Missouri Nonprofit Corporations
The Missouri Nonprofit Corporation Act (Mo. Rev. Stat. Chapter 355) (the “Act”) governs the formation, operation and dissolution of nonprofit corporations in Missouri. A nonprofit corporation in Missouri is managed by its board of directors and operated by its officers and employees. Instead of shareholders, a nonprofit corporation may, but is not required to, have members. Nonprofit corporations, of course, are specifically organized to not earn profits. Subject to limited exceptions, a Missouri nonprofit corporation may not make distributions.
A nonprofit corporation has an existence of its own, independent of the terms of office or employment of members, directors or officers. It can sue or be sued in its own name and can own real estate in its own name.
Advantages of Incorporation: pros and cons of nonprofit vs for-profit
The principal advantage of incorporation is that it protects the members from personal liability for the obligations and liabilities of the corporation. In addition, incorporation establishes continuity; corporations (both for-profit and nonprofit) are subject to a body of statutes that provide very specific guidance as to their formation and operation; and incorporation brings stature to the organization and implies stability.
Where profit is not a goal and the enterprise can be funded without the need for access to capital markets, the nonprofit corporation is the preferred vehicle for pursuing social objectives. Although nonprofit corporations are not prohibited from engaging in commercial activities, the directors of a nonprofit are duty-bound to devote primary attention to the promotion of the social mission of the corporation rather than the production of net income.
On the other hand, if access to capital markets is needed, a for-profit corporation (or limited liability company, discussed here) is likely to be the preferred option because nonprofit corporations cannot issue capital stock. The directors of a for- profit corporation, however, owe strict duties to the shareholders to maximize profits and value. Therefore, unless the directors and managers can tie the social mission of their for-profit corporation directly to its business purpose, they can be sued for breach of their duties to shareholders and for misuse of corporate assets if they focus too much on the social mission and forego profits. This problem can be avoided where all shareholders agree to pursue a social mission or devote a percentage of revenues to charitable causes but such agreements may be temporary because a change in control—or a drop in earnings—can lead to amendment or abrogation of shareholder agreements.
A nonprofit corporation attains its separate legal status through the filing and approval by Missouri’s Secretary of State (http://www.sos.mo.gov/) of its articles of incorporation. This document is in essence a contract between the state and the nonprofit corporation in which Missouri grants individual legal status to the corporation in exchange for the corporation’s commitment to follow its rules.
In order to form a nonprofit corporation, one or more individuals must sign the articles of incorporation as incorporators. Such articles must set forth: (1) A corporate name for the corporation that satisfies the requirements of the Act; (2) whether the corporation is a public benefit corporation or a mutual benefit corporation; (3) The street address of the corporation’s initial registered office and the name of its initial registered agent at that office; (4) The name and address of each incorporator; (5) Whether or not the corporation will have members; and (6) Provisions not inconsistent with law regarding the distribution of assets on dissolution. The articles of incorporation may set forth other matters, such as the corporation’s purpose, the initial directors, provisions regulating the management and powers of the corporation, or other matters required or permitted to be placed in the bylaws. While the Missouri Secretary of State has generally made a form of articles of incorporation available, the Act does not require the use of this form. The Act sets the filing fee for articles of incorporation at $20, plus a fee of $5 for copying and certifying the filed document. As noted above, there are some limitations on the name that may be adopted by a Missouri nonprofit corporation. For instance, the name cannot imply that the corporation is organized for a purpose other than as permitted by the Act and the name must be distinguishable from other legal entities organized in or authorized to conduct business in Missouri.
As noted above, a nonprofit must indicate whether it is a public benefit or mutual benefit organization, within the meaning of the Act. A corporation will be deemed to be a mutual benefit corporation, unless it qualifies as a public benefit corporation as follows: (1) designated by statute as a public benefit corporation; (2) is organized primarily or exclusively for religious purposes; (3) recognized as exempt under section 501(c)(3) of the Internal Revenue Code, or any successor section; or (4) is organized for a public or charitable purpose and upon dissolution must distribute its assets to a public benefit corporation, the United States, a state or a person which is recognized as exempt under section 501(c)(3) of the Internal Revenue Code, or any successor section.
If the nonprofit corporation intends to obtain exemption from federal and state income taxation, the articles of incorporation must conform with applicable tax statutes and regulations, including provisions addressing distribution of assets upon dissolution and the prohibition of personal investment or other personal benefits to individuals.
A generic form of articles of incorporation for a Missouri corporation may be found in “Missouri Practice – Business Organizations” at § 35.7. (See 26 P. Louis, Missouri Practice—Business Organizations § 35.7 (2000).)
Management and Control
Once the nonprofit corporation has been established, the initial board of directors should hold an organizational meeting to ratify the acts in connection with the initial formation of the corporation and adopt bylaws which set forth the rules and procedures governing the decision-making process of the board of directors and the general operation and management of the corporation consistent with the applicable statutes of Missouri and the articles of incorporation. If the initial board of directors was not designated in the articles of incorporation, then the incorporators may meet in person or act by unanimous written consent to elect the initial directors, who may then hold the organizational meeting.
Typically, the bylaws of a nonprofit corporation contain provisions governing membership (if applicable), director and officer qualifications, powers, and duties; voting; filling of vacancies; meetings; property holding and transfer; indemnification of directors and officers; committees; bank accounts; fiscal year audits and financial reports; conflicts of interest; amendments to articles and bylaws; and dissolution procedures, including permissible recipients of assets upon dissolution.
While the articles of incorporation may set forth the number of directors of the corporation, it is not required that this number be set forth in the articles. If not established in the articles, the number of directors should be set forth in the bylaws and must be in a number not less than three. Under the Act, a nonprofit corporation is permitted to refer to its board of directors as a board of trustees, a board of regents, or a board of overseers. The board is the governing body of the corporation and has the authority to manage the affairs of the corporation. If the nonprofit corporation has members, then the directors (other than the initial directors) will be elected by the members annually, unless the articles or bylaws provide for some other process of appointment or designation. If the nonprofit corporation has no members, then the directors shall be elected, appointed or designated as set forth in the articles or bylaws. If not otherwise provided in the articles or bylaws, then the board is self-perpetuating, with the board itself electing new members.
The terms of directors shall be established by the articles or bylaws, but cannot exceed a period of six years. If no term is so established, then the term shall be for a period of one year. Notwithstanding the “expiration of a director’s term, the director continues to serve until the director’s successor is elected, designated or appointed and qualifies, or until there is a decrease in the number of directors.” The articles or bylaws may provide for staggered terms of directors.
A generic form of bylaws for a Missouri corporation may be found in “Missouri Practice – Business Organizations” at § 35.13. (See 26 P. Louis, Missouri Practice—Business Organizations § 35.13 (2000).)
Liability of Members, Directors and Officers
While the prior version of the Act specifically provided that neither directors nor members of a nonprofit corporation would be personally liable for debts, liabilities, or obligations of the corporation, this clause was removed in the adoption of the Act in 1995. The Act does have a specific provision making it clear that “[a] member of a corporation is not, as such, personally liable for the acts, debts, liabilities, or obligations of the corporation.” There is no analogous provision in the Act with respect to directors.
With respect to directors, there is a broader immunity from personal liability or civil damages under Missouri law outside of the Act. This immunity applies to any uncompensated officer or member of the governing body of an entity which operates under the standards of section 501(c) of the Internal Revenue Code of 1986. This immunity only applies to “to such actions for which the person would not otherwise be liable, but for his affiliation with such an entity.” Similarly, this immunity would not apply to “intentional conduct, wanton or willful conduct, or gross negligence.” While there is similar immunity applied to volunteers for 501(c) organizations more broadly, this immunity may have limited scope in that it expressly excludes the negligence of the volunteer. Potential liability of officers, directors and volunteers should be appropriately addressed with indemnification provisions in the articles and bylaws as well as with appropriate insurance coverage.
Those serving as directors for Missouri nonprofit organizations may also take comfort from a federal law, the Volunteer Protection Act of 1997, which specifically preempts any inconsistent state law. Under the Volunteer Protection Act of 1997 and subject to certain exceptions, no volunteer of a nonprofit organization is liable for an act or omission on behalf of that organization if: “(1) the volunteer was acting within the scope of the volunteer’s responsibilities in the [nonprofit organization] at the time of the act or omission; (2) if appropriate or required, the volunteer was properly licensed, certified, or authorized by the appropriate authorities for the activities or practice in the State in which the harm occurred, where the activities were or practice was undertaken within the scope of the volunteer’s responsibilities in the nonprofit organization or governmental entity; (3) the harm was not caused by willful or criminal misconduct, gross negligence, reckless misconduct, or a conscious, flagrant indifference to the rights or safety of the individual harmed by the volunteer; and (4) the harm was not caused by the volunteer operating a motor vehicle, vessel, aircraft, or other vehicle for which the State requires the operator or the owner of the vehicle, craft, or vessel to - (A) possess an operator’s license; or (B) maintain insurance.”
The Act includes authorization for indemnification of directors and officers of nonprofit corporations, which is very similar to that allowed for business corporations organized for profit. The provisions of the Act are not very specific to nonprofit corporations and much of the language seems to be taken directly from the statutes concerning business corporations (for example, the Act provisions concerning indemnification continue to make reference to “shareholders”, as would be applicable for a business corporation).
Mergers, Acquisitions and Dissolution
Nonprofit corporations organized under the Act may merge with or into other business or nonprofit corporations, subject to the terms and limitations within the Act. Any such merger would occur pursuant to a plan of merger, which would set forth among other matters, “(1) the name of each corporation planning to merge and the name of the surviving corporation into which each plans to merge; (2) the terms and conditions of the planned merger; (3) the manner and basis, if any, of converting the memberships of each public benefit or religious corporation into memberships of the surviving corporation; and (4) if the merger involves a mutual benefit corporation, the manner and basis, if any, of converting memberships of each merging corporation into memberships, obligations or securities of the surviving or any other corporation or into cash or other property in whole or in part.” Any such plan would need to be adopted by (at least) the board of each merging corporation and by the members (if any). If there are members, the Act contemplates an affirmative vote of (at least) “two-thirds of the votes cast or a majority of the voting power, whichever is less”. If there are no members, the Act contemplates that board approval would require (at least) the affirmative vote of “a majority of the directors in office at the time the merger is approved”. These generic requirements may be modified by other relevant provisions of the Act, the articles or bylaws of the corporations involved, or additional requirements of the relevant boards of directors. Any approval of the board or members would need to be obtained pursuant to the notice requirements in the Act.
A merger involving a public benefit corporation is subject to additional limitations under the Act. For example, a public benefit corporation may need to provide advance written notice to the Missouri Attorney General with respect to certain details of the merger. Similarly, if a public benefit corporation proposes to merge with a mutual benefit corporation or a business corporation, the public benefit corporation must first distribute assets with “a value equal to the greater of the fair market value of the net tangible and intangible assets, including goodwill, of the public benefit corporation or the fair market value of the public benefit corporation if it were to be operated as a business concern” as provided in its articles or bylaws. If no such provision exists, then it must transfer such assets in accordance with the Act, which may include a transfer to an organization acting under Section 501(c)(3) of the Internal Revenue Code or to one or more public benefit corporations under the Act.
A majority of the incorporators or directors of a corporation that has no members may, subject to any approval required by the articles or bylaws, dissolve the corporation by delivering to the secretary of state articles of dissolution. The corporation must give notice of any meeting at which dissolution will be approved. The notice must comply with the requirements under the Act, including a requirement that the notice state that the purpose, or one of the purposes, of the meeting is to consider dissolution of the corporation. The incorporators or directors in approving dissolution shall adopt a plan of dissolution indicating to whom the assets owned or held by the corporation will be distributed after all creditors have been paid.
The voting requirements are similar to those for a merger described above. Although these voting requirements can be subject to modification, it is generally contemplated that a corporation with members would need to have the dissolution approved “by two-thirds of the votes cast or a majority of the voting power, whichever is less” and that a corporation without members would need its board to approve the dissolution “by a vote of a majority of the directors in office at the time the transaction is approved”.
As with a merger there are certain additional requirements under the Act. For example, a public benefit corporation must provide the Missouri Attorney General with notice of an intent to dissolve in advance of delivering the articles of dissolution to the Missouri Secretary of State.
Recordkeeping, State Reports and State Taxes
A nonprofit corporation operating under the Act must maintain records as required under the Act. For instance, the Act requires a nonprofit corporation to keep as permanent records minutes of all meetings of its members and board of directors, a record of all actions taken by the members or directors without a meeting, and a record of all actions taken by committees of the board of directors. Any such nonprofit corporation must also maintain appropriate accounting records and a record of its members. In addition to other requirements under the Act, the nonprofit corporation’s records must be maintained in written form or in another form capable of conversion into written form within a reasonable time. Copies of the following records should be kept at the principal office of the nonprofit corporation: (1) its articles or restated articles of incorporation and all amendments to them currently in effect; (2) its bylaws or restated bylaws and all amendments to them currently in effect; (3) resolutions adopted by its board of directors relating to the characteristics, qualifications, rights, limitations and obligations of members or any class or category of members; (4) the minutes of all meetings of members and records of all actions approved by the members for the past three years; (5) all written communications to all members or any specific class of members generally within the past three years, including the financial statements furnished for the past three years under the Act; (6) a list of the names and business or home addresses of its current directors and officers; (7) its most recent annual report delivered to the secretary of state under the Act; and (8) appropriate financial statements of all income and expenses. As noted, a nonprofit corporation must provide annually a report to the Missouri Secretary of State. Such report must contain the information required by the Act and should be filed on the form prescribed and furnished by the secretary of state.
Nonprofit corporations organized under the Act may be exempt from certain Missouri taxes. The following organizations are exempt from state and local property taxes: Nonprofit cemeteries; agricultural or horticultural societies organized in this state, including not-for-profit agribusiness associations; and certain religious, educational or charitable organizations. Notably, real property held for investment is taxable even if the proceeds are used for religious, educational or charitable purposes.
State income tax would not generally apply to nonprofit corporation that “by reason of its purposes and activities is exempt from federal income tax.” This exemption would not apply to unrelated business taxable income that is federally taxable.
Nonprofit corporations may also be exempt from sales and use tax. For example, the following sales would be exempt from sales tax: “all sales made by or to religious and charitable organizations and institutions in their religious, charitable or educational functions and activities” and “all sales made to any private not-for-profit elementary or secondary school”.
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 responsible for 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.
Liability insurance for nonprofit corporations is often a very 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).
- 26 P. Louis, Missouri Practice—Business Organizations Chapter 35 (2000).
- C. Hansen and D. Lents, Missouri Corporation Law & Practice (Tower Publishing 7th ed. 2009).J. Dankenbring, W. Hutton, and J. Loranger, “Nonprofit Corporations”, III Mo. Business Organizations § 24 (MoBar 1998, 2001).
- Takagi, Gene. “Nonprofit Bylaws - Common Issues” Nonprofit Law Blog http://www.nonprofitlawblog.com/home/2009/09/nonprofit-bylaws-common-issues.html