South Dakota Nonprofit Corporations
The South Dakota Nonprofit Corporation Act, which is codified in chapters 47-22 through 47-28 inclusive, governs the formation, operation and dissolution of nonprofit corporations in South Dakota. A nonprofit corporation in South Dakota 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 a South Dakota 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 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 South Dakota of its articles of incorporation. This document is in essence a contract between the state and the nonprofit corporation in which South Dakota grants individual legal status to the corporation in exchange for the corporation’s commitment to follow its rules.
Three or more people who are of majority age (18) may act as incorporators of the nonprofit corporation by filing articles of incorporation with the South Dakota Secretary of State. The incorporators must file one original Articles of Incorporation and one exact conforming copy. The filing fee which must accompany the Articles of Incorporation is $30.00. The Articles of Incorporation must set forth the name of the corporation, period of duration, which may be perpetual; the purpose or purposes for which the corporation is organized; if the corporation is to have no members, a statement to that effect; if the corporation is to have members, the qualifications and rights of each class; how the directors shall be appointed or elected; a statement for distribution of assets on dissolution or final liquidation; information regarding the registered agent including the registered agent’s name and address; number, names, and addressees of the initial board of directors.
The corporate name shall not contain any word or phrase which indicates or implies that it is organized for any purpose other than one or more of the purposes contained in its articles of incorporation. A nonprofit corporation cannot be organized for profit. The purposes for which the corporation must be organized for are: to operate exclusively for religious, charitable, scientific, or educational purposes as referred to in Sections 501(c)(3) and 170(c)(2) of the Internal Revenue Code. SDCL § 47-22-4 sets forth the purposes for which a nonprofit corporation can be organized under South Dakota law, these purposes include, but are not limited to: agricultural, charitable, benevolent, civic, educational, religion, and social. (For a complete list of purposes see SDCL § 47-22-4). The minimum number of directors on the board of directors of a non profit corporation are three (3). The website for the South Dakota Secretary of State is: http://www.sdsos.gov/, which provides general information regarding the different businesses. The link to the website where you will find a form Articles of Incorporation of a non profit corporation is:
If the nonprofit corporation intends to obtain exemption from federal income taxation, the articles of incorporation must conform with applicable statutes and regulations. South Dakota does not have a state income tax.
Management and Control
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 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 South Dakota 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.
Liability of Members, Directors and Officers
Directors, trustees, committee members, or officers who are serving without compensation for a nonprofit corporation are not liable, and no cause of action may be brought, for damages resulting from the exercise of judgment or discretion in connection with the duties or responsibilities of such person while acting in such capacity unless the act was willful or wanton misconduct.
Mergers, acquisitions and dissolution
Two or more domestic corporations may merge into one corporation by adopting a plan of merger. Each corporation that is planning on entering into the merger must adapt a separate plan of merger which contains the names of the merging corporation and the name of the resulting corporation, the terms and conditions of the merger and any changes in the articles of incorporation of the resulting corporation. However, before a merger can be effectuated, the members or the board of directors must adopt a resolution for a proposed merger. The approved articles of merger must be filed with the South Dakota Secretary of State as well as an exact conforming copy.
A corporation may dissolve and wind up its business by an adoption of a resolution to dissolve either by its members or by the board of directors. Once a resolution to dissolve has been adopted, a notice of the proposed dissolution must be mailed to each known creditor of the corporation. The assets of the corporation in the process of dissolution shall be applied and distributed as follows: liabilities and obligations of the corporation shall be paid and discharged assets held by the corporation upon condition of requiring return shall be returned, all assets received and held by the corporation for nonprofit status shall be transferred or conveyed to one or more domestic or foreign corporations. Particularly for nonprofit corporations, the remaining assets of the corporation must be transferred or conveyed to an entity or organization which is then exempt as an organization described in Sections 501(c)(3) and 170(c)(2) of the Internal Revenue Code of 1954 or corresponding provisions of any prior or future law. Additionally, the assets may be conferred to more than one such exempt entity or organization or to the State of South Dakota (including any governmental subdivision) exclusively for public purposes determined by the board of directors of the corporation or by the State of South Dakota, when such purposes are enumerated and fall under Section 501(c)(3) of the Internal Revenue Code. No part of the property of the corporation or any of the proceeds shall be distributed or given for the benefit of any private individual. Once the dissolution has been properly authorized, the articles of dissolution may be filed with the South Dakota Secretary of State.
Recordkeeping, State Reports and State Taxes
Each corporation must keep books and records of account as well as minutes of the meetings/proceedings of its members, board of directors and committees having any of the authority of the board of directors; and shall keep at its registered office or principal office a record of the names and addresses of its members entitled to vote. A nonprofit corporation must file an annual report with the South Dakota Secretary of State. For the specific information that must be included in the annual report see SDCL §§ 59-11-24 through 59-11-26.
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)
- Takagi, Gene. “Nonprofit Bylaws - Common Issues” Nonprofit Law Blog http://www.nonprofitlawblog.com/home/2009/09/nonprofit-bylaws-common-issues.html
- South Dakota Codified Laws chapters 47-22 through 47-28 inclusive.