Ohio Nonprofit Corporations
The Ohio Revised Code, Chapter 1702: Nonprofit Corporation Law governs the formation, operation and dissolution of nonprofit corporations in Ohio. A nonprofit corporation in Ohio 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. No part of the income or surplus of an Ohio nonprofit corporation may be distributed to its members, directors or officers; 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.
Where profit is not a goal and the enterprise can be funded without 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 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 the Ohio Secretary of State of its articles of incorporation; the requirements can be found in OHIO REV. CODE §1702.04. This document is in essence a contract between the state and the nonprofit corporation in which Ohio grants individual legal status to the corporation in exchange for the corporation’s commitment to follow its rules.
Under OHIO REV. CODE §1702.03, a corporation may be formed for any purpose or purposes for which natural persons lawfully may associate themselves. Any person, singly or jointly with others, and without regard to residence, domicile, or state of incorporation, may form a corporation by signing and filing with the secretary of state articles of incorporation. Required filing forms can be found at: www.sos.state.oh.us.
Steps to Formation
i) Choose a business name and check for availability
- A nonprofit corporation’s name may not be the same as, or deceptively similar to, other corporate names on file with the Secretary of State (limited exceptions apply). The name must be “distinguishable upon the records” from the name of any corporation, limited liability company, limited partnership, limited liability partnership, or trade name previously registered with the Ohio Secretary of State. The name must contain the words “Corporation,” “Incorporated,” “Company,” “Limited,” or an abbreviation of these words (e.g. “Corp.” or “Inc.”).
- The name must not contain words that suggest an association with certain specialized entities like the federal government (prohibited names include: “Federal,” “National,” or “United States”) or a restricted type of business (prohibited names include: “Bank,” “Lawyer,” or “Doctor”) or a special legal entity (prohibited names include: “Cooperative,” “Reserve,” or “Trust”). Although you are not required to do so, you should consider registering your business name as a federal and/or state trademark. See Trademark for Business Naming for details.
- To determine whether the name you wish you use is available, visit the Secretary of State’s website (www.sos.state.oh.us) or call the Secretary of State’s office at 877-767-3453.
- If the name you have chosen is already reserved or registered, you may still register and use the name if you obtain consent from the prior registrant.
- If you choose a corporate name that is available but you are not ready to register it with the Secretary of State’s office, you may reserve the name. Essentially, reserving a name is like putting it on “hold” temporarily so that others cannot register the name before you do. To do this, please submit the Name Reservation form and the corresponding filing fee of $50 payable to “Ohio Secretary of State,” and the name will be reserved for a period of six months (180 days).
- There must be at least three directors for your nonprofit corporation.
- Directors do not have to reside within Ohio, nor do they have to be of a certain age.
- The Ohio Attorney General has a Guide for Board Members, which explains the duties and responsibilities that directors owe to a nonprofit organization.
a) Prepare and file articles of incorporation with the Secretary of State, http://www.citmedialaw.org/legal-guide/articles-incorporation-nonprofits.
- The filing fee in Ohio is $125, payable to “Ohio Secretary of State,” and the filing may be expedited for an additional fee.
- The Ohio Secretary of State offers three levels of expedite service for nonprofit filings. The expedite levels 1 and 2 filing may be mailed or submitted in person. Level 3 may only be submitted in person at the Client Service Center or the Cleveland Regional Office. The expedite filing fee must be added to each filing submitted. If only some of your filings require expedite service, submit a separate check for the expedited filings. In the event of an expedite 3 filing containing an error, the customer will be notified. If a filing is re-submitted by 1:00 p.m., the filing will be processed by 5:00 p.m. Please note that expedite level 3 filings submitted after 1:00 p.m. will be available the next business day.
| Levels of Expedite
|| Additional Fee
|| Turnaround Time
||$100.00||2 Business days
||$200.00||1 Business day
- The legal existence of the corporation begins upon the filing of the articles or on a later date specified in the articles that is not more than ninety days after the filing, and, unless the articles otherwise provide, its period of existence shall be perpetual.
- The articles of incorporation must include:1) The name of the corporation, 2) The place in Ohio where the principal office is to be located, and 3) The purpose or purposes for which the corporation is formed.
- The articles of incorporation may also include the following: 1)The names of individuals who are to serve as the initial directors; 2) The names of any persons or the designation of any group of persons who are to be the initial members; 3) Any qualification of membership and the classification of members; 4) A provision to the effect that the corporation shall be subordinate to and subject to the authority of any head or national association, lodge, order, beneficial association, fraternal or beneficial society, foundation, federation, or any other nonprofit corporation, society, organization or association; 5) Any lawful provision for the purpose of defining, limiting, or regulating the exercise of the authority of the corporation, the incorporators, the directors, the officers, the members or any class of members, or creating or defining rights and privileges of the members among themselves or in the property of the corporation, or governing the distribution of assets on dissolution; 6) Any provision that may be set forth in the regulations; and 7) A provision specifying the period of existence of the corporation if it is to be other than perpetual. The incorporator, as the person who creates the corporation, must sign the articles.
- The required statement of purpose in the articles must be carefully constructed, because the stated purpose(s) is the only purpose(s) for which the corporation may legally operate, and the purpose clause will help determine whether the corporation qualifies to be tax-exempt. The articles may also include any additional provisions permitted by OHIO REV. CODE §1702.
- There are no set criteria for the content of bylaws, but they typically set forth internal rules and procedures.
- You are not required to file bylaws with the Secretary of State, but you must keep a copy at the nonprofit corporation’s principal place of business.
- The owners/incorporators, or the initial directors if named in the articles of incorporation, should hold an initial organizational meeting to: 1) Appoint directors (if not named in the articles); 2) Appoint corporate officers; 3) Adopt the bylaws ; 4) Set the nonprofit corporation’s budget for the fiscal year; 5) Designate a bank; and 6)Select a corporate seal
- Someone present at the meeting should record minutes of the meeting. These minutes should be stored at the nonprofit corporation’s principal place of business.
- You will need a records book to store important documents concerning your nonprofit corporation. See OHIO REV. CODE §1702-15 for specific information about record-keeping requirements under Ohio law.
At the same time the articles are filed, a nonprofit corporation must appoint a statutory agent to accept service of process on behalf of the corporation. A nonprofit corporation is a fictitious “person” under the law, and the law requires that a “statutory agent” be appointed to receive notices and other documents on the corporation’s behalf. When filing your articles, you will also need to complete the Original Appointment of Statutory portion of the Articles of Incorporation form to appoint the statutory agent. If a statutory agent is not appointed when the articles are filed, the Secretary of State must reject the articles.
The incorporator, or a majority of the incorporators if the entity has more than one, must sign the Original Appointment of Statutory Agent. The statutory agent must also sign to indicate his or her acceptance of the appointment. A statutory agent for a nonprofit corporation may be any of the following:
- An individual who is a resident of Ohio;
- A domestic corporation for profit; or
- A foreign corporation for profit that is licensed to do business in Ohio, is authorized by its articles to act as a statutory agent, and has an Ohio business address.
If the Secretary of State’s office learns that a nonprofit corporation has failed to maintain a statutory agent, the corporation will be notified at the address appearing in the corporation’s articles or on the most recent Statement of Continued Existence, that its statutory agent must be updated. Under OHIO REV. CODE §1702.06, if the corporation fails to update its statutory agent within 30 days of the date on the Secretary of State’s notice, the Secretary of State may cancel the corporation’s articles without further notice to the corporation. For this reason, it is important to remain aware of the statutory agent information on file with the Secretary of State’s office and to make sure it is updated as necessary.
v) Request an Employer Identification Number (“EIN”) from the IRS.
This can be done by:
- Submitting the required information online at the IRS website
- Calling 1-800-829-4933 from 7:00 a.m. to 10:00 p.m. in your local time zone
- Mailing or faxing Form SS-4, the Application for Employer Identification Number
vi) Register with state offices
a) Ohio Attorney General
- Before engaging in any solicitation activities you must register with the Attorney General by filing the Charitable Organization Registration Form.
- Refer to the Attorney General’s What and When to File publication for more information.
- The filing fee depends on the nonprofit corporation’s estimated contributions for the coming year.
- The fee is waived for nonprofit corporations with estimates less than $25,000. The filing fee is $50 those with estimates between $25,000 and $100,000.
- Additionally, if you have solicited more than $5,000 in the previous year, you will also need to file a Verification of Filing with the IRS Form with the Attorney General on an annual basis. (You can also file the form via the Charitable Organization Information Network).
- You must register for state business taxes. The Ohio Business Gateway has information on your nonprofit corporation’s tax responsibilities.
- The IRS lists a series of questions to help you determine whether your organization is eligible for federal tax exemption.
- To Obtain 501(c)(3) Tax-Exempt Status: Submit Form 1023, Application for Recognition of Exemption to (note: new address):
P.O. Box 12192
Covington, KY 41012-0192
Information: (800) 829-1040
Forms: (800) 829-3676
Web Site: www.irs.gov/charities
Filing Fee: $750 ($300 if revenues less than $10,000/year)
- The Secretary of State’s Legal Guide for Nonprofit Organizations provides information on how to obtain corporate income, sales, and property tax exemptions for your nonprofit corporation.
- To Obtain Ohio Franchise Tax and Sales Tax Exemptions: Nonprofit organizations (except agricultural and consumer cooperatives) are exempt from the corporation franchise tax. 501(c)(3) nonprofit organizations are exempt from sales taxes. Sales and use tax blanket exemption certificates (form STEC-B) are to be provided to vendors.
30 East Broad Street
Columbus, OH 43215
Information: (888) 405-4039
Fax: (614) 466-6401
Web Site: tax.ohio.gov/channels/other/business.stm
- Your nonprofit organization may be exempt from paying property taxes on property it owns or leases. Such exemptions vary widely by location; check with the tax assessor of your local government (town or city hall, or the seat of county government) to find out how to apply for applicable exemptions.
a) Within 6 months of creating a nonprofit organization, all organizations must register with the Ohio Attorney General by submitting Form CFR-1 and copies of the 501(c)(3) Determination Letter from the IRS, Articles of Incorporation, and Bylaws to:
Charitable Law Section
150 East Gay Street, 23 rd Floor
Columbus, OH 43215-3130
Information: (614) 466-3180
Web Site: www.ag.state.oh.us
Filing Fee: $0
b) In order to solicit contributions in Ohio, nonprofit organizations must first register with the Ohio Attorney General by submitting a Charitable Organization Registration Statement along with copies of the 501(c)(3) Determination Letter from the IRS, Articles of Incorporation, Bylaws, and a copy of IRS Form 990 to:
Charitable Law Section
150 East Gay Street, 23 rd Floor
Columbus, OH 43215-3130
Information: (614) 466-3180
Web Site: www.ag.state.oh.us
Note: If contributions < $5,000: Filing Fee = $0
If contributions >= $5,000 but < $25,000: Filing Fee = $50
If contributions >= $25,000 but < $50,000: Filing Fee = $100
If contributions >= $50,000: Filing Fee = $200
Filing must be notarized.
If the nonprofit corporation intends to obtain exemption from federal and state income taxation, the articles of incorporation must conform with applicable statutes and regulations (discussed below).
Management and Control
The board of directors makes the major strategic and financial decisions for a nonprofit corporation, including appointing its officers. You must have at least three directors for your nonprofit corporation. Directors do not have to reside within Ohio, nor do they have to be of a certain age.
Once the nonprofit corporation has been established, the initial board of directors should meet (in person/by consent) to ratify the acts in connection with the initial formation of the corporation and adopt bylaws, if the corporation has not already done so. The bylaws 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 Ohio and the articles of incorporation.
Except where the law, the articles, or the regulations require that action be otherwise authorized or taken, all of the authority of a corporation shall be exercised by or under the direction of its directors. For their own government, the directors may adopt bylaws that are not inconsistent with the articles or the regulations.
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.
Liability of Members, Directors and Officers
The members, directors, and the officers of a corporation are not personally liable for any obligation of the corporation. However, a director must serve the corporation in good faith; specially this means that the director must act “in a manner the director reasonably believes to be in or not opposed to the best interests of the corporation, and with the care that an ordinarily prudent person in a like position would use under similar circumstances.”
A director is liable for damages for any act that the director takes or fails to take as director only if it is proved, by clear and convincing evidence, in a court with jurisdiction that the act or omission of the director was one undertaken with a deliberate intent to cause injury to the corporation or was undertaken with a reckless disregard for the best interests of the corporation.
Furthermore, a director shall not be found to have failed to perform the director’s duties unless it is proved, by clear and convincing evidence, in an action brought against the director that the director did not act in good faith. Such an action includes, but is not limited to, an action that involves or affects any of the following: (a) A change or potential change in control of the corporation; (b) A termination or potential termination of the director’s service to the corporation as a director; (c) The director’s service in any other position or relationship with the corporation.
In determining what a director reasonably believes is in or is not opposed to the best interests of the corporation, a director must consider the purposes of the corporation and may consider any of the following:(a) The interests of the employees, suppliers, creditors, and customers of the corporation; (b) The economy of this state and of the nation; (c) Community and societal considerations; or (d) The long-term and short-term best interests of the corporation, including, but not limited to, the possibility that those interests may be best served by the continued independence of the corporation.
Directors can sometimes be jointly and severally liable to the corporation in certain cases. Specifically, a director can be held liable if the director illegally voted for/assented to a distribution of assets to members or persons other than creditors without first paying all known obligations of the corporation, or, illegally voted for/assented to the distribution of loans to officers, directors, or members, other than in the usual conduct of the corporations’ affairs.
The specific division of director joint and several liability in the above mentioned situations is described in full in OHIO REV. CODE §1702.55. If a director is held liable, he has a right of contribution from the members who knowingly received any distribution made contrary to law or the articles, and such members shall also be entitled to contribution in proportion to the amounts received by them respectively.
If a member knowingly receives any distribution made contrary to law or the articles, the member is liable to the corporation for the amount received by the member that is in excess of the amount that could have been distributed without violation of law or the articles.
Mergers, Acquisitions and Dissolution
Merger and Consolidation
One way a nonprofit can end is by merging (combining) with another nonprofit corporation. Information about nonprofit mergers can be found in OHIO REV. CODE §1702.43. The Ohio Revised Code permits two or more corporations to merge into a single corporation or consolidate into a new corporation. To effect a merger or consolidation, the ORC requires that the directors of each constituent corporation approve an agreement of merger or consolidation to be signed by the chairperson of the board, the president, or a vice-president and by the secretary or an assistant secretary. Specific provisions apply if one of the merging corporations is a foreign nonprofit or domestic or foreign business corporations.
A general agreement must include the following provisions:
- A stipulation that the constituent corporations have agreed to merge or consolidate into a specified constituent corporation;
- The name of the surviving or new corporation (which may be the same as or similar to that of any constituent corporation);
- The location in the state of the new or surviving principal office;
- The names and addresses of the first directors and officers of the surviving or new corporation, and, if desired, their term or terms of office;
- The name and address of the statutory agent;
- The terms of the merger or consolidation and the mode of carrying the same into effect;
- The regulations of the surviving or new corporation or a provision to the effect that the regulations of one of the constituent corporations shall be the regulations of the surviving or new corporation or to the effect that the voting members or the directors of the surviving or new corporation may adopt regulations, or any combination thereof.
- The specification of a date when the merger will become effective (which can be the date of the filing of the agreement);
- A provision conferring upon the directors of one or more of the constituent corporations the power to abandon the merger or consolidation prior to the filing of the agreement;
- Any additional provision permitted to be included in the articles of a newly formed corporation;
- Any additional provision deemed necessary or desirable with respect to the proposed merger or consolidation.
After the agreement of merger is adopted by a corporation’s directors and members, a “certificate of merger or consolidation” must be signed by an authorized representative of each constituent corporation and filed with the Ohio Secretary of State with all of the other required paperwork and the current fee(s).
A few examples of fees you may need to pay are:
- Filing and recording Articles of Incorporation and many other documents.
- Specific fees if the nonprofit has capital stock.
- Filing and recording amendments (changes or updates) you made to the Articles of Incorporation.
- Filing and recording a form for reorganization or for dissolution.
- For making copies of any certificate.
- The name of each corporation, the state(s) they operate in, the effective date of the merger and the names of both statutory agents.
- Proving that each nonprofit is following all laws and that current law permits the merger.
- Each corporation’s authorized representative should sign the form.
A nonprofit corporation may elect to voluntarily dissolve by adopting an appropriate resolution setting forth that the corporation elects to be dissolved and any additional provision deemed necessary with respect to the proposed dissolution and winding up. For a nonprofit corporation which is a tax-exempt organization under the Internal Revenue Code, the resolutions should include any provisions regarding the manner of distribution of assets as may be required by the IRC and by its Articles of Incorporation. In order to complete the dissolution process, the Secretary of State requires many specific details. Again, a reminder that this is a complicated subject and site users should not try to set up any portion of a nonprofit corporation or end one based solely on the information they find on this site. You should work with specialists in each area such as talking to an attorney and/or CPA.
Except in the following cases where the Directors of the corporation may adopt the resolution, the resolution must be adopted and approved by a majority of the members:
- When the corporation has been adjudged bankrupt or has made a general assignment for the benefit of creditors;
- By leave of the court, when a receiver has been appointed in a general creditors’ suit or in any suit in which the affairs of the corporation are to be wound up;
- When substantially all of the assets have been sold at judicial sale or otherwise;
- When the period of existence of the corporation specified in its articles has expired
Upon adoption of an appropriate resolution, dissolution is effected by filing a Certificate of Dissolution on with the Secretary of State on a form prescribed by the State, which sets forth the following:
- The name of the corporation;
- A statement that a resolution of dissolution has been adopted;
- A statement of the manner of adoption of that resolution, and, in the case of its adoption by the directors, a statement of the basis for the adoption;
- The place in this state where its principal office is or is to be located;
- The names and addresses of its directors, and officers;
- The name and address of its statutory agent;
- The date of dissolution, if other than the filing date.
The Certificate of Dissolution must be accompanied by an affidavit regarding personal property and each of the certificates, or affidavits in lieu thereof as required under, all as described in subsection G of OHIO REV. CODE §1702.49.
Upon receipt of evidence of the filing of the Certificate of Dissolution with the Secretary of State, the directors must promptly (1) cause a notice of voluntary dissolution. to be published once a week on the same day of each week for two successive weeks, in a newspaper published and of general circulation in the county in which the principal office of the corporation was to be or is located, and (b) cause written notice of dissolution to be given either personally or by mail to all known creditors of, and to all known claimants against, the dissolved corporation.
After a corporation is voluntarily dissolved, the corporation ceases to carry on its activities and is only permitted to do such acts as required to “wind up its affairs.” The specific winding-up acts that are allowed after voluntary dissolution are described in OHIO REV. CODE §1702.49.
Recordkeeping, State Reports and State Taxes
Each corporation shall keep correct and complete books and records of account, together with minutes of the proceedings of its incorporators, members, directors, and committees of the directors or members. All books and records of a corporation, including the membership records prescribed by §1702.13 of the Ohio Revised Code, may be examined by any member or director or the agent or attorney of either, for any reasonable and proper purpose and at any reasonable time (subject to limitations prescribed in the articles or the regulations upon the right of members of a corporation to examine the books and records).
Even if the IRS approves a nonprofit corporation’s tax-exempt status, the organization may need to file annual state and federal tax returns. All nonprofit organizations are required to file an annual tax return (generally, IRS Form 990) even when no taxes are due. A nonprofit organization should consult with an attorney and/or tax advisor about its tax obligations. The following general rules apply:
- A nonprofit organization is subject to payroll taxes. Although a nonprofit organization may be exempt from the payment of federal and state income taxes, it is responsible for payroll taxes, including federal and state withholding and Social Security taxes. In addition, most municipalities in Ohio impose a city income tax and require employers to withhold the tax. Please consult your city treasurer’s office to learn more.
- If the tax-exempt organization engages in commercial activities, it may have to pay income tax on profits derived from such activities under the IRS Unrelated Business Income Rules.
- Generally, nonprofit organizations are not subject to the Ohio franchise tax. However, a nonprofit organization must pay Ohio sales or use tax on purchases unless the corporation qualifies as a church or charitable organization.
- Even if the organization generally must pay sales or use tax on purchases, there are numerous specific exemptions from the tax that may apply when making purchases. Nonprofit organizations should take the time to determine which exemptions apply by consulting an attorney and/or tax advisor. When an exemption is claimed, the supplier will require a completed tax exemption certificate at the time of purchase. Blank forms may be obtained from business supply stores. Nonprofit organizations that make sales must obtain a vendor’s license and may be required to collect Ohio sales tax.
- A nonprofit organization may be required to pay real estate tax on property it owns unless the use of the property qualifies for a specific exemption. If the organization believes it qualifies for an exemption, it should file an application for exemption with the Ohio Department of Taxation. Tangible personal property is generally not subject to tax unless the property is used for commercial purposes.
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. You will probably need to take out new policy for the nonprofit corporation from organizations such as The Nonprofits Insurance Alliance Group, Nonprofit Insurance Services, First Nonprofit Insurance Company, or Riverport Insurance. 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)
- Attorney General’s Office: Charitable Law Section, http://www.ag.state.oh.us/business/charitable.asp
- Ohio Revised Code Online, http://www.codes.ohio.gov
- Ohio Department of Taxation, http://www.tax.ohio.gov