New Hampshire Nonprofit Corporations
N.H. RSA 292, Voluntary Corporations and Associations, governs the formation, operation and dissolution of nonprofit corporations in New Hampshire. Nonprofit corporations are by far the entity of choice for doing not-for-profit activity in New Hampshire. Nonprofit corporations in New Hampshire must be established for religious, civic, charitable, educational, scientific, or social purposes as described in RSA 292:1. A nonprofit corporation (also known in New Hampshire as a “voluntary corporation”) is managed by its board of directors and operated by its officers and employees. A nonprofit corporation in New Hampshire may, but is not required to, have “members” (which are akin to shareholders in a for-profit corporation) and the criteria for membership in the corporation must be set forth in the articles of agreement. Often, the “members” are defined in the Articles to be the same as the Board of Directors, thus vesting the Board with ultimate control of the corporation – a so-called self-perpetuating board. If a separate category of members is desired, that group needs to be defined carefully or it may be impossible to get a vote of members that is legally defensible. Nonprofit corporations are specifically organized for a qualified not-for-profit purpose. However, this should not be confused with operating without fiscal surpluses. No part of the income or surplus of a New Hampshire nonprofit corporation may be distributed to its members, directors, officers or shareholders. However, reasonable compensation may be paid for services rendered.
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 shareholders or members from personal liability for the obligations and liabilities of the corporation, including unlawful actions of officers, directors and staff acting on its behalf. In addition, incorporation establishes continuity; corporations (both nonprofit and for-profit) 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. In addition, state and federal laws afford officers, directors and volunteer immunity from liability if acting in good faith.
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.
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 if 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 the NH Secretary of State of its Articles of Agreement. At least five adults, known as “incorporators,” are required to sign the Articles of Agreement. The articles must contain the corporation’s name (which must not be in use by any other registered corporation in the state), its purpose, rules concerning membership, the provisions for dissolution of the corporation and disposing of its assets, its business address, and the signature of its incorporators. The Articles of Agreement can be completed on form NP-1, available at http://www.sos.nh.gov/corporate/Nonprofitforms.html. The filing fee with the Secretary of State (Corporate Division, Department of State, 107 North Main Street, Concord NH 03301-4989) is $25. After filing with the Secretary of State, the articles must also be filed with the clerk in the municipality where the corporation’s mailing address is located along with a $5 fee. This latter requirement is a vestige of the time when municipalities needed to know which charities were operating in within its borders, and today provides the municipality with notice of entities that may claim an exemption from local property taxes, a major issue in New Hampshire.
In addition to the Articles of Agreement, all charitable nonprofits (those that plan to solicit funds within New Hampshire) are also required to register with the Charitable Trusts Unit of the NH Attorney General’s Office. This requires the filing of a form NHCT-1, available at http://doj.nh.gov/charitable/pdf/nhct1.pdf, along with a $25 fee. Organizations must include a copy of their conflict of interest policies, which they are required to have under RSA 7:19-a. Note that while sample language for such a policy appears at the end of the NHCT-1 form thought should be given to developing a conflict of interest policy that fits the specific mission of the organization.
Organizations exempt from federal tax under Section 501(a) of the Internal Revenue Code are exempt from the New Hampshire Business Profits Tax and organizations exempt under section 501(c)(3) are exempt from the New Hampshire Business Profits Tax and the New Hampshire Business Enterprise Tax; provided, however, that both taxes apply to all tax-exempt organizations to the extent of their unrelated business taxable income. The articles of agreement must indicate the charitable or educational purpose of the organization. Obtaining federal tax-exempt status requires filing Form 1023 with the IRS. Nonprofits must file IRS Form 990 annually, unless their gross receipts are less than $25,000.
Management and Control
Once the nonprofit corporation has been established, the incorporators must meet to elect the initial board of directors, who will ratify the acts in connection with the initial formation of the corporation, adopt the bylaws and complete the organization of the corporation. In New Hampshire, the adoption of a voluntary corporation’s initial bylaws require a 2/3 majority vote of the incorporators.
Typically, the bylaws of a nonprofit corporation contain provisions governing membership, 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; and amendment and dissolution procedures.
New Hampshire also requires that the nonprofit’s board have at least five voting members who are not related to each other. In addition, the board chair may not be an employee of the corporation. Organizations must also adopt and file with the Division of Charitable Trusts a conflict of interest policy as discussed in the Formation section above.
See resources below for sample bylaws.
Liability of Members, Directors and Officers
The articles of agreement may contain a provision to limit the personal liability of directors or officers to the corporation. Such provisions cannot, however, eliminate the liability for breach of an officer’s duty of loyalty, intentional or bad-faith misconduct, or transactions that result in an improper personal benefit to the officer or director.
Mergers, Acquisitions and Dissolution
New Hampshire nonprofits may merge by a majority vote of their boards at a meeting called specifically for that purpose. A certified copy of that vote needs to be recorded with both the secretary of state and the town/city clerk in the municipality in which the corporation maintains its principal place of business.
Recordkeeping, State Reports and State Taxes
Charitable and educational (but not religious) nonprofits must file annual reports (Form NHCT-2A) with the Division of Charitable Trusts within four and a half months of their fiscal year’s end. If the organization is required to file a Form 990 with the IRS (generally, organizations with annual gross receipts over $25,000), the organization can submit a copy of the 990 to the Division of Charitable Trusts along with applicable portions of the NHCT-2A. Organizations with lower gross receipts need to complete and file the full NHCT-2A. The form is available at: http://doj.nh.gov/charitable/pdf/nhct2a.pdf
Corporations also must file returns with the Secretary of State in 2010 and every five years thereafter, along with a $25 fee, on a form that the Secretary of State will mail to all registered voluntary corporations.
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)
- New Hampshire Department of Justice, Charitable Trusts Unit, http://doj.nh.gov/charitable/
- New Hampshire Center for Nonprofits, http://nhnonprofits.org/
- Incorporation and Tax Exemption for New Hampshire Arts and Other Nonprofit Organizations: An Introductory Guide (2002), http://www.nhbca.com/Non-Profit_Guide.pdf (contains sample articles of incorporation and bylaws)