Nonprofit Corporations:  The Basics

The defining feature of a nonprofit corporation is that it has no owners or shareholders.  But although nonprofits have no owners, they are not limited to charitable activities; they operate businesses of all kinds, such as schools, hospitals, clubs and trade associations.

In New Jersey, as in most other states, nonprofit corporations are governed by a separate title of the state’s code.  In New Jersey, it’s Title 15A, and it sets out the requirement for the formation and governance of nonprofit corporations.  Title 15A has many similarities to the nonprofit statutes of other state, and so can serve as reference for a general discussion of the basics.  If you plan to form a nonprofit in a state other than New Jersey, do not do so until you review the statute of the relevant state.

All corporations have a board.

In a profit corporation, the members of the board are typically called directors; in a nonprofit, they are known as trustees, governors or directors.  By whatever name, the members of the board have the ultimate responsibility for governing the corporation.  For profit corporations need have only one director, but nonprofits must have at least three, a useful number for breaking a tie.

All corporations are required to have officers.

Typically, a president, a treasurer and a secretary.  Additional officers are optional, and often advisable, depending on the scope and scale of the organization.

Directors and officers are not figureheads; they have real responsibilities, and liability that attaches if they fail in those responsibilities.

The certificate of incorporation of a nonprofit must specify whether or not it has members.  Typically, a club or church will have members who elect the board, while a hospital or a charity will not, and board members will select their successors, or they will be appointed by persons outside the corporation.

Nonprofit corporations must specify the purpose for which they are organized.

The general-purpose language employed by most for-profit corporations is not acceptable.

A nonprofit is not automatically “tax exempt”.  That status is conferred by the Internal Revenue Service after review of an application for designation as tax exempt.  In general, tax exempt status is important for nonprofits that solicit and depend on donations to fund their operations.  If the corporation does not require donations to sustain its operations, it may not be worth the time and expense of seeking tax exempt status.  However, bear in mind that if a nonprofit will solicit donation, it must register under the Charitable Registration and Investigation Act.

One final note.

If a nonprofit will own real or personal property, liability insurance is a must, and whether or not the corporation owns property, liability insurance for officers and directors is strongly encouraged.  Directors and officers should not rely solely on the Charitable Immunity Act. If you have any questions, please contact Praxis Legal Solutions for more information.