The New Jersey Nonprofit Corporation Act (the “NPCA”) governs the formation, operation and dissolution of nonprofit corporations in New Jersey. A nonprofit corporation is managed by its board of trustees and operated by its officers and employees. Instead of shareholders, a nonprofit corporation may but is not required to have members, which are similar in role to that of shareholders, but without an equity interest in the nonprofit corporations. NP corporations, of course, are specifically organized to not earn profits. No part of the income or surplus of a NP Corporation may be distributed to its members, trustees or officers; however, reasonable compensation may be paid for services rendered.
A nonprofit corporation has an existence of its own, independent of 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 versus 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, trustees 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. Also, 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 NP Corporation is the preferred vehicle for pursuing social objectives. Although nonprofit corporations are not prohibited from engaging in commercial activities or generating net income, the trustees of a nonprofit corporation are duty-bound to devote primary attention to the promotion of the social mission of the nonprofit corporation rather than the production of income.
On the other hand, if access to capital markets is needed, a for-profit corporation (or limited liability company, as discussed here) is likely to be the preferred option because NP Corporations cannot issue capital stock. The directors of a for-profit corporation, however, owe strict duties to the corporation’s 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 forgo 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 with and approval by the New Jersey Secretary of State of the certificate of incorporation.
The incorporator files the certificate of incorporation with the New Jersey Division of Revenue, Corporate Filing Unit, PO Box 308, Trenton, NJ 08625 (for administrative reasons, filings are made through the Division of Revenue, not the Secretary of State). One or more natural persons of at least 18 years of age, corporations, foreign corporations or corporate entities, regardless of the incorporator’s residence or state of incorporation, may incorporate a nonprofit corporation, with each incorporator required to sign the certificate or incorporatoin. The filing fee is $75. The certificate of incorporation for a NP Corporation must set forth:
• the name of the nonprofit corporation, with the corporate name such as to distinguish it from the names of corporations of any type or kind, or any other entity registered with the New Jersey Secretary of State, and contain one of the following: “a New Jersey nonprofit corporation,” “corporation,” “incorporated”, “inc.” or “corp.”
• the purpose or purposes for which the nonprofit corporation is formed, which may be for any purpose other than for pecuniary profit including, without limitation, any of the purposes stated below:o charitable
• if the nonprofit corporation is to have no members, that there shall be no members;
• the method of electing trustees or that the method shall be as set forth in the bylaws of the nonprofit corporation;
• any provision not inconsistent with New Jersey law which the incorporators elect to set forth for the management and conduct of the affairs of the nonprofit corporation, or creating, defining, limiting or regulating the powers of the nonprofit corporation, its trustees and members or any class of members, including any provision which is required or permitted to be set forth in the nonprofit corporation’s bylaws;
• the address, including actual location as well as postal designation, if different, of the nonprofit corporation’s initial registered office, and the name of the nonprofit corporation’s initial registered agent at that address;
• the number of trustees, not less than three, constituting the first board and the names and addresses of such trustees (either residential address or other address where the person regularly receives mail, other than the address of the nonprofit corporation);
• the names and addresses of the incorporators (either the residential adress or other address where the person regularly receives mail, other than the address of the nonprofit corporation);
• the duration of the nonprofit corporation if other than perpetual;
• the method of distribution of assets of the nonprofit corporation upon dissolution, or that the distribution shall be as set forth in the bylaws of the nonprofit corporation; and
• if the certificate of incorporation is to be effective on a date subsequent to the date of filing, the future effective date of the certificate.
The corporate existence of the nonprofit corporation begins upon the filing of the certificate of incorporation with the New Jersey Secretary of State.
Except as otherwise provided in the certificate of incorporation, generally a nonprofit corporation must be managed by its board of trustees, and the certificate of incorporation or the bylaws may prescribe qualifications for trustees. While the NPCA sets forth general guidelines for powers of the board of trustees, the certificate of incorporation may vest the management of the nonprofit corporation in persons other than the board. The board must consist of at least three trustees.
If the nonprofit corporation intends to obtain exemption from federal income taxation, the certificate of incorporation must conform with applicable statutes and regulations. Nonprofit corporations are not legally required to obtain a State of New Jersey determination of tax-exempt status from the New Jersey corporation business tax. However, if a nonprofit corporation intends to obtain an exemption from the New Jersey sales and use tax or petroleum products gross receipts tax, it will be required to submit Form REG-1E, Application for Exempt Organization Certificate. Also, the nonprofit corporation may be required to register with the New Jersey Charities Registration Section and, for raffles, 50/50s, etc., with the New Jersey Legalized Games of Chance Control Commission. The nonprofit corporation may also need a letter of exemption from the New Jersey corporation business tax for banking purposes and if it engages in certain real property transactions.
Examples of certificates of incorporation may be found in Public Records, The State of New Jersey, Division of Revenue at http://www.state.nj.us/treasury/revenue/pdforms/pubrec.pdf and in “New Jersey Corporations and Other Business Entities” as Form 4.01 (See Mackay, John R., New Jersey Corporations and Other Business Entities Form 4.01 (3d ed., LexisNexis Matthew Bender 2005)) (form updated December 2008). Some general forms of certificate of incorporation for nonprofit corporations may be found in “General Forms: Nonprofit Organizations: Forms for Creation, Operation and Dissolution” referenced in the resources section below.
Management and Control
Once the nonprofit corporation has been established, the initial board of trustees should meet (or sign a unanimous written consent in lieu of a meeting) to ratify the acts in connection with the initial formation of the nonprofit corporation and adopt bylaws which set forth the rules and procedures governing the decision-making process of the board of trustees and the general operation and management of the nonprofit corporation consistent with the applicable statutes of New Jersey and the certificate of incorporation.
Typically, the bylaws of a nonprofit corporation contain provisions governing member, 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.
A generic form of bylaws for a New Jersey corporation may be found in “New Jersey Corporations and Other Business Entities” as Form 4.21 (See Mackay, John R., New Jersey Corporations and Other Business Entities Form 4.21 (3d ed., LexisNexis Matthew Bender 2005)) (form updated December 2008). Some general forms of bylaws for nonprofit corporations may be found in “General Forms: Nonprofit Organizations: Forms for Creation, Operation and Dissolution” referenced in the Resources Section below.
Liability of Members, Directors and Officers
The NPCA imposes upon trustees and officers duties of good faith and a degree of care which an ordinarily prudent person in a like position would use under similar circumstances. In performing his or her duties, a trustee is entitled to rely in good faith on information, opinions, reports or statements including financial statements and other financial data, in each case prepared or presented by officers or employees of the corporation, a committee of the board, or the corporation’s counsel or public accountants. Trustees also owe the corporation and its shareholders a duty of loyalty. A trustee may not use his or her position within the corporation for self-dealing at the expense of the corporation or exploit for personal benefit a business opportunity that should be utilized by the corporation.
The members of a nonprofit corporation are not personally liable for the debts, liabilities or obligations of the nonprofit corporation, and member liability is limited to the extent of any unpaid portion of the initiation fees, membership dues or assessments imposed upon the member by the nonprofit corporation, or for any other indebtedness owed by the member to the nonprofit corporation.
With certain exceptions, a nonprofit corporation trustee or officer serving without compensation is not liable to any person other than the nonprofit corporation based solely on his or her conduct in the execution of such office unless the conduct evidenced a reckless disregard for the duties imposed by the position. For this purpose, a director or officer is not considered compensated solely by receiving payments for actual expenses incurred in discharging his or her duties. In certain cases, trustees of a corporation who vote for or concur in corporate actions such as the distribution of assets in violation of the NPCA or fraudulent conveyance, or the making of a loan to directors and officers which contravenes the NPCA, will be jointly and severally liable to the corporation for the benefit of the corporation and its creditors, to the extent of any injury suffered by such persons, respectively.
An nonprofit corporation may indemnify any director or officer made, or threatened to be made, a party to an action or proceeding because he or she was a director or officer of the corporation against judgments, fines, amounts paid in settlement and reasonable expenses if such director or officer acted in good faith for a purpose which such director reasonably believed to be in, or not opposed to, the best interests of the nonprofit corporation and, in criminal actions or proceedings, in addition, had no reasonable cause to believe that his or her conduct was unlawful.
New Jersey provisions for liability of volunteer trustees, officers or members are subject to the Federal Volunteer Protection Act of 1997 (42 U.S.C. §14501, et seq.). This Federal law generally pre-empts state laws to the contrary and provides that volunteers can plead volunteer immunity as a defense against any claim arising out of their volunteer activities, except for “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” or harm caused by motor vehicles. Board members concerned about liability should therefore consider serving as volunteers rather than collecting compensation for their activities.
Mergers, Acquisitions and Dissolution
Two or more nonprofit corporations may merge into a single nonprofit corporation. The board of each corporation proposing to participate in the merger must adopt a plan of merger setting forth: the name of each constituent corporation, the name of the corporation into which they propose to merge, the terms and conditions of the proposed merger, and statement of any amendments or changes in the certificate of incorporation of the surviving corporation to be effected by such merger. Upon approving such plan of merger, the board must submit the plan for member approval if the corporation has any member entitled to vote. If the nonprofit corporation has no members entitled to vote, the plan of merger must be approved by two-thirds of the trustees present at a meeting called for the purpose of considering and voting upon the proposed merger. After the approval of the merger, a certificate of merger is filed with the New Jersey Secretary of State.
The dissolution of a nonprofit corporation may be accomplished by unanimous written consent, by the board and members if there are members entitled to vote on the matter, or by the board if the nonprofit corporation does not have members entitled to vote on the dissolution. Upon adopting a plan of dissolution and distribution of assets, the board must submit the plan to a vote of the members, if any are entitled to vote. The plan of dissolution and distribution of assets must then be approved by a two-thirds vote or via the unanimous written consent of the members in lieu of a meeting. If the nonprofit corporation does not have members entitled to vote, a plan of merger may be approved by two-thirds of its trustees at a meeting of the board or via the unanimous written consent of the board in lieu of a meeting. It is a good practice, in determining the requirements for dissolution to consult the Attorney General’s office for the district in which the corporation is headquartered prior to beginning the legal process. After dissolution, a corporation may not commence any new activities, but a dissolved corporation, its trustees, officers and members may continue to function for the purpose of winding up the affairs of the corporation.
Recordkeeping, State Reports and State Taxes
In addition to filing the certificate of incorporation, each nonprofit corporation must file a signed statement annually disclosing the name of the NP Corporation and jurisdiction of incorporation (if a foreign corporation), the address of the registered office of the nonprofit corporation in New Jersey where the Secretary of the State is to mail a copy of any process against it served upon him or her and the name of its registered agent in New Jersey, and the names and addresses of the trustees and officers of the corporation, which may not be the address of the nonprofit corporation.
Charitable organizations that plan to solicit contributions from the public are required to file a registration statement with the New Jersey Attorney General prior to soliciting and to file annual renewal registration statements unless exempted from registration under the New Jersey Charitable Registration and Investigation Act. This includes corporations that are 501(c)(3) tax exempt organizations and any corporation that holds itself out to be established for any benevolent, philanthropic, human, social, welfare, public health, or other eleemosynary purpose or for the benefit of law enforcement personnel, firefighters or other person who protect the public safety, or any person who in any manner employs a charitable appeal as the basis of any solicitation.
New Jersey exempts nonprofit organizations from state and local sales and use taxes. The Division of Revenue of the State of New Jersey requires all new nonprofit corporations in the state to register with the Division of Revenue, which can be done by completing Form REG-1E, which also applies for exemption from New Jersey sales and use tax. To be approved for exemption, REG-1E must be accompanied with a copy of the certificate of incorporation or other organizing documents, any by-laws, and an IRS 501(c)(3) determination letter. Form REG-1E is obtained from and submitted to the Regulatory Service Branch of the Division of Taxation and is available on the Division’s website: www.state.nj.us/treasury/taxation/. Once the form is submitted, it takes approximately three to four weeks for the State to mail the ST-5 exemption certificate. . After registering, nonprofit corporations will receive the forms, returns, instructions and other information required for ongoing compliance with New Jersey State taxes and employment regulations.
Nearly every type of activity by an 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 nonprofit corporation or individuals responsible for it (i.e., trustees, 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).
Takagi, Gene. “Nonprofit Bylaws - Common Issues” Nonprofit Law Blog http://www.nonprofitlawblog.com/home/2009/09/nonprofit-bylaws-common-issues.html
General Forms: Nonprofit Organizations: Forms for Creation, Operation and Dissolution (Marcia Clifford, et al. ed., Callaghan & Company) (1987).
Public Records, The State of New Jersey, Division of Revenue at http://www.state.nj.us/treasury/revenue/pdforms/pubrec.pdf.