. The reason thecorporation might want certain matters in the articles rather than the bylaws is that the articles cannot easily be amended. Most articles, however, contain only the bare basics required under state law. All states require the articles to contain the following minimum information:

A. NAME OF THE CORPORATION

Obviously, the articles must state the name of the corporation. The name of a proposed corporation must not be so similar to an existing corporation as to be confusing. Should that happen, the new corporation can be sued for trade infringement. To avoid that confusion, unless absolutely sure that no other corporation has a similar name, the incorporator should contact the secretary of state's office and search for the name. Sometimes it is free, but usually the secretary of state will charge for a name search and will for a fee reserve the proposed name for the new corporation, if available.

In each state there are attorney service companies located in the state's capital that will do the name search, reservation and file the articles for a slight fee (usually $50). This is a bargain when the incorporator does not live near the secretary of state's office. The attorney service companies are listed in the phone book for the state capital.

B. PURPOSE

The articles must state the purpose for which a corporation is formed. Previously, a corporation had to state what specific type of business it was going to do. Today, most states will accepta simple statement that the corporation is formed to do any business which is legal and in furtherance of its stated nonprofit goals.

C. AGENT FOR SERVICE OF PROCESS

All states require that a corporation have an agent residing in the state to receive process (accept service of a complaint and legal notification of all orders). Usually this is no problem because the shareholders live in the state and one of them agrees to be the resident agent. Most states, such as California, require the articles to name only the agent and give his address.

Nevada, however, requires that the agent actually sign a notarized acceptance of the appointment. For states that require the agent to sign an acceptance there is a general acceptance form for the notification. Every corporation should file an acceptance of appointment with their articles. If the acceptance is not required under state law, the secretary of state will simply return it. New York has a special requirement that the incorporator appoint the secretary of state the agent for service of process. Following this chapter are sample articles for a New York corporation.

D. MEMBERSHIP CERTIFICATES

The issuance of membership certificates completes the incorporation process. Persons or entities that own a membership certificate are members of the corporation as long as they pay their annual dues. Only those persons and entities who possess membership certificates and are valid members of the corporationcan participate in the management of the corporation. Determination of the type of membership certificate which the corporation will adopt is made at the first meeting of directors.

E. STATEMENT OF INITIAL DIRECTORS

Most states require that the initial directors and their addresses be listed in the articles. The State Laws chapter lists the minimum number of directors that a nonprofit corporation formed in that state must have.

F. TERM

One of the advantages of a corporation is that it can have perpetual existence. Unlike a partnership or an association, it can survive the death of its owners. The articles in this book make it clear that the corporation is intended to have perpetual existence and survive the death of all members.

G. MEETINGS

The Corporate Meetings chapter outlines the basic form for minutes of corporate meetings and contains sample minutes. The more removed the corporate management is from that of a normal corporation, the greater the likelihood of a successful creditor challenge that the business is not truly a nonprofit corporation but is the alter ego of its members. In that circumstance, the corporation will be treated as a partnership, and the members will become individually and personally liable for the debts of the non-profit corporation.

H. WHERE TO FILE THE ARTICLES OF INCORPORATION

ALABAMA. Alabama is unique. It is one of three jurisdictions (District of Columbia and Arkansas are the others) where the incorporator does not file the articles directly with the secretary of state or the department of corporations. Instead, the incorporator files the articles and two copies with the probate judge of the county where the corporation will have its registered office. The judge then issues a certificate of incorporation to the incorporators. Within 10 days of filing of the articles, the probate judge sends the original articles to the secretary of state.

ALASKA

DEPARTMENT OF COMMERCE

CORPORATIONS DIVISION

Pouch D

Juneau, AK 99811

ARIZONA

CORPORATIONS COMMISSION

PHOENIX, AZ 85007

ARKANSAS. Arkansas is rare. It is one of three jurisdictions (District of Columbia and Arizona are the others) where the incorporator does not file the articles directly with the secretary of state or the department of corporations. Instead, the incorporator files the articles and two copies with the circuit court of the county where the corporation will have its registered office. The judge of the court then issues an approval of the articles of incorporation. The judge sends the approval and two copies of the articles to the secretary of state for filing.

CALIFORNIA

SECRETARY OF STATE

SACRAMENTO, CA 95814

COLORADO

SECRETARY OF STATE

DENVER, CO 80302

CONNECTICUT

SECRETARY OF STATE

HARTFORD, CT 06115

DELAWARE

SECRETARY OF STATE

DOVER, DE 19903

DISTRICT OF COLUMBIA is different. It is one of three jurisdictions (Alabama and Arkansas are the others) where the incorporator does not file the articles directly with the secretary of state or the department of corporations. Instead, the incorporator files the articles and a copy with the mayor's office of the District of Columbia. The mayor then issues a certificate of incorporation if the articles are in order.

END OF SAMPLE VIEW

III. BASIC ARTICLES FOR THE FOLLOWING STATES

ALABAMA

ALASKA

ARIZONA

ARKANSAS

COLORADO

FLORIDA

GEORGIA

HAWAII

IDAHO

IOWA

KANSAS

KENTUCKY

MAINE

MARYLAND

MISSOURI

MISSISSIPP

INEBRASKA

NEW MEXICO

NEVADA

TEXAS

UTAH

N. DAKOTA

OHIO

RHODE ISLANDVERMONT

VIRGINIA

WASHINGTON

WEST VIRGINIA

WISCONSIN

WYOMING

Most of the states have adopted either the Model Nonprofit Corporation Law or the Revised Model Nonprofit Law. As a result the following basic set of articles can be used in each of the foregoing states. The remaining states have either not adopted the above laws or have imposed their own additional requirements and are therefore treated separately.

NOTE: Vermont calls its formation "Articles of Association"

Note: Arizona has a special requirement under section 10-128 that a "Certificate of Disclosure" accompany the Articles of Incorporation. This "Certificate of Disclosure" applies to the corporation's directors and officers and any person or entity which has 10% or more membership or beneficial or proprietary interest in the corporation. The disclosure statement is required to list with particularity any of the following matters that relate to any of the above persons or entities:

A "Certificate of Disclosure" for use in Arkansas follows this first set of basic articles.

BASIC ARTICLES NOT PRESENTED FOR PREVIEW


IV. BASIC ARTICLES OF INCORPORATION FOR

MINNESOTA, NORTH CAROLINA, PENNSYLVANIA

The following basic articles are sufficient for each of the above states except for the Second Article. Each of the state's have their own requirements for the Second Article.

Minnesota requires that the Second Article state that the corporation is formed pursuant to Chapter 317A of the Minnesota Nonprofit Corporation Act.

North Carolina requires that the Second Article state that the corporation was formed after the effective date of the North Carolina Nonprofit Corporation Act.

Pennsylvania requires that the Second Article state that the corporation was incorporated under the Pennsylvania Nonprofit Corporation Law of 1988.

BASIC ARTICLES NOT PRESNTED FOR PREVIEW


V. BASIC ARTICLES FOR CALIFORNIA

California requires that the nonprofit corporation state that it is formed under its Nonprofit Public Benefit Corporation Law and is formed for either or both public or charitable purposes. California also requires that if an existing corporation is being formed it must have the name of the organization listed.

BASIC ARTICLES NOT PRESNTED FOR PREVIEW


VI. BASIC CERTIFICATION OF INCORPORATION FOR

CONNECTICUT, DELAWARE, NEW JERSEY, OKLAHOMA

The above states have adopted the model or revised nonprofit corporation law. These states, however, call their formation documents "Certificates of Incorporation" rather than "Articles of Incorporation" and require a more detailed statement of membership qualifications and rights. the basic "Certificate of Incorporation" that follows will satisfy the filing requirements for these states.

BASIC CERTIFICATE NOT PRESENTED FOR PREVIEW


VII. BASIC ARTICLES OF INCORPORATION FOR

THE DISTRICT OF COLUMBIA AND SOUTH DAKOTA

The District of Columbia and South Dakota have adopted the model or revised nonprofit corporation law. Even so, they require a more detailed statement of membership qualifications and rights in their articles than the general set of articles for the first set of states (Arizona through Vermont). The basic set that follows will satisfy the filing requirements for the District of Columbia and South Dakota.

These articles can, if the incorporator so elects, also be used for the states covered in the first set (Arizona through Vermont). This set of articles should not be used for those states, however, if it is foreseeable that in the future changes in membership qualifications or rights might occur. In such an event these articles should not be used for those states because implementing those changes would require the filing an amendment to the articles. Remember, anything placed into the articles can only be changed by filing an amendment to the articles. To be flexible in operations, a corporation should only put in the articles that information required under state law plus whatever other information it deems vital to the operation of the corporation. All other matters can be addressed in the bylaws.

BASIC ARTICLES NOT PRESNTED FOR PREVIEW


VIII. BASIC ARTICLES OF INCORPORATION FOR ILLINOIS

Illinois has several specific requirements to be included in the articles which the other states do not require. Illinois requires a social club to state that it will obey all liquor laws. The corporation must state if it or is not a condominium or cooperative. An optional provision for release of liability for directors is also permissible.

BASIC ARTICLES NOT PRESENTED FOR PREVIEW


IX. BASIC ARTICLES OF INCORPORATION FOR

INDIANA, LOUISIANA, MASSACHUSETTS,

MICHIGAN, AND NEW HAMPSHIRE

The above states have adopted the model or revised nonprofit corporation law. These states, however, require a more detailed statement of membership qualifications and rights along with a statement of corporation's property and a general financing scheme. The basic articles of incorporation which follows will satisfy the filing requirements for these states.

These articles can also be used for New Hampshire and Louisiana which requires the statement of memberships rights and qualifications but does not require a statement of corporation's property or financing scheme.

Note: Most new corporations will not have any property upon formation, and so none will be listed. The financing scheme is only required in Michigan. The financing scheme must support the corporation's nonprofit purpose.

BASIC ARTICLES NOT PRESENTED FOR PREVIEW


X. BASIC ARTICLES OF INCORPORATION FOR

MONTANA, SOUTH CAROLINA AND OREGON

The following are basic articles of incorporation for use in Montana and Oregon. These states have a requirement that the corporation actually state in the articles whether it is being formed as a public benefit, mutual benefit or religious corporation. Most states do not require a nonprofit corporation to be limited to just public benefit (activities to benefit the public), mutual benefit (activities to benefits its members) or religious purposes and allow them to engage in activities to further any or all of the purposes. The incorporators must choose one of the selections under the second article that best defines its purpose. The filing fee for South Carolina is $25.00

BASIC ARTICLES NOT PRESENTED FOR PREVIEW


XI. BASIC CERTIFICATE OF INCORPORATION FOR

NEW YORK

New York has enough special requirements for formation documents. It is presented separately. New York divides its nonprofit corporations into four types. Type A corporations engage in activities for the benefit of its members. Type B corporations are charitable organizations for educational, scientific, literary or cultural purposes. Type C corporations perform business activities. Type D corporations are federal tax exempt corporations that are exempt under some other New York Law. There are separate laws for incorporating religious organizations under the New York Religious Corporations Law. The certificate in this book assumes that the corporation will seek a 501(c)(3) tax exemption as a charitable, educational, scientific or literary corporation: the corporation will be a New York Type B corporation.

If an existing association is being incorporated, the incorporators must also file an affidavit which states that they constitute the majority of the members on the committee of the existing organization that was authorized to incorporate the association.

New York also requires types B and C nonprofit corporations to get the approval of a New York Supreme Court judge (the equivalent of a superior court or district court judge in other states) before the secretary of state can file the certificate of incorporation.

Moreover, the New York Attorney General must approve certain nonprofit corporations in accordance with H-PCL sec. 404. To receive this approval, send the certificate to the New York Attorney General office for signature:

New York State Department of Law

Charities Bureau

120 Broadway

New York, NY 10271

(212) 341-2000

Once the certificate is signed and returned, it can be filed. The approval is routine; it notifies the New York Attorney General of the existence of the corporation.

BASIC CERTIFICATE NOT PRESENTED FOR PREVIEW


XII. BASIC CHARTER OF INCORPORATION FOR

TENNESSEE

Tennessee is unique in that it calls its document for formation of a nonprofit corporation a "Charter of Incorporation." The following is a basic "Charter of Incorporation" for a corporation formed under Tennessee law. Tennessee law requires that the charter actually state whether the corporation is being formed as a public benefit, mutual benefit or religious corporation. Most states do not have this requirement because it limits the activities of the corporation to just activities involving only the furthering of a public benefit (activities to benefit the public), mutual benefit (activities to benefit its members) or religious purposes. Most states permit their nonprofit corporations to engage in any activities that would further any or all of the above purposes. The incorporators for a Tennessee corporation must choose one of the selections under the second article that best defines its purpose.



CHAPTER 6

BYLAWS

I. DEFINITION

Bylaws are the corporate rules adopted for the general day-to-day management and operation of the corporation. At the first meeting of directors, when the corporation is formed, the bylaws are adopted by the incorporator. While the articles of incorporation establish the governing structure of the corporation, the bylaws regulate the management of the business and conduct of the corporation The bylaws prescribe the rights and duties of the members of the corporation towards the corporation and among themselves in relation to its management and its affairs.

In its decision Casady v. Modern Metal & Spinning Mfg. (1961) 188 Cal.App.2d 728, the California Court of Appeals expressed the position of most states when it stated that bylaws are to be construed as a contract between the shareholders (members of a nonprofit corporation) and the corporation and also as a contract between the shareholders or members.

Bylaws attempt to resolve the many areas of potential conflict within a corporation. Bylaws assign duties and responsibilities. Bylaws can be general in nature or closely tailored to the needs and desires of the members. Most bylaws contain most of the issues covered in the sample bylaws following this chapter.

Bylaws are not set in concrete. Members of a nonprofit corporation can alter or amend the bylaws by simply holding ameeting and voting chapter. The purpose of bylaws is to establish the procedures for the daily administration and management of the corporation. As the corporation develops, the bylaws can be amended to keep pace with new requirements.

II. AUTHORITY TO ADOPT

The corporation may adopt, amend and repeal the corporate bylaws. Common law recognized that a fundamental element of corporate law was that a corporation has the inherent right to make bylaws, but the bylaws, old or amended, cannot conflict with federal or state laws, or the articles of incorporation. Bylaws always must be reasonable under the overall circumstances of each situation they address.

While a corporation has the right to adopt bylaws, it is not required to do so. Yet should a corporation fail to adopt any bylaws, the authority to perform those acts that are normally defined by the bylaws is vested in the Board of Directors. The failure of a corporation to adopt bylaws can have disastrous results. A court might find that a real corporation was never truly intended to be created. The prime proof of the existence of a corporation is the manner in which it operated. A business that acts as a partnership will be treated as a partnership even though it is incorporated. Not having bylaws is evidence to infer that a corporation really was never intended to be created.

All things considered, there is no valid justification for a corporation not to adopt bylaws. Not adopting bylaws may result in the corporation losing its shield against personal liability forthe members. There just is no reason to endure such a risk.

III. WHO AND HOW ADOPTED

Bylaws can be adopted in one of three ways. The first is by the incorporator adopting the initial bylaws at the first meeting of directors. Most bylaws are originally adopted by the incorporator at this meeting. In fact, the minutes of the first meeting of directors that are contained in this book call for the incorporator to adopt the original bylaws for the corporation. The second method of adopting bylaws is at a meeting of members wherein a majority of the members approve the bylaws. The third method of adopting or changing bylaws is at a meeting of the board of directors wherein a majority of the board adopts or repeals the bylaws.

There are some bylaws, however, that can only be changed by the members. A bylaw changing the number of directors for a corporation can only be changed by a majority vote of the members. Likewise, members alone determine if a board of directors can be changed from a variable board to a fixed board or vice versa.

The articles of incorporation may require more than a simple majority of votes to approve any change of the bylaws. In addition, the articles may restrict or eliminate the power of the board of directors to adopt, alter, amend or in any way affect the bylaws.

The original or a copy of the bylaws that are certified to be a true copy executed by the corporate secretary or assistant secretary is prima facie evidence of the adoption of those bylaws and the matters stated in them.

IV. CONSTRUCTION

A corporation is required to construe its bylaws reasonably and in such a way as to sustain their validity. When a bylaw is subject to different constructions, the one most in harmony and accordance with state law is the one given effect.

A bylaw cannot overrule or violate the articles of a corporation. For that reason, all bylaws must be construed in such a manner as not to violate the articles. Any bylaw that can not be so construed is automatically rendered void and invalid by operation of law.

Unless a bylaw specifically states that it is intended to operate retroactively, it will not do so. In addition, a bylaw cannot operate retroactively if by doing so it unfairly and unreasonably violates the rights of members. Example: If the bylaw changes the number of directors. It cannot be applied retroactively because it would invalidate every past action taken by the board.

V. WAIVER OF BYLAWS' PROTECTION

Bylaws exist to govern the operation of the corporation and to protect the members. Just as the members can enact bylaws for their protection, they can waive that protection without having to repeal the bylaws in question. Example: A situation occurs for the benefit of the corporation, and the officers act in the best interests of the company. The members find they must ratify the conduct of the business but that the ratification will specifically and intentionally violate one or more of the bylaws. Without suchan express waiver of the bylaws, the board of directors and the officers will not have the authority to complete the anticipated transaction.

Ratification of the proposed or completed act must be done by the same number of members needed to adopt or repeal a bylaw. Example: A bylaw requires the president to get board approval before executing a contract on behalf of the corporation. Without board approval, the president executes a favorable contract for the corporation. Unless a majority of the members ratify the president's conduct that was undertaken in violation of the bylaws, the contract is invalid.

VI. LOCATION

The bylaws of a corporation, either in original form or in true copies as amended, are required to be kept at its principal executive office in every state where it does business.

The bylaws are required to be kept open for inspection by the members at all reasonable times during regular business hours. When the principal place of business is outside the state of incorporation, most states require that the corporation furnish copies of the bylaws as amended to the members upon request.

VII. FORMS

A set of bylaws that will adequately manage most corporations is presented on the following pages.


BYLAWS

OF

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ARTICLES I

OFFICES

Section 1. PRINCIPAL OFFICE. The principal office of , hereinafter entitled the Corporation, shall be in the City of or such other place as designated by resolution of the Board of Directors of the Corporation.

Section 2. OTHER OFFICES. The Board of Directors may also elect to open other offices of the Corporation both within and without the State of to conduct the business of the Corporation.

ARTICLE II

MEMBERS

Section 1: RIGHTS. The Corporation will be controlled by members. No Member shall hold more than one membership in the Corporation. All Members shall have the same rights, privileges, restrictions and conditions. Any person, partnership, corporation,association or other legal entity can be a Member of the Corporation. There is no limitation on the number of Members of the Corporation. Membership interests in the Corporation are not transferable.

Section 2. MEMBERSHIP DUES. Anyone wishing to become a Member of the Corporation shall pay an application fee of . Upon admission to the Corporation, each Member shall pay annual dues to the Corporation of .

Section 3. MEMBERSHIP BOOK. The Corporation shall maintain a membership book listing the name and address of each corporate Member. The book shall also contain the date the membership of any Member in the Corporation ceases. The membership book will be kept in the principal place of business of the Corporation.

Section 4. NONLIABILITY OF MEMBERS. No Member by virtue of just being a Member of the Corporation shall be liable for the debts, liabilities or obligations of the Corporation.

Section 5. TERMINATION OF MEMBERSHIP. A Member's membership interest in the Corporation shall terminate on the occurrence of any of the following events:

Section 6. ANNUAL MEETINGS. At least one meeting of the Members will be held each year. This annual meeting will be held at the principal office of the Corporation designated in Article 1 or such other place as chosen by the Board of Directors.

The annual meeting of Members shall be held on a date and at a time designated by the Board of Directors beginning in the year 199___. The purpose of the annual meeting will be to transact any and all business of the Corporation including but not limited to the election of the Board of Directors and the ratification of the acts of the Board of Directors undertaken since the last meeting of members.

Section 7. SPECIAL MEETINGS. Special meetings of the Membersmay be called for any purpose or purposes by:

All requests for a special meeting of Members must state the reason for which the special meeting of Members is being sought. Requests to have a special meeting of Members will be considered served on the Board of Directors of the Corporation if they are given to any member of the Board of Directors or any Officer of the Corporation by either personal delivery or certified mail.

Upon receipt of a valid request for a special meeting by a Member, the Board of Directors will schedule a special meeting at a date not less than thirty (30) days nor no more than sixty (60) days from the receipt of the request. The Board of Directors shall give notice of the special meetings to all members entitled to vote.

If the Board of Directors fails to give the notice of the special meeting, the person or persons making the request for the special meeting may set the date and time of the special meeting and give the notice themselves.

Section 8. NOTICES OF MEETINGS. Notices of all Member meetings shall be in writing and must be signed by the President, Vice President or Secretary of the Corporation. All notices of a Members meeting must contain a statement about the purpose for which the meeting is to be called and any special business which is to be conducted therein. The notice must also state the date, time andplace of the meeting. The notice must be either delivered or mailed to each Member at least fifteen (15) days before the meeting. If the notice is mailed, it must be sent to the last known address of the Member as it appears on the Corporation's books. Upon such mailing the service shall be deemed complete. If the Corporation does not have an address of a Member or knows that the address it has is no longer valid, it shall give notice to that Member by publishing it at least once in a newspaper of general circulation in the county of the Corporation's principal office.

Personal delivery of a notice to any officer of a corporation, a member of an association, or any partner of a partnership which is a Member of this corporation shall constitute valid service on the Member corporation, partnership or association.

The officer of the Corporation giving notice of the meeting shall file a declaration with the minutes of the Corporation stating that notice of the meeting has been duly given to all Members entitled to vote.

If a meeting is adjourned after being properly called for less than thirty (30) days, no new notice need be given to the Members. If a meeting is adjourned for more than thirty (30) days, a new notice of the date, time and place or the resumptions of the meeting must be given to the Members.

Section 9. BUSINESS AT THE MEETING. At a special meeting of Members, the business transacted therein shall be limited to that which is stated in the notice of the meeting unless all of the Corporation's Members are present in person or by proxy and allagree to additional business being conducted.

Section 10. QUORUM FOR MEETING. If Members representing a majority of the corporate membership certificates issued, outstanding and entitled to vote are present either in person or by proxy, a quorum shall exist for conducting the meeting. If, however, a quorum does not exist either in person or by proxy, a valid meeting cannot be held.

If a quorum is present when the meeting is called, the Members may continue to hold the meeting and transact business until adjournment, even if some Members leave so that a quorum is no longer present, provided a majority of members who constituted the initial quorum still remain.

Section 11. MAJORITY RULES. At a duly called meeting with a present quorum, the vote of Members holding a majority of the membership certificates of the Corporation, either in person or by proxy, shall determine the passage of any corporate resolution or other business matter unless either state law or the Articles of Incorporation require a different percentage of vote.

Section 12. RECORDS DATE. Only those persons or entities who are shown to be the owners of corporate stock in the records of the Corporation on the day of any meeting of Members or such other day as fixed by the Board of Directors shall be entitled to vote.

Section 13. PROXIES. At any Member meeting, a Member may be represented by a person or persons to vote for the Member. A proxy must be in writing and designate under what terms the personholding the proxy may vote. A proxy shall not be valid for more than ninety (90) days after the date of its execution unless the Member executing it specifies the time for which it will last, but in no event shall it remain in force for more than two years from the date of its execution. Once duly created, a proxy shall remain in effect until it expires, is revoked or another proxy is subsequently given to another person.

Section 14. ACTION TAKEN WITHOUT A MEETING. Except for the election of Directors, Members can without a meeting undertake any business that would otherwise require a meeting if authorized by the written consent of Members holding a majority of voting power, unless state law or the Articles of Incorporation require a higher voting percentage.

Section 15. CONSENTS TO MEETINGS. The actions undertaken at a meeting of Members, that was not properly called and noticed shall nevertheless be valid if:

All such waivers and consents must be filed with the corporate books and made a part of the minutes of the corporate meeting therein. A Member's attendance of a meeting which was not properly called and noticed shall constitute a waiver of notice unless anobjection is made on the record at the meeting.

Section 16. CONDUCT OF MEETING. The President, if present and if not then the Vice President, shall call a meeting of Members together and preside over the meeting as the Chairman. If neither the President or the Vice President are present, the Members shall appoint a person to serve as the Chairman. The Secretary of the Corporation, if present and if not a person chosen by the Members, shall serve as the secretary of the meeting of Members.

ARTICLE III

DIRECTORS

Section 1. NUMBER OF DIRECTORS. The number of Directors which will compose its Board of Directors shall be . All Directors shall be of legal age and at least one Director shall be an American citizen. The Directors shall be elected at the annual meeting of Members except where a vacancy is filled pursuant to Section 4 below. Each Director shall hold office until a successor is elected or appointed. Directors do not need to be Members of the Corporation.

Section 2. STANDARD OF CARE. Each Director shall perform his duties, including those of being a Member on any corporate board, in good faith. Each Director shall execute all duties through the use of the standard as to what in the Director's opinion is in the best interests of the Corporation. In making all decisions a Director shall utilize such reasonable care and inquiry as a reasonably prudent person in a like situation would employ.

Section 3. VACANCIES ON THE BOARD. Vacancies on the Board andnew positions created by increasing the number of Directors may be filled by a vote of the majority of the remaining Directors even though they may constitute less than a majority of the full Board.

A vacancy on the Board shall be deemed to exist upon the death, resignation, or removal of any Director, an increase in the number of Directors or a failure of the Members to fill all Board vacancies at any meeting of Members to elect Directors.

The Members may elect Directors at any time to fill vacancies on the Board which have not been filled by the Directors. Such election shall require a consent of Members holding a majority of the Corporation's voting stock.

Section 4. REMOVAL OF DIRECTORS. The Members may at any time remove the entire Board of Directors or any individual Director as provided by these Bylaws. The remaining board, or the Members, at a special meeting, may elect directors to fill such vacancies as may result.

Section 5. POWERS OF THE BOARD OF DIRECTORS. The Board of Directors, unless closely held corporate status is elected, is responsible for the management of the Corporation's business and legal affairs. Towards this end, the Board will exercise all of the corporate powers to do such lawful acts which are not prohibited by either state law or the Articles of Incorporation.

MEETINGS OF THE BOARD OF DIRECTORS

Section 6. DIRECTORS MEETINGS. The Board of Directors shall set all meetings of the Board, both regular and special, pursuant to these Bylaws. Such meetings may be held both within and withoutthe state of incorporation as designated by the Board.

Section 7. ANNUAL MEETINGS. Regular meetings of the Board of Directors may be held without notice at such time and place as set by the Board of Directors.

The Board of Directors shall hold an annual meeting without notice immediately after and at the same place as the annual meeting of members.

Regular non-annual meetings of the Board of Directors (weekly, monthly or quarterly) shall be held at the corporate offices or such other place as may be designated, as follows:

Time of the Meeting:

Date of the Meeting:

If the date for the regular meeting falls on a holiday or weekend, the meeting shall be held on the next business day. No notice for a regular meeting set in these Bylaws need be given.

Section 8. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the President or Secretary upon receipt of a written request to do so from a Director. Written notice of Special Meetings shall be given to each Director at least fifteen (15) days prior to the meeting. Such notice shall be given either personally to each director or by mail.

If the notice is mailed, then it must be sent to the last known address of the Director as it appears on the Corporation's books. Upon such mailing the service shall be deemed complete. If the Corporation does not have an address of a Director or knows that the address it has is no longer valid, it shall give noticeto that Director by publishing it at least once in a newspaper of general circulation in the county of the Corporation's principal office.

The actions taken at a special meeting of Directors which was not properly called and noticed will nonetheless be considered valid if:

If a Director attends a special meeting which was not properly called and noticed without objecting upon arrival, that Director waives such notice and the actions taken thereunder shall be as valid as if the meeting was properly called.

Section 9. QUORUM. At any meeting of the Board of Directors no action may be undertaken unless a quorum of Directors is present. A quorum of Directors shall constitute a majority of duly elected and appointed Directors. Unless state law specifies a higher percentage, every act or resolution of the Board shall need only a majority vote of the quorum to pass.

Section 10. RESIGNATION. A Director may resign at any time effective upon giving written notice to the Board of Directors.Upon notice of the resignation the Board shall notify the members and either fill the vacancy by appointment or schedule a special meeting of Members for the election of a new Director.

Section 11. COMPENSATION OF DIRECTORS. The corporation shall pay any expenses incurred by its Directors in attending any meeting of the Board. In addition, the Directors may be paid a salary or a fixed amount for attending the meeting as set by the Board. The receipt of any payment for services rendered as a Director shall not prevent the person from serving the Corporation in any other capacity and receiving compensation for such other work.

COMMITTEE OF DIRECTORS

Section 12. UTILIZATION OF COMMITTEES. The Board of Directors has the authority to create as it deems necessary committees of one or more Directors to exercise the powers of the Board of Directors in specified areas of the Corporation's business and legal affairs. A committee so formed may be given the power to affix the corporate seal to documents which it may execute.

Section 13. COMMITTEE MINUTES. All committees created by the Board shall keep regular and detailed records of their activities and make regular reports to the full Board of Directors.

Section 14. CONSULTANTS. The Board of Directors have the authority to appoint one or more persons to serve as consultants to the Board. Such consultants perform such special assignments as delegated to them by the President and furnish such consultations on such matters as requested by the Board.

ARTICLE IV

NOTICES

Section 1. NOTICE TO DIRECTORS AND MEMBERS. All notices to Directors and Members must be in writing and given by personal delivery, by telegram or by mail. If the notice is mailed, then it must be sent to the last known address of the Director or Member as it appears on the Corporation's books. Upon such mailing the service shall be deemed complete. If the Corporation does not have an address of a Director or Member or knows that the address it has is no longer valid, it shall give notice to that Director or Member by publishing it at least once in a newspaper of general circulation in the county of the Corporation's principal office.

Section 2. WAIVER OF NOTICE. If a person who is entitled to vote at any meeting, be it a Members or Directors meeting, is not given such a valid notice of the meeting, no action undertaken at such meeting will be valid unless the person gives a valid waiver of notice. A waiver of notice is accomplished by:

Once a waiver of notice has been validly executed, the transaction undertaken at the meeting, if a quorum was present, shall be as valid as if the meeting had been properly called and noticed.

ARTICLE V

OFFICERS

Section 1. APPOINTMENT. The Board of Directors shall appoint the officers of the Corporation. The initial Officers of the Corporation shall be the President, Vice President, Secretary and Treasurer. The Board may appoint assistants to the above officers as it deems appropriate. Any person can hold two or more offices unless precluded by state law. The election of officers shall normally occur, except for the filling of vacancies, at the annual meeting of Directors following the annual meeting of Members.

Section 2. OFFICERS' SALARIES. The Board of Directors shall set by resolution the salaries and compensation to be paid by the Corporation to the officers.

Section 3. OFFICERS' TERM OF OFFICE. The term of office for the officers of the Corporation shall continue to the their death, resignation or removal. Any officer may be removed from office by the Board at any time by a majority vote. Any vacancy in any office of the Corporation shall be filled by the Board of Directors.

Any officer may resign at any time by giving written notice to the Board of Directors. A resignation shall take effect on the date specified in the notice unless the Board of Directors votes to have a sooner date and removes the resigning officer prior to the effective date of the resignation.


CHAPTER 7

FIRST MEETING OF DIRECTORS

I. INTRODUCTION

Once the articles are filed, the next matter to be attended in forming a corporation is the issuance of the membership certificates. The issuance of membership certificates actually creates the true corporate status. Before membership certificates can be issued there must be a meeting of the directors to authorize the corporation to issue a set amount of membership certificates.

The first official meeting of the corporation is called either a "Special Meeting of Directors" or more commonly the "First Meeting of Directors." It is a meeting of directors because there are no shareholders at that time because the membership certificates have not yet been issued. The meeting is called by the incorporators who adopt the corporate bylaws, appoint the initial directors (if they are not named in the articles) and resigns. After the resignation of the incorporator, the directors conduct the meeting and sign a waiver of notice that permits the meeting to proceed.

II. ACTIONS UNDERTAKEN

A. ELECTION OF OFFICERS

On of the first matters to be addressed by the corporation is the election of officers. The directors appoint the president, vice president, treasurer and secretary along with any assistant officers. After their appointment, the corporate officers assumetheir duties as specified in the bylaws.

The directors may also at that time fix the corporate salary for the officers or (as is more usual) reserve the fixing of salaries to another time. This reservation of time for setting the corporate salaries is usually used in newly established corporations that need time and capital to get in operation. The salary is later established once the corporation starts business.

B. ADOPTING MEMBERSHIP CERTIFICATES

The directors must adopt the form of the membership certificates for the corporation. This is an important detail because it is the actual issuance of the membership certificates to members that completes the incorporation. The membership certificate is the title document that the members possess to evidence their ownership interest. The directors by approving the membership certificates approve the form of the ownership documentation. Membership certificates cannot be sold by the corporation until the form of the membership certificates is approved.

C. AUTHORIZING BANK ACCOUNTS

The directors must authorize the president to open a corporate bank account. Likewise, the directors authorize who may be the signatory on the accounts. Usually, the directors permit the president and treasurer to sign on the corporate accounts. The directors may authorize special smaller accounts on which other agents may sign.

D. AUTHORIZING PRINCIPAL EXECUTIVE OFFICE

The articles of incorporation may list the location of the principal executive office for the corporation. Even so, the directors should adopt a location where the principal executive office will be located at the first meeting. It is at this location that the future director meetings will be held unless changed by a corporate resolution or waiver.

E. ISSUANCE OF MEMBERSHIP CERTIFICATES

The corporation can only issue membership certificates that are approved by the directors. Therefore the directors approve the corporation's issuance of membership certificates pursuant to the state law at the first meeting. The directors determine at this time the annual dues to be paid by a member of the corporation.

The issuance of the membership certificates completes the corporation. The ownership of a membership certificate makes the member and bestows the rights of participation in the corporation.

F. CORPORATE SEAL

Most states no longer require that a corporation have a corporate seal. This requirement was once required to prove corporate approval of a contract. At one time, no corporate contract could be enforced unless it had the corporate seal affixed to it.

Once the articles are filed, the corporate seal can be ordered from most printing companies or attorney service firms for $10. All that is needed to create the seal is the name of the corporation, its state of incorporation and its date of incorporation. The cheapest corporate seal is a rubber stamp. The traditional seal isa clamp-like device that crimps a piece of paper and imprints the corporate name.

The following minutes call for the approval of a corporate seal if the corporation decides to get a seal. When the seal is obtained, the seal's imprint should be placed in the clause.

G. FISCAL YEAR

The last major act to be undertaken by the directors is the adoption of a fiscal year. A corporation can have any fiscal year. Since a nonprofit corporation usually will not have to pay taxes, it is better to simply use a calendar year as its fiscal year. The minutes for the first meeting used in this book calls for a calendar year to be the fiscal year. If the corporation does not want a calendar year, it can change that clause to state the fiscal year as adopted before executing the minutes.

III. FORMS

The following pages contain:

1. Waiver of Notice of Special Meeting of Board of Directors.

2. Action of Incorporator and Minutes of Special Meeting of the Board of Directors.

PREVIEW MINUTES FOR SPECIAL MEETING NOT PRESENTED


CHAPTER 8

MEMBERSHIP CERTIFICATE

The most important characteristic of any corporation, be it a profit or nonprofit corporation, is that its ownership is reflected by either a stock or membership certificate. All of the rights and interests in a corporation which a member in a nonprofit corporation may possess derives from the fact that the member owns membership certificates in the corporation. Not all nonprofit corporations actually issue a formal membership certificate. Some rely instead on the receipt for the payment of annual dues as proof of membership. Nevertheless, most nonprofit corporations do issue some form of membership certificate.

A membership certificate operates as a title document, much in the same vein as a deed is a title document to a piece of real property. A membership certificate states on its face that a certain person or entity is to be treated as owning and controlling the number of shares designated on the membership certificate.

Control of a corporation is usually determined by a majority vote of the outstanding membership certificates of the nonprofit corporation. Membership can be issued as either voting or non-voting certificates; although most often the certificates are of a voting nature. One important difference between a membership certificate in a nonprofit corporation and a share of stock in aregular for-profit corporation are the rights to share in the corporation's profits. In a nonprofit corporation, the members have no right to receive any dividends from the corporation. On the other hand, in a regular for-profit corporation such a right exists, and the stock can be issued as either common stock (that is with ordinary rights) or as preferred stock (with special rights, usually including guaranteed dividends, special voting rights, or special conversion rights that turn the preferred stock into common stock or bonds).

Following this chapter are general membership certificates for a nonprofit corporation. Fancy engraved membership certificates can be purchased at a nominal price from most print shops. For the normal, small nonprofit corporation the membership certificate in this book is sufficient. All that has to be done is for the membership certificate to be completed. The issuance of the certificate is reflected on the membership certificate. The membership certificate must be signed by both the president and secretary. The certificate should be signed in blue ink to show that it is an original membership certificate and not a copy.

Following this chapter also is a membership register for the corporation. The membership register is important because it names the owner for each membership certificate that is issued. It is from the membership register that the members eligible to vote at member meetings are determined. Under the Bylaws, only the registered members on a certain date before a members meeting can exercise voting privileges, even though the person may no longerown the membership.

Unlike a regular corporation, in most nonprofit corporations member-ship certificates are not transferable. Membership certificates cannot be sold nor will they pass by gift, devise or descent. Membership in a nonprofit corporation is only dependent upon the payment of dues and the opening of the corporate Bylaws. A nonprofit corporation cannot discriminate in the admission of members. Hence the easiest way for anyone to become a member is to join the corporation rather than try to purchase a membership certificate or wait for the death of a member to inherit a certificate.

These forms follow:

1. Membership Certificate

2. Membership Register

FORMS NOT PRESENTED IN PREVIEW


CHAPTER 9

AFTERWARDS: POST INCORPORATION ACTS

This chapter is basically an information chapter to remind the officers of the corporation of the various acts that may be required to be performed after the incorporation is completed. The officers will be familiar with most of the acts herein that may have to be performed if they had previously operated a business.

This chapter discusses the general requirements most often encountered by a newly incorporated corporation. There is no way that this chapter will be able to cover each item in detail. Consequently references are made to the appropriate code sections when available.

Many of the post incorporation acts pertain to tax filings. The treasurer and president should work closely with the corporation's tax advisor to established appropriate accounting procedures for the corporation. Some matters can be handled by the corporation's accountant or bookkeeper while others can only be handled by the officers. An understanding of what is expected and by whom is of great importance for the smooth operation of the business.

I. STATE LICENSES

A state may require a state license be obtained to do a certain type of business regardless of whether the business is conducted in a profit or nonprofit mode. Example: A state mayrequire anyone disposing of hazardous waste to have a state license or permit. The fact that the company doing the hauling may or may not be a nonprofit corporation is irrelevant. It is important that the corporation obtain all the necessary licenses and permits for the operation of its business in the state.

State permits are not transferable. If a partnership or association that has the necessary permits and licenses to do business should form a nonprofit corporation to continue the work, it would have to reapply for new state licenses and permits in its own name. A corporation, regardless of whether it is a profit or nonprofit entity, is still a legal entity in its own right and is treated separate and apart from its members and any business in which they might have previously been engaged.

II. LOCAL BUSINESS LICENSES

Many states, usually those that have corporate taxes, permit its counties, parishes, cities and other governmental entities to raise revenue by taxing corporations, even nonprofit corporations, doing business in their jurisdictional area. Unlike a regular for-profit corporation, nonprofit corporations do not have a city or county income tax imposed on them. A nonprofit corporation, however, may be subject to a straight license fee for a permit to conduct business in the city or county. A nonprofit corporation, like a regular corporation, should always consider whether there is a city or county business license required to operate. Such licenses would be required regardless of whether the business is operated for profit or not.

III. EMPLOYER IDENTIFICATION NUMBER

A nonprofit corporation, like all employers, is required to obtain a federal employer's identification number (EIN) from the IRS. The application for an EIN is Form SS-4. Form SS-4 must be filed within seven days after the first payment of earnings to an employee. There is no filing fee for the form and the IRS will give the corporation an identification number upon the filing . This identification number will be used on all tax returns.

Form SS-4 and the instructions for completing it are in the Tax Exemptions chapter. The SS-4 must be filed with the application for a Federal Tax Exemption if it has not been filed earlier.

IV. ESTIMATED TAX

A. FEDERAL INCOME TAX

IRC Section 6655 requires corporations to pay installments on estimated income tax to the IRS . Corporations are required to make their estimated payments to an authorized commercial bank depository or a Federal Reserve Bank by the statutory payment dates. Accompanying the payment is Federal Deposit Form 8109. Instructions for the estimated tax are provided on IRS Form 1120-W (Worksheet) "Corporation Estimated Tax."

If a nonprofit corporation has obtained a federal tax exemption under IRS Section 501, it will be exempt from taxes on income derived from its ordinary related business activities. For income unrelated to its normal activities, called "unrelated business income," it must pay taxes and comply with the payment of the estimated tax. An example of unrelated business income is anonprofit corporation formed to save the environment, and it operates a hotel in New York City. The income for the hotel will be taxed as ordinary income, but contributions and fund raising for the environmental operations will not be taxed.

B. STATE ESTIMATED TAX

Every corporation must comply with the tax law of any state in which it does business. Therefore, if a nonprofit corporation does business in a state that has a corporate tax, the corporation will be taxed unless it is recognized as exempt under that state's laws. Example: Nevada has no corporate income tax, but California does have a corporate tax. A Nevada nonprofit corporation does business in California. It must pay California tax on that portion of its income derived from its California operations unless it applies and receives an exemption from the State of California.

It is very easy for a nonprofit corporation to obtain tax-exempt status for activities conducted in a state. Many states automatically grant that tax-exempt status once it is granted by the IRS. Usually, the corporation applies for state tax exemption at the same time as it files for incorporation. It involves nothing more than filing of a notice certificate with the State Tax Agency stating that a nonprofit corporation was formed. The state agency then issues a tax exemption statement or certificate. A nonprofit corporation will still have to pay state taxes on all unrelated business income.

V. PERSONAL PROPERTY TAXES

Many states, such as California, tax the personal property ofa corporation located within the state. This tax is in addition to its income tax and business license and sales and use taxes. To avoid this tax, some airlines doing business in California actually fly to Las Vegas or Reno just to park the aircraft so they will not be taxed in California. A corporation should be aware of the personal property tax a state may charge on corporate assets located in the state. Generally, nonprofit corporations are not subject to personal property taxes, but each state may have exceptions to this rule. Care should be taken to ascertain if any personal property is taxed by any state in which the nonprofit corporation will do business.

VI. SALES AND USE TAXES

If the corporation expects to engage in the business of selling tangible personal property, it the corporation must determine if it needs to obtain a sales-and-use tax permit. Many states do not require a nonprofit corporation to obtain sales-and-use permits.

Some states, however, do require a nonprofit corporation selling personal property to collect a sales tax. In these states, as with personal property taxes the form of the business does not matter. As long as goods subject to the tax are sold, sales tax must be charged.

VII. ANNUAL STATEMENT OF OFFICERS

After a corporation is formed, it must file an annual statement of the officers and directors with the secretary of state. The state uses the filing to stay aware of the corporation.The form is usually mailed to the corporation each year. The corporation must then complete it and mail it back usually with a small fee.

VIII. PAYROLL WITHHOLDING

A nonprofit corporation, as with any other employer, must withhold income tax and social security tax from all employees' salary. Instructions for federal withholding are in IRS Circular E, "Employer's Tax Guide." The corporation must have each employee complete the Employee's Withholding Allowance Certificate Form W-4.

The withheld income and social security taxes are deposited in an authorized commercial bank depository or a Federal Reserve Bank along with a Federal Deposit Form 8109.

An "Employer's Quarterly Federal Tax Return" (Form 941) is required to be filed by the corporation before the end of the month following each quarter.

If the taxes are not withheld or paid, any person whose duty it is to make the payments will be 100% liable for all the taxes. This can work a manifest injustice but remains the law.

In states that have income taxes, such as California, there must be state payroll withholding as well. It is important that the corporation understand its tax obligations for each state in which it will operate.

IX. FEDERAL UNEMPLOYMENT TAX

Any corporation that has an employee at least part of one day every week during the current or preceding calendar year, or has paid wages of $1,500 or more during any calendar year is subjectto the Federal Unemployment Tax (FUTA).

The corporation may receive credit against FUTA for taxes paid into a state's unemployment fund. The taxes are deposited in an authorized commercial bank depository or a Federal Reserve Bank along with a Federal Deposit Form 8109. An "Employers Annual Federal Unemployment Tax Return" (Form 940) must be filed by the corporation by January 31 of each year. More information can be obtained from the IRS's "Employer's Tax Guide."

X. UNEMPLOYMENT COMPENSATION INSURANCE

Many states, such as California, require that employers provide unemployment and disability insurance for employees. For unemployment insurance, the employers must make annual contributions to a state fund based on a percentage of the employee's payroll for a year.

The disability coverage is paid by withholding from the employees' wages. Some states, like California, permit the employer to elect private disability insurance covered under a state-approved voluntary disability program. If such an election is made, the employees are not required to pay disability taxes to the state.

XI. WORKER'S COMPENSATION

All states have enacted Worker's Compensation Laws. An employer is liable for any injuries to a worker on the job regardless of any negligence by either the employer or the employee. The employee, however, cannot sue the employer for punitive damages regardless of how egregious the employer's conductwas in causing the injury.

The employer must either carry workers compensation insurance through a state fund or carry it through an approved private insurance carrier. In some states the employer may be permitted to be self-insured provided the company considered large enough and stable enough to do so.

Failure to carry the insurance could be disastrous for a corporation. An injured employee could sue the corporation for punitive damages; if the insurance was in place, the suit could not be filed.

XII. FICTITIOUS NAME FILINGS

If the nonprofit corporation is going to do business in a name other than its own, it must conform to the state's requirements for filing a fictitious name statement. Most states require anyone, even a corporation, that does business in a name other than its own to file a fictitious name statement with the county clerk.

The purpose of such a filing is to provide the public a means of identifying the owner of the business in the event of litigation or any other need to contact the owner. For example, assume that ABCD Nonprofit Corporation operates a restaurant named Guido's. A patron suffers food poisoning. The patron reads the fictitious-name filings and finds the name of the owner in the event the employees would not divulge it.

XIII. STATE TAX EXEMPTIONS

Once the corporation files its articles of incorporation, it should contact the state taxing agency at the address shown in theState Laws chapter to determine any forms that must be filed to receive a state tax exemption. Many states will not require any forms to be filed because they grant such exemptions automatically to nonprofit corporations. Other states will grant the exemption only after the corporation receives the federal tax exemption and will retroactively apply the tax exemption.

Once the state tax exemption is obtained, the corporation should then contact the local county tax agency to determine any forms must complete to be exempt from local real property and personal property taxes. Such exemptions are automatic once the state exemption is obtained. Any required forms are merely information forms for the local taxing agency.

XIV. SUBSEQUENT ACTS REGARDING THE ARTICLES

In addition to filing the articles of incorporation some states require that the corporation also give notice in general to the public to be properly formed. The states that have these extra notice provisions are:

Arizona:The corporation must publish a Notice of Incorporation within 60 days of the filing of the articles in a paper of general circulation.

Delaware:The corporation must file the articles with county clerk where the corporation's registered office is located within 20 days of the filing with the secretary of state.

Georgia:The corporation must publish a notice of filing of the articles of incorporation four times in a paper of general circulation. Form A100 is to be filed with thesecretary of state to verify the filing.

Illinois:The corporation must file the articles with the county recorder within 15 days of filing the articles.

Kansas:The corporation must file the articles with the registrar of deeds where the corporation's registered office is located within 20 days of the filing with the secretary of state.

Kentucky:The corporation must file the articles with the county clerk where the corporation will have its registered office.

Louisiana: The corporation must file the articles with the county clerk where the corporation will have its registered office.

Mississippi:The corporation must file the articles with the county clerk where the corporation will have its registered office. In addition, the articles must be published in a newspaper for that county.

Nebraska:The corporation must file the articles with the county clerk where the corporation will have its registered office. In addition, the articles must be published in a newspaper for that county.

Nevada:The corporation must file the articles with county clerk where the corporation's registered office is located within 60 days of the filing with the secretary of state.

North Carolina: The corporation must file the articles with county clerk where the corporation's registeredoffice is located within 60 days of the filing with the secretary of state.

Pennsylvania: The corporation must file the articles with the clerk of the Court of Common Pleas where the corporation's registered office will be located. In addition, the corporation must publish a notice of the filing of the articles in two papers of general circulation.

W. Virginia: The corporation must file the articles with the county clerk where the corporation will have its registered office.

For those states which require publication of a notice that the articles have been filed, the following should be sufficient:

Notice: Articles of Incorporation have been filed on (insert date) with the secretary of state of the State of (insert state) incorporating (insert name) as a nonprofit corporation. The name and address of the registered agent for the corporation is (insert name and address). The principal place of business of the corporation shall be (insert address).


CHAPTER 10

AMENDMENT OF ARTICLES

The matters stated in the articles of incorporation cannot be changed unless an amendment of the articles of incorporation is filed. Amending the articles is different from amending the bylaws. The matters covered in the articles are those items required by law to be stated. It is public information readily available to anyone upon request. Bylaws are just the internal procedures adopted for the operation of the company and thus can be changed at any time by a majority vote of the directors. The provisions in the bylaws are optional whereas certain provisions in the articles are mandated by law in order to define the rights and privileges of the members.

Amendments of the articles take two forms. Amendments before membership certificates are issued simply requires the filing of a certificate of amendment. The certificate states that no membership certificates have been issued and lists the changes to be made in the articles. Some states, such as Nevada, require that a state approved form be used for the amendment of the articles. Following this chapter is the form used in Nevada for the amendment of the articles for a corporation before a membership certificate is issued. In most states, however, no set form is used as long as the basic information is imparted. Following this chapter also is a certificate of amendment form for states which do not haveapproved forms, such as California.

Amendments to the articles after membership certificates are issued requires both the holding of a special meeting of the members to approve the amendment and the subsequent filing of the certificate of amendment. Nevada and a few other states require their own approved forms be used for a corporation who has issued stock. Following this chapter is the Nevada form for a certificate of amendment. Most states do not require approved forms to be used. Following this chapter also is a certificate of amendment form for states such as California, that do not have approved forms for amendments by a corporation that has issued stock.

For reference purposes the corporation amending the articles in the following example is a California corporation.

Some states, such as Nevada, require the signatures to the certificate to be notarized. Other states, such as California, simply require a declaration under penalty of perjury that the certificate was properly executed. The certificates to cover both eventualities contain both the declaration and the notary statement.

These forms follow:

1. Certificate of Amendment, Shares Issued

2. Certificate of Amendment, No Shares Issued

3. Declaration of Amendment by Incorporators


CHAPTER 11

CORPORATE MEETINGS

One of the most important functional differences between a corporation and a partnership is that a corporation must have annual and special meetings both of the members and of the directors to approve the business operations of a corporation. If a corporation does not comply with the statutory requirements for a corporation, the members will not be shielded from personal liability for the corporation's debts. The law forbids commingling of corporate assets with members' assets and always requires the business to be conducted in the corporate form. If the corporation acts like a partnership or sole proprietorship, it will be treated as one and the members will be treated as partners with a partner's liability for the corporation's debts.

To avoid liability for the corporate debts, the members only need make sure that the corporation is run as a corporation. To do that, there must be at least one annual meeting of members each year. At the meeting, the directors are elected for the next year, and the acts taken the previous year by the corporation are either approved or rejected. Following this chapter are sample minutes for the annual meeting of members for a corporation. Additional resolutions may be added as needed. These samples will meet the yearly requirements for an annual meeting.

Following this chapter also are sample minutes for the annual meeting of directors of a corporation. Unlike an annual meeting ofmembers, no notice is needed for this meeting because the bylaws state on what date and time the meeting is to be held. At this meeting the directors elect the officers for the corporation for the next year and approve or disapprove the acts taken by the officers for the previous year.

Special business of the corporation is required to be handled by a special meeting of the board of directors. Such special business consists of items like the purchase of real estate and borrowing money. Following this chapter is the form for a special meeting of directors. For a completed sample of a special meeting of directors see the "Certificates for Corporate Resolutions" chapter approving the purchase of real property.

Special meetings of members can also be called when necessary such as when the directors want specific approval for their actions.

These forms follow:

MINUTES NOT PRESENTED FOR PREVIEW


CHAPTER 12

CERTIFICATES OF CORPORATE RESOLUTIONS

The officers of a corporation have only the authority to act on behalf of the corporation that is bestowed upon them by the board of directors and the corporate bylaws. Hence many businesses and third parties require a certificate of corporate resolution executed by the corporate secretary stating that the board of directors had expressly granted the officer the power to execute a particular contract.

In order to get the certificate, the Board of Directors must hold a meeting and vote a resolution to grant the officer the specific power to do the intended act. Certificates of corporate resolutions are usually required when a corporate officer seeks to borrow money for the corporation, purchase property on credit for the corporation or lease property for the corporation.

A corporation is not bound by any acts of an officer it did not give the officer either express or implied authority to do. Thus third parties, particularly landlords and lenders, will not enter contracts with a corporation without first having a certificate of corporate resolution stating that the corporation approves the officer's execution of the contract.

Following this chapter are minutes of a special meeting of directors authorizing the corporation to purchase a specific piece of real property and a certificate of corporate resolution documenting that approval. The basic form of these minutes and certificate can be used for any transaction for which a certificateof corporate resolution is needed.


ABCDE CORPORATION

WAIVER OF NOTICE OF SPECIAL MEETING

OF THE BOARD OF DIRECTORS

The undersigned, being the directors of ABCDE CORPORATION , a Nonprofit Corporation incorporated under the laws of the State of CALIFORNIA , do hereby waive notice of the time, place and purpose of a special meeting of the Board of Directors of the Corporation. The directors designate the 25TH day of JUNE 2015 at 10:00 AM , as the time and 1999 TRUXTUN, UKIAH, CALIFORNIA as the place of said meeting, the purpose of said meeting being to do the following acts: vote as to whether the corporation should execute a contract for the purchase of real property and to transact such other business related to the above acts.

Dated: ________________

______________________________

______________________________

______________________________

______________________________


MINUTES OF THE SPECIAL MEETING

OF THE DIRECTORS OF

ABCDE CORPORATION

A Special Meeting of the Directors of ABCDE CORPORATION was held on JUNE 25, 2015 at 10.A.M. at 1999 TRUXTUN, UKIAH, CALIFORNIA .

The Directors present at the meeting were JOAN A. DOE, MARK K. SMITH and JOHN Q. JONES who together constituted a quorum, being a majority of the authorized number of Directors of the corporation.

A waiver of notice for this Meeting was signed by JOAN A. DOE, MARK K. SMITH and JOHN Q. JONES .

MARK K. SMITH served as the Chairman of the meeting and JOAN A. DOE served as the Secretary of the meeting.

As the first matter of business, the Chairman stated that the Corporation should consider the purchase of the real property described below.

Upon motion duly made, seconded and carried it was

There being no further business to come before the meeting, on motion duly made, seconded and carried, the meeting was adjourned.

Dated: JUNE 25, 2015


RESOLUTION OF THE BOARD OF DIRECTORS ABCDE

CORPORATION, A CALIFORNIA NONPROFIT CORPORATION

AUTHORIZING THE PURCHASE OF REAL ESTATE

RECITALS

WHEREAS the California Corporation Code empowers corporations organized under the General Corporation Law to PURCHASE AND OWN REAL PROPERTY ,

WHEREAS the Articles of Incorporation and Bylaws of this corporation expressly provide that the powers of the Corporation are to be exercised by the Board of Directors, and

WHEREAS the Board of Directors deem it to be in the best interests of the Corporation in the economical transaction of its business to PURCHASE THE REAL PROPERTY DESCRIBED BELOW therefore be it

RESOLUTION

RESOLVED FURTHER that the President and Secretary of this Corporation be and they hereby are, authorized and directed to execute and deliver all documents and papers necessary in connection therewith and to affix the seal of the Corporation thereto.

CERTIFICATE

I, JOAN A. DOE , hereby certify that I am the duly qualified and acting Secretary of ABCDE CORPORATION , a California Corporation.

That the foregoing Resolution of the Board of Directors of ABCDE CORPORATION was duly adopted by the Board of Directors of this Corporation at a special meeting duly called and held on JUNE 25, 2015 at the Corporation's principal place of business in MENDOCINO County, CALIFORNIA and that the resolution has neither been modified nor rescinded and is on the date of this certificate in full force and effect.

IN WITNESS WHEREOF I have hereunder set my hand and affixed the seal of the Corporation this 25TH day of JUNE 2015 .

JOAN A. DOE, Secretary


CHAPTER 13

STATES' LAWS

This chapter is a synopsis of much of the material presented throughout this book as its relates to states and their requirements to form a nonprofit corporation. Neither this chapter nor this book is intended to replace the need for reviewing a state's nonprofit corporation law. The purpose of this book is to help a person or group form a nonprofit corporation easily and inexpensively and to explain how a nonprofit corporation operates.

The articles of incorporation presented in this book are a basic type that meets the current requirements of the various state laws. Before using the articles, the incorporator should review the state law to be assured that additional requirements were not recently added to the contents of articles of incorporation. Any such new requirements can be added as additional provisions. Also any optional provisions which the incorporators may wish to add to the articles can be typed in this section.

Many states provide, upon request, sample articles of incorporation through their secretary of state's office. These states are listed in this chapter. An incorporator may request a copy of those basic articles. The incorporator then has the option of using the articles presented in this book, using the basic articles of the state or creating a set of his own as long as the minimum content requirements of state law are included in the articles.

A nonprofit corporation must have at least one director. Many states require that there be at least three directors. If the corporation is going to operate in more than one state, it must satisfy the minimum number of directors for each state. As a practical matter, the number of directors in the corporation and whether they are public officials or not is one of the factors the IRS uses in determining whether the corporation is publicly supported. Most states require the initial directors and their addresses be listed in the articles. Some state require that the names and addresses of the incorporators also be listed in the articles. The articles in this book list both the names and addresses of the incorporators and initial directors.

Several states have special requirements after the articles are filed with the secretary of state. Some states require that after the articles are filed the corporation record a copy of the articles in the county where the corporation will have its principal executive office. Other states require that the corporation publish a notice of incorporation in a paper of general circulation after incorporation. The states having such requirements are listed in this chapter. State law should also be reviewed to assure that additional requirements have not been added or that other states have not added new requirements.


ALABAMA

NONPROFIT CORPORATION LAW

TITLE 10, CHAPTER 3A

ARTICLES OF INCORPORATION

SAMPLE: NOT PROVIDED BY SECRETARY OF STATE

NAME: The name cannot be similar to another corporation, be it profit or nonprofit. The name cannot indicate that the corporation is formed for a purpose not stated or permitted under the articles.

WHERE TO FILE: Alabama is unique. Alabama, Arkansas and the District of Columbia are the only jurisdictions in which the incorporator does not file the articles directly with the secretary of state or the department of corporations. Instead, the incorporator files the articles and two copies with the probate judge of the county wherein the corporation will have its registered office. The judge then issues a certificate of incorporation to the incorporators. Within 10 days of the filing of the articles, the probate judge sends the original articles to the secretary of state.

ANNUAL REPORT: The corporation must file an annual report by March 15 on a form provided by the secretary of state which states:

1. The corporate name and states in which it is operating,

2. The name and address of the registered agent,

3. A statement of the business in which the corporation has engaged in since the last annual report was filed; and

4. The names and addresses of the corporate officers.

STATE TAX EXEMPTION: There is a state tax exemption. The exemption is administered by:

Alabama Department of Revenue

Income Tax Division

Corporate Income Tax Section

P.O. Box 327310

Montgomery, AL 36132-7310

(205) 242-2000

REQUIREMENTS: To receive the tax exemption, the corporation must submit:

1. A copy of its articles and bylaws.

2. Financial statements for the corporations.

3. An affidavit that the corporation exists to perform nonprofit purposes and how it will raise its money and how it will spend it.

4. A federal determination letter, if any. If a federal tax exemption has been sought, a copy of Form 1023 can be submitted to meet the requirements of item 3.

5. Religious, benevolent and educational nonprofit corporations are exempted from the annual permit fee of $10 to $100.

ALASKA

NONPROFIT CORPORATION LAW

NONPROFIT CORPORATION ACT, SECTION 10.06-208

ARTICLES OF INCORPORATION

SAMPLE: PROVIDED BY SECRETARY OF STATE

NAME: The name cannot be similar to another corporation, be it profit or nonprofit. The name cannot indicate that the corporation is formed for a purpose not stated or permitted under the articles of incorporation.

WHERE TO FILE:

ALASKA DEPARTMENT OF COMMERCE

CORPORATIONS DIVISION

Pouch D

Juneau, AK 99811

(907) 465-2530

ANNUAL REPORT: The corporation must file an annual report by July 2 on a form provided by the secretary of state which states:

1. The corporate name and states in which it is operating,

2. The name and address of the registered agent,

3. A statement of the business in which the corporation has engaged since the last annual report was filed,

4. The names and addresses of the corporate directors and officers, and

5. A financial statement and description of assets.

STATE TAX EXEMPTION: There is a state tax exemption. The exemption is administered by:

Alaska Department of Revenue

State Office Building

P.O. BOX SA

Juneau, AK 99811-0400

(907) 465-2372

REQUIREMENTS: State tax exemption is automatic upon receipt of federal exemption. A copy of the federal determination letter must be submitted.

ARIZONA

NONPROFIT CORPORATION LAW

ARIZONA REVISED STATUTES, TITLE 10,

CORPORATIONS AND ASSOCIATIONS, 10-1002

ARTICLES OF INCORPORATION

SAMPLE: PROVIDED BY SECRETARY OF STATE

NAME: The name cannot be similar to another corporation, be it profit or nonprofit. The name cannot indicate that the corporation is formed for a purpose not stated or permitted under the articles.

Under section 10-1084, a certificate of disclosure regarding conduct of officers, directors and incorporators must accompany the articles. This statement must disclose all criminal felonyconvictions, convictions for theft, antitrust, restraint of trade and injunction within seven years.

WHERE TO FILE:

ARIZONA CORPORATIONS COMMISSION

P.O. BOX 6019

Phoenix, AZ 85005

(602) 255-3135

ANNUAL REPORT: The corporation must file an annual report by April 15 or 15th day of the 4th month of the corporation's fiscal year which states:

1. The corporate name and states in which it is operating,

2. The name and address of the registered agent;

3. A statement of the business in which the corporation has engaged since the last annual report was filed,

4. The names and addresses of the corporate officers, and

5. Statement of disclosure regarding conduct of officers, directors and incorporators. This statement must disclose all criminal felony convictions, convictions for theft, antitrust, restraint of trade and injunction within seven years.

STATE TAX EXEMPTION: There is a state tax exemption. The exemption is administered by:

Arizona Department of Revenue

Corporate Income Tax Section

1600 Washington Avenue

Phoenix, AZ 85007

(602) 542-3345 ext. 116

REQUIREMENTS: Automatic upon receipt of federal exemption. Must submit a copy of the federal determination letter along with copies of the articles and bylaws.

AFTERWARDS: The corporation must publish a notice of incorporation within 60 days of the filing of the articles in a paper of general circulation.

ARKANSAS

END OF PREVIEW


INDEX

Advantages of Incorporating 3,11

Federal Tax Exemption 37

Financial Grants and Donations 38

Limited Liability for Members 34

Afterwards 239

Annual Statement of Officers 19,243

Business Licenses 240

Fictitious Name Filings 19,246

Estimated Taxes 241,242

Payroll Withholding 20,244

Personal Property Taxes 242

Publication or Recording of the Articles 247

Sales and Use Taxes 243

State Tax Exemptions 247

State Licenses 239

Unemployment Tax 22,244

Unemployment Compensation 245

Worker's Compensation 245

Amendment of the Articles 251

Articles of Incorporation 89

Agent for Service of Process .91

Contents 89

Definition 89

Directors 92

Meetings 92

Membership Certificate 91

Name 90

Purpose 90

Term 92

Where to File 93

Basic Articles for

Alabama, Alaska, Arizona, Arkansas,

Colorado, Florida, Georgia, Hawaii,

Idaho, Iowa, Kansas, Kentucky, Maine,

Maryland, Missouri, Mississippi,

Nebraska, New Mexico, Nevada, N. Dakota,

Ohio, Rhode Island, Texas, Utah, Vermont,

Virginia, Washington, W. Virginia, Wisconsin 102

California 124

District of Columbia, South Dakota 140

Illinois 149

Indiana, Louisiana, Massachusetts,

Michigan, New Hampshire 157

Minnesota, N. Carolina, Pennsylvania 115

Montana, Oregon 167

Basic Certificate of Incorporation for

Connecticut, Delaware, New Jersey,

Oklahoma, 131

New York 176

Basic Charter of Incorporation for

Tennessee 185

Bylaws 17,193

Authority to Adopt 194

Basic Set 198

How Adopted 195

Construction 196

Location 197

Waiver 196

Commonly Asked Questions 3

Are Employees Liable for Taxes 23

Are Directors Employees 21

How Long Does a Corporation Last 12

How Are Profits Taxed 11

Must State Taxes Be Paid 24

Proceeds from Dissolution 16

Tax Differences Between Association & Nonprofit Corporation 13

What Are Membership Certificates 14

What Are Corporate Powers 5

What Is a Corporate Kit 16

What Is a Corporation 4

What Is a Federal Identification Number 20

What Is a Nonprofit Corporation 4

What Is a Tax Year 21

What Is a Wage and State Statement 22

What Is an Annual Statement of Officers 19

What Is Dissolution of a Corporation 15

What Is Federal Unemployment Tax 22

What Is Payroll Withholding 20

What Is the Corporation's Tax Return 23

What Is the Cost of Formation 12

What Is the First Meeting of Directors 18

Who Are Directors 7

Who Are Members 10

Who Are Officers 9

Who Is an Incorporator 6

Certificates of Corporate Resolutions 273

Corporate Meetings 259

Basic Minutes for Member's Meeting 262

Basic Minutes for Directors' Meeting 265

Incorporation 89

Choosing a Name 90

Preparing and Filing the Articles 89,93

Issuance of Membership Certificates 91,223

First Meeting of Directors 92,221

Meeting of Directors 221

Adoption of Membership Certificates 222

Authorizing Bank Accounts 222

Basic Minutes 226

Corporate Seal 223

Election of Officers 221

Fiscal Year 224

Principal Office 223

Membership Certificate 233

Basic Certificate 236

Membership Register 237

State Laws 279

Tax Exemptions 45

Deductible Contributions to Tax Exempt Organizations 53

Nondeductible Contributions to Tax Exempt Organizations 48

Application 72

Identification of Applicant 73

Activities and Operational Information 75

Technical Requirements 79

Financial Data 82

Limitations on Operations 70

Disclosure of Free Government Services 71

No Substantial Unrelated Activities 71

No Special Benefits for Individuals 71

Religious Purposes 54

Charitable Purposes 55

Scientific, Education and Literary Purposes 56

Private Foundations 67

Operating Limitations 68,70

Required Provisions in Articles 68

Public Charities 27

Automatic Charity Test 58

Public Support Test 60

Attraction of Public Support 60,63

Limitations on Public Contributions 62

General Support Test 65