Kansas Nonprofit Corporations
The Kansas General Corporation Code, K.S.A. § 17-101 through 17-7709, (the “KGCC”) governs the formation, operation, and dissolution of nonprofit corporations in Kansas. The Kansas Legislature has not adopted the Model Nonprofit Corporation Act, so the provisions dealing with nonprofit corporations are scattered throughout the general corporation law.
Under the KGCC, nonprofit corporations may issue capital stock, but in our experience, the majority do not and instead operate as “membership” corporations. A corporation’s articles of incorporation must delineate whether the nonprofit has the authority to issue stock and whether it is organized “for-profit” or “nonprofit.”
A nonprofit corporation in Kansas is managed by its board of directors and operated by its officers and employees. The corporation will retain its nonprofit status as long as it follows its purposes as set forth in the articles of incorporation and confers no economic gain to incorporators, directors, or members. However, a nonprofit corporation can benefit from economic gain that is used to further its purposes.
A nonprofit corporation’s existence is independent of its members, directors, or officers. It can own real estate, borrow, and sue and be sued in its own name. The Kansas attorney general has the power to pursue suits against nonprofit corporations and, in some cases, to enforce the law of public charities.
Advantages of Incorporation: pros and cons of nonprofit versus for-profit
The principal advantage of incorporation is that stockholders or members generally are not personally liable for the obligations and liabilities of the corporation, including unlawful actions of officers, directors and staff acting on its behalf.
Nonprofit corporations can be the preferred vehicle for an organization that wants to pursue social objectives when the enterprise can be funded without the need for access to capital markets. Although nonprofit corporations are not necessarily prohibited from engaging in commercial activities, the directors of a nonprofit are required to focus on the promotion of the corporation’s social mission, rather than the production of new income.
For-profit corporations generally enjoy more flexibility in pursuing philanthropic goals. For example, a for-profit corporation can engage in certain activities that may allow it to pursue certain goals faster. For example, lobbying and making profits to reinvest. In states that do not allow nonprofits to issue stock, an organization may wish to become a for-profit corporation so that it can better access capital.
FormationUnder the KGCC, a nonprofit corporation attains its separate legal status by filing its articles of incorporation with the Secretary of State. Any person, partnership, association or corporation, singly or jointly with others, may incorporate or organize a Kansas nonprofit corporation regardless of the incorporators' residence, domicile or state of incorporation.
The KGCC requires that a nonprofit’s articles of incorporation contain the same mandatory provisions as those of for-profit corporations. For example, each corporation’s articles of incorporation must include the name of the entity, the name and address of the registered office and resident agent, the nature or purpose of corporate business, whether the nonprofit has the authority to issue stock, the name and address of each incorporator, and the number and/or identification of directors. If no stock may be issued, the conditions of membership must either be stated in the articles or the articles must provide that the conditions be stated in the bylaws. In addition to these mandatory provisions, optional provisions may be inserted as long as they do not contravene the laws of Kansas. If the incorporators want the corporation to qualify as a 501(c)(3) charitable organization, then the articles of incorporation must also contain those specific provisions. 501(c)(3) organizations must be operated exclusively for charitable, educational, religious, scientific or other purposes specified in I.R.C. § 501(c)(3).
Like for-profit corporations, nonprofit corporations are managed by or under a board of directors unless otherwise provided by the KGCC or the articles of incorporation. The rules applicable to for-profit directors generally also apply for nonprofit directors. Directors of nonprofit corporations can generally exercise the same prerogatives as directors of for-profit corporations.
As of July 2011, the filing fee for filing articles of incorporation for nonprofit corporations was $20 for paper filings. A generic form of nonprofit articles of incorporation for a Kansas corporation may be found on the Kansas Secretary of State’s website (www.kssos.org). However, this form does not satisfy the requirements for tax exemption under the Internal Revenue Code, so counsel should be consulted in instances where tax exemption is desired.
Management and Control
Once a nonprofit corporation has been established, the initial directors, if named in the articles of incorporation, should conduct certain organizational activities, either in person at a board meeting or by written consent. For example, they should ratify the acts in connection with the initial formation of the corporation and adopt bylaws. Nonprofit corporations usually have relatively simple articles of incorporation. Instead, the specifics of the business of the corporation are delineated in the bylaws. Bylaws can contain any provision not inconsistent with Kansas law or the articles of incorporation that relates to the business of the corporation, the conduct of its affairs, and its powers.
The bylaws of a nonprofit corporation often contain provisions governing member, director, and officer qualifications, powers, and duties; voting; filling of vacancies; conduct of meetings; property holding and transfer; indemnification of directors and officers; committees; bank accounts; audits and financial reports; conflicts of interest; and amendment and dissolution procedures. For a sample set of bylaws, see Fletcher Corp. Forms § 4151 (4th ed. 1984).
Liability of Members, Directors and Officers
Directors and officers stand in a fiduciary relationship to the corporation. In addition to the conventional duties of due care, loyalty and candor, directors of nonprofit corporations are also thought to owe a special duty of obedience: a duty to advance its charitable goals and protect its assets. Officers and directors of corporations also have fiduciary relationships between themselves and shareholders.
Members of a nonprofit corporation are generally not personally liable for the corporation's debts. In unusual circumstances, the articles of incorporation may include a provision imposing liability on the members of the corporation, but otherwise the default rule is that members of a corporation are not personally liable for the
corporation's debts except by reason of their own conduct.
The KGCC allows the indemnification of officers, directors, employees, or agents for attorney’s fees and other expenses, as well as judgments or amounts paid in settlement in civil cases if the person acted in good faith and in a manner he reasonably believed to be in the best interests of the corporation. The KGCC permits indemnification in third party actions and also allows limited indemnification in derivative actions (i.e., only expenses and not judgments or settlement amounts). K.S.A. § 17-6305(c) mandates indemnification of reasonable expenses, including attorney fees:
[T]o the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in subjections (a) and (b) or in defense of any claim, issue or matter therein, such director, officer, employee or agent . . . .
Mergers, Acquisitions and Dissolution
There are four different kinds of merger or consolidation under the KGCC, with the variations depending upon whether one or both of the corporations are domestic or foreign corporations, and whether they are stock or membership corporations. The mechanics of each type of merger vary, but generally require the approval of each corporation’s board of directors and shareholders or members.
Dissolution procedures are the same for stock and nonstock corporations. K.S.A. § 17-6805 addressed the dissolution of membership corporations. A majority of the board must adopt a resolution agreeing to the dissolution and then notify each member who is entitled to vote. Members should then generally proceed as if they were stockholders under K.S.A. §17-6804. Therefore, a majority of members may ratify the action or may unanimously agree to dissolution without a director’s meeting.
Recordkeeping, State Reports, and State Taxes
Under the KGCC, the secretary should record minutes of all proceedings of meetings and retain them in a book. There is no express requirement that membership corporations do the same. Rights of inspection and notice of meetings and adjourned meetings are required for stockholders, but not for members.
Every nonprofit corporation is required to make an annual report in writing to the Secretary of State. The report includes the name of the corporation, the location of the principal office, the names and addresses of the president, secretary and treasurer, and the members of the governing body, the number of memberships or the number of shares, and the name and identification number of any subsidiary business if the corporation holds more than 50% equity ownership. Each nonprofit corporation pays an annual report fee of $40.
Income and property tax exemptions for charitable organizations are based on the philosophy that income and property used for certain public activities should not be taxed. Any corporation that is exempt from federal income tax is also exempt from Kansas income tax. Also, certain types of nonprofit corporations with literary, educational, scientific, religious, benevolent, or charitable purposes may be exempt from property tax. Also sales tax exemptions may be available in certain instances.
However, those exemptions are very fact-specific and are beyond the scope of these guidelines.
Nearly every type of activity by a nonprofit corporation can become the target of some kind of a claim by a firm or an individual that alleges damage or injury by the corporation or individuals associated with it (i.e., directors, officers or employees). Even if the claim is without merit, the costs of defending against the claim can be very substantial.
To encourage qualified individuals to accept positions as directors and officers, many nonprofit corporations purchase insurance to cover director and officer (D&O) liability. In addition, most responsible nonprofit corporations purchase a basic comprehensive general liability policy that covers liability for accidents in the corporation's offices, at sponsored meetings and the like.
Kansas statutes provide additional immunity from liability in certain circumstances for directors and officers of nonprofit organizations. Generally, a director or officer who is a volunteer (i.e., does not receive compensation, either directly or indirectly, for his or her services), is not liable for damages in a civil action if the organization maintains general liability insurance coverage. Exceptions to this grant of immunity apply where the conduct at issue is willful, wanton, or intentionally tortuous misconduct, or the volunteer is required by law to be, or otherwise is, insured.
Liability insurance for nonprofit corporations is often a complicated matter. Consultation with an experienced and knowledgeable agent or consultant is essential in order to obtain the right coverage at the lowest premium.
- Oleck and Stewart, Nonprofit Corporations, Organizations & Associations (Prentice-Hall, 1994, Cum. Supp. 2002).
- Jacobs, Jerald A., Association Law Handbook (ASAE & The Center for Association Leadership 4th ed., 2007).
- Nonprofit Governance and Management (American Bar Association and American Society of Corporate Secretaries, 2002).
- Guide to Nonprofit Corporate Governance in the Wake of Sarbanes-Oxley (American Bar Association Section of Business Law, 2005).
- Guidebook for Directors of Nonprofit Corporations (American Bar Association Section of Business Law 2d ed., 2002).
- General Forms: Nonprofit Organizations: Forms for Creation, Operation and Dissolution (Marcia Clifford, et al. ed., Callaghan & Company) (1987).
- Takagi, Gene. “Nonprofit Bylaws - Common Issues” Nonprofit Law Blog http://www.nonprofitlawblog.com/home/2009/09/nonprofit-bylaws-common-issues.html
- Kansas Corporation Law & Practice (Steven A Ramirez ed., 4th ed. 1998).