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FAQ's - Nonprofit Corporations

I.   What is "nonprofit"?

    A.  A nonprofit corporation must generally be formed to carry out lawful purposes not involving any pecuniary profit or gain for its members, directors and officers. Nonetheless, a nonprofit corporation may receive income and make a profit as a result.

    B.   The members, directors and officers of the corporation are generally prohibited from profiting at the expense of the corporation. The assets, income or profits may generally be distributed to such people only when:

      1.   Paid as reasonable compensation for services actually rendered;

      2.   Assets, other than those held for charitable purposes, are distributed to members upon dissolution of the corporation;

      3.   The articles of incorporation provide for the payment of dividends to members (special cases only); or

      4.   Profit derived from sales to members is rebated to members in proportion to fees paid by members.

II.   What is a corporation?

    A.   A corporation is an artificial person. This means that it has a legal existence, it can sue or be sued, hold property in its own name, and enter into contracts on its own behalf. Corporations have their own federal identification number (like a social security number), and many state laws expressly apply to corporations as persons covered by the law.

    B.   Every nonprofit corporation must be organized upon a stock or nonstock basis (some states do not allow for the formation of a stock-issuing nonprofit corporation). Every nonstock corporation is generally organized as either a directorship corporation (the directors elect their own successors) or a membership corporation (the members elect the directors), although hybrid forms are sometimes possible.

      1.   Directorship corporation. The corporation may or may not have members, but if it does, such members have no voting power.

      2.   Membership corporation. The corporation has members and such members have voting power.

    C. Nonprofit corporations are limited as to permissible purposes.

      1.   Purposes must be stated with some specificity - a general statement that it will engage in any permissible activity is insufficient.

      2.   Purposes must meet IRS guidelines if tax exempt status is sought.

III.   Key definitions.
    A.   Who is a director?

      1.   A director is an individual who is a member of the governing board of a corporation. The term is synonymous with trustee and similar designations of governing board members.

      2.   A volunteer director is a director who does not receive anything more than nominal value from the corporation for serving as a director other than a reasonable per diem compensation and reimbursement for actual reasonable and necessary expenses incurred in the capacity as a director.

    B.   An officer is an agent of the corporation having only the authority given them by the corporation or by law.

    C.   What are fiduciary duties? Officers and directors are corporate fiduciaries who hold an office of trust. They are both subject to statutory and judicially imposed duties, including the duties of care, loyalty, and obedience.

    D.   A nondirector volunteer is an individual, other than a director, performing services for a nonprofit organization who does not receive compensation or any other type of consideration for his or her services other than reimbursement for expenses actually incurred.

      
 
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