Vermont Nonprofit Corporations
The Vermont Nonprofit Corporation Act (Vt. Stat. Ann. tit. 11B) governs the formation, operation and dissolution of nonprofit corporations in Vermont. The Vermont Act is based on a model act drafted by the American Bar Association. A nonprofit corporation in Vermont 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 Vermont nonprofit corporation may be distributed to its members, directors or officers; however, reasonable compensation may be paid for services rendered. Any revenues generated by the nonprofit corporation are expected to be used by the corporation to further its mission.
In Vermont, there are two types of nonprofit corporations: public benefit nonprofit corporations and mutual benefit nonprofit corporations. A public benefit nonprofit corporation is usually a charity—it exists to provide a particular public benefit. A mutual public benefit nonprofit corporation, on the other hand, exists for the benefit of its members only (such as a golf club).
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. For example, the Vermont Attorney General has the power to pursue suits against public benefit nonprofit corporations to make sure that they actually operate for the public benefit.
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 the Corporations Division at the Vermont Secretary of State’s Office of its articles of incorporation. This document is in essence a contract between the state and the nonprofit corporation in which Vermont grants individual legal status to the corporation in exchange for the corporation’s commitment to follow its rules.
Under the Vermont Nonprofit Corporation Act, one or more persons of majority age may file articles of incorporation with the Secretary of State. The person or persons who complete the articles of incorporations are termed the “incorporators.” The articles of incorporation must include a corporate name that includes one of the following words: corporation, incorporated, company, limited, or any abbreviations thereof. The name cannot use the word “cooperative” and it must not be easily confused with another registered name. In addition, the articles of incorporation must set out: whether the nonprofit is a public or mutual benefit corporation, the street address of its initial office, the name and address of each incorporator, whether or not it will have members, and provisions concerning the distribution of assets upon its dissolution. Though the information is not required, the articles of incorporation may also establish: the purpose for which the corporation is organized, the names and addresses of all initial directors, and limitations on the power of the corporation. Each incorporator and director named in the article must then sign the document.
Once the document is completed, typewritten or printed, it must be submitted to the Vermont Secretary of State along with one additional copy and a $75 filing fee. For more information, including example forms and links to the relevant Vermont statutes, see the Vermont Secretary of State’s website at: http://www.sec.state.vt.us/.
If the nonprofit corporation intends to obtain exemption from federal and state income taxation, the articles of incorporation must conform to applicable statutes and regulations.
Management and Control
Once the nonprofit corporation has been established, the initial board of directors must hold an organizational meeting, either in person or 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 Vermont 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.
Examples of bylaws may be found on the Vermont Secretary of State’s website, at: http://www.sec.state.vt.us/.
Liability of Members, Directors and Officers
In general, officers of a corporation stand in a fiduciary relationship to that corporation. Under Title 11B of Vermont statute, there are specific standards of conduct expected of directors of nonprofit corporations, which emphasize due care, good faith, and reasonableness. If directors comply with the requirements of this section, they cannot be held liable for the performance of the duties of their office. Although directors may not be held liable in a lawsuit if this standard of care is met, this does not mean that they cannot be sued personally for actions taken as a member of the board of directors. Therefore, many nonprofit corporations purchase directors and officers liability insurance. See the “insurance” section below.
Members of a nonprofit corporation are generally not personally liable to third parties for the corporation's debts. The certificate of incorporation may include a provision imposing liability on the members of the corporation, but otherwise the default rule is that members of a corporation shall not be personally liable for the corporation's debts except by reason of their own conduct. However, pursuant to §6.23, a member may be liable for dues, assessments, or fees owed to the corporation. Also, under §6.24, a creditor may proceed against the liability of a member to a corporation if “final judgment has been rendered in favor of the creditor against the corporation and execution has been returned unsatisfied in whole or in part.”
Directors made a party to a proceeding by reason of being directors may be indemnified by the corporation if the individuals conducted themselves in good faith and reasonably believed that they were acting in the corporation’s best interest. This permissive indemnification is limited by §8.51(d), which states that a corporation may not indemnify a director if the director has been adjudged liable to the corporation in a proceeding by or in the right of the corporation, or if the director is adjudged liable of receiving “improper personal benefit.” In contrast to this permissive indemnification, a nonprofit corporation must indemnify a director for reasonable expenses incurred where the director was “wholly successful, on the merits or otherwise, in the defense of any proceeding to which the director was a party because he or she is or was a director.” This mandatory indemnification may be limited by the articles of incorporation. A director may also seek court-ordered indemnification under the mandatory provisions of §8.52, or if indemnification would otherwise be “fair and reasonable.” §8.55 sets forth the procedure that a corporation must use in each case to determine if a director is entitled to indemnification. An officer, employee, or agent of the nonprofit corporation may seek mandatory and court-ordered indemnification in the same manner as a director. This statutory section extending indemnification to those other than directors does not specifically mention members. It is therefore arguable that indemnification is not available to members and, if a nonprofit corporation is not governed by a board, that indemnification is not available to members of its governing body.
Mergers, Acquisitions and Dissolution
Under 11B V.S.A Chapter 11, one or more nonprofit corporations may merge into an existing business or nonprofit corporation, which may be one of the merging corporations as long as the plan of merger is approved as required by the statute. The plan of merger must state: the names of the merging corporations, the name of the surviving corporation into which they will merge, the terms and conditions of the merger, the manner of conversion of disparate memberships into membership of the surviving corporation, and any amendments to the articles of incorporation or bylaws of the surviving corporation to be effected by the merger. This plan of merger must be approved by the board and the members. Once the plan is approved, the surviving corporation must deliver the “articles of merger” to the Secretary of State, which includes the plan of merger and the details of the approval process.
Public benefit nonprofit corporations, as opposed to those that are mutual benefit, have additional limitations on their mergers. Unless the public benefit nonprofit corporation is merging with another public benefit corporation, a foreign corporation that would qualify as a public benefit corporation, or certain foreign or business corporations, the public benefit corporation must get prior approval of the superior court of Washington county in a proceeding where the attorney general has written notice.
When a merger takes effect, all other corporations cease to exist except for the surviving corporation, all real estate owned by the corporations is vested in the surviving corporation and all liabilities and obligations of each corporation extends to the surviving corporation.
Chapter 14 of the Vermont Nonprofit Corporation Act governs the voluntary dissolution of corporations subject to the Act. A nonprofit corporation without members may dissolve upon authorization from a majority of the incorporators (if there are no directors) or directors of the corporation at a duly noticed meeting, who may dissolve the corporation by filing “articles of dissolution” with the Secretary of State. Where a nonprofit corporation has members, dissolution must be authorized by a vote of the board of directors, the members, and by any person designated in the articles of incorporation. Members must have access to a summary of the “articles of dissolution” prior to the vote.
The “articles of dissolution” must include: the nonprofit corporation’s name, the date dissolution was authorized, and a statement that dissolution was approved by the correct procedures. The corporation is deemed dissolved upon the effective date of the articles of dissolution.
A Vermont nonprofit corporation may also be involuntarily terminated by the Secretary of State or judicially dissolved.
Recordkeeping, State Reports and State Taxes
A corporation must keep permanent records of: the minutes of all meetings of its members and board of directors, all actions taken by directors or members without a meeting, appropriate accounting records, membership lists, and the rules governing the corporation (such as the articles of incorporation, bylaws, etc.). Members, and their attorneys, have a right to inspect the corporation’s records, and a court may order inspection if the corporation denies this right.
To remain in good standing with the state, a Vermont nonprofit corporation must also submit a biennial report the year following its incorporation, and then every two years thereafter. The corporation must also include a small fee with its report. Failure to file a required report and pay applicable fees and/or penalties may result in administrative dissolution under the Act.
If certain requirements are met, the nonprofit corporation may qualify as a tax-exempt organization under state and federal law. The most common tax-exempt nonprofit corporation is the “501(c)(3) nonprofit corporation.” A nonprofit corporation must incorporate under Vermont statute before it can apply to the IRS for 501(c)(3) tax-exempt status.
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.
Section 8.57 of the Vermont Nonprofit Corporation Act specifically allows a Vermont nonprofit corporation to purchase liability insurance on behalf of its directors, officers, employees, or agents and to insure against potential liability of such persons regardless of whether the corporation has the power to indemnify the particular litigant. Thus, Section 8.57 theoretically permits the corporation to insure its directors against judgments or amounts paid in settlement of derivative suits and against expenses incurred by a director even in circumstances in which a director has been found to have acted unlawfully or in bad faith.
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