The New Mexico Nonprofit Corporation Act [Chapter 53, Article 8 NMSA 1978] governs the formation, operation and dissolution of nonprofit corporations in New Mexico. A nonprofit corporation formed in New Mexico is managed by its board of directors and operated by its officers and members. Instead of shareholders, a nonprofit corporation may, but is not required to, have members. Nonprofit corporations, of course, are specifically organized not to earn profits. No part of the income or surplus of a New Mexico nonprofit corporation may be distributed to its members, directors or officers; however, reasonable compensation may be paid to its members, directors, and officers for services rendered.
A nonprofit corporation has an existence of its own, independent of then 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.
Where profit is not a goal and the enterprise can be founded without the access to debt or equity financing, 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 debt or equity financing 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 tie the social mission 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 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 New Mexico Public Regulation Commission ("PRC") of its articles of incorporation. This document is in essence a contract between the state and the nonprofit corporation in which New Mexico grants individual legal status to the nonprofit corporation in exchange for the corporation’s commitment to follow its rules.
The New Mexico Nonprofit Corporation Act sets forth the specific state requirements for forming a nonprofit corporation which are:
One or more persons, including for-profit and nonprofit corporations, may incorporate a nonprofit corporation by signing and delivering articles of incorporation in duplicate to the PRC. The articles of incorporation, approved by the PRC by a certificate of incorporation, must state the name of the corporation; the period of duration, which may be perpetual; the purpose or purposes for which the corporation is organized; any provisions, not inconsistent with law, which the incorporators elect to set forth in the articles of incorporation for the regulation of the internal affairs of the corporation, including any provision for distribution of assets on dissolution or final liquidation; the address of its initial registered office, and the name of its initial registered agentat such address; the names and addresses of the persons who have consented to serve as a the initial directors; and the name and address of each incorporator.
The number of directors of a New Mexico nonprofit corporation may not be less than three; subject to that limitation, the number of directors is determined by the bylaws or articles of incorporation. The number of directors may be increased or decreased from time to time. The directors constituting the first board of directors are named in the articles of incorporation and shall hold office until the first annual election of directors; after, directors will be elected in the manner and for the terms provided in the articles of incorporation or the bylaws. In the absence of a provision fixing the term of office, the term for the initial directors is one year. Directors may be divided into classes and the terms of office of the several classes need not be uniform. A director may be removed from office pursuant to any procedure provided in the articles of incorporation or the bylaws.
For an example of nonprofit bylaws, please visit: http://www.nmag.gov/office/Divisions/Civ/Charity/formingcharity.aspx
Management and Control
Once the nonprofit corporation has been established, the initial board of directors should meet in person 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 nonprofit corporation consistent with the applicable statutes of the New Mexico Nonprofit Corporation Act and the articles 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.
See Office of New Mexico, Attorney general Gary King, http://www.nmag.gov/office/Divisions/Civ/charity/default.aspx.
Liability of Members, Directors and Officers
The directors, officers, employees and members of the nonprofit corporation shall not be personally liable for the corporation’s obligations.
No director of the cnonprofit orporation can be personally liable to the corporation or its members for monetary damages or breach of fiduciary duty as a director unless the director has breached or failed to perform the duties of the director’s office and such breach or failure to perform constitutes willful misconduct or recklessness.
No member of a board of directors of a nonprofit corporation is personally liable for any damages resulting from any negligent act or omission of an employee or another director of that nonprofit corporation.
Mergers, Acquisitions and Dissolution
Any two or more domestic corporations may merge into one corporation or consolidate into a new corporation pursuant to a plan of merger or consolidation approved in the manner provided in the Nonprofit Corporation Act, adopted in the following manner:
i) if the members of any merging or consolidating corporation are entitled to vote, the board of directors of the corporation must adopt a resolution approving the proposed plan of merger or consolidatoin and directing that it be submitted to a vote at a meeting of members entitled to vote. The proposed plan must be adopted upon receiving at least two-thirds of the votes which members present; or
ii) if any merging or consolidating corporation has no members, or no members entitled to vote, a plan of merger or consolidation shall be adopted at a meeting of the board of directors of the corporation upon receiving the vote of a majority of the directors in office.
Recordkeeping, State Reports and State Taxes
The PRC shall provide, pursuant to the provisions of the Public Records Act [Chapter 14, Article 3 NMSA 1978], for the retention, storage and destruction of annual reports filed with the PRC.
Each nonprofit corporation must keep correct and complete books and records of account and minutes of the proceedings of its members, board of directors and committees having any of the authority of the board of directors. Each nonprofit corporation shall keep at its registered office or principal office in New Mexico a record of the names and addresses of its members entitled to vote. All books and records of a nonprofit corporation may be inspected by any member, or his agent or attorney, for any proper purpose at any reasonable time.
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.