South Carolina Non-Profit Corporations
The South Carolina Nonprofit Corporation Act of 1994, as amended (S.C. Code Ann. §§ 33-31-101 et seq.) governs the formation, operation and dissolution of nonprofit corporations in South Carolina. A nonprofit corporation in South Carolina is governed by its board of directors and managed 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 Carolina 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 Carolina of its articles of incorporation. This document is in essence a contract between the state and the nonprofit corporation in which South Carolina grants individual legal status to the corporation in exchange for the corporation’s commitment to follow its rules.
One or more persons (where legal entities like corporations as well as natural persons are included in the definition of “person”) may form a South Carolina nonprofit corporation by filing articles of incorporation with the South Carolina Secretary of State. There is no requirement that any incorporator be a South Carolina resident. The Articles of Incorporation must include (i) the nonprofit corporation’s name, (ii) a statement as to whether it is a public benefit corporation, a mutual benefit corporation or a religious corporation, (iii) the street address of the nonprofit corporation’s initial registered office and the name of its initial registered agent at that office, (iv) the name and address of each incorporator, (v) whether the nonprofit corporation will have members and (vi) the address of the proposed principal office of the nonprofit corporation (which does not have to be located in South Carolina). The articles of incorporation may include any other provisions the incorporators choose to include so long as such additional provisions are not inconsistent with applicable law, such as the purposes for which the corporation is organized and the identities and addresses of the initial directors. Each incorporator and director named in the articles of incorporation must sign them. There is a $25 filing fee. Political Associations must also submit to the South Carolina Secretary of State an initial report to the Department of Revenue on Form CL-1 with the articles of incorporation and pay an additional $25 fee.
The corporate name must be distinguishable from the name of any other nonprofit or for-profit business entity organized in or qualified to do business in South Carolina and may not contain language stating or implying that the corporation is organized other than for a purpose permitted by the South Carolina Nonprofit Corporation Act and the articles of incorporation. A South Carolina nonprofit corporation must have at least three directors, with the number specified in or fixed in accordance with the articles of incorporation or the bylaws.
Public benefit corporations may or may not have members and generally exist to benefit the general public welfare or engage in acts of charity to persons other than the corporation’s officers, directors and members. Mutual benefit corporations, such as a homeowners’ association, have members and generally exist to benefit their members. Public benefit corporations may qualify to be exempt from federal and state income tax pursuant to Section 501(c)(3) of the Internal Revenue Code and may also qualify to receive donations which are tax deductible to their donors. Mutual benefit corporations may qualify for exemption from federal and state income taxation under a provision of the Internal Revenue Code other than Section 501(c)(3), but donations to such organizations generally are not tax deductible.
The Office of the South Carolina Secretary of State provides blank forms in PDF format for nonprofit corporation articles of incorporation, CL-1 forms and other filings at its web site located at www.scsos.com.
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 in the Recordkeeping, State Reports and State Taxes section) and should include either the following provision or else identify by name a 501(c)(3) entity to which all assets will be distributed if the corporation is dissolved:
Upon dissolution of the corporation, assets shall be distributed for one or more exempt purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future Federal tax code, or shall be distributed to the Federal government, or to a state or local government, for a public purpose. Any such asset not so disposed of shall be disposed of by the Court of Common Pleas of the county in which the principal office of the corporation is then located, exclusively for such purposes or to such organization or organizations, as said court shall determine, which are organized and operated exclusively for such purposes.
Management and Control
After the articles of incorporation are filed, if initial directors are named in the articles, the initial directors hold an organizational meeting at the call of a majority of the initial directors, at which the initial directors appoint officers, adopt bylaws and carry on other initial business. If the articles of incorporation do not name initial directors, then the incorporators hold the organizational meeting at the call of a majority of the incorporators, and the incorporators then either elect directors and officers, adopt bylaws and complete the organization of the corporation or else elect the initial directors and then let them complete the organization of the corporation. A unanimous written consent of the incorporators or initial directors named in the articles of incorporation can take the place of an organizational meeting.
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
Under Section 33-31-612 of the South Carolina Nonprofit Corporation Act, a member of a nonprofit corporation is not, as such, personally liable for the acts, debts, liabilities, or obligations of the corporation. However, in South Carolina, a court may permit a plaintiff to pierce the corporate veil and impose the liabilities of the nonprofit corporation on the members if (1) the dominant members have failed to treat the entity as a truly separate “legal person” and (2) it would be unjust or fundamentally unfair to protect the dominant members from the plaintiff.
Sections 33-31-830 and 33-31-842 of the South Carolina Nonprofit Corporation Act provide that directors and officers, respectively, of South Carolina nonprofit corporations must discharge their duties (1) in good faith, (2) with the care of an ordinarily prudent person in a like position would exercise under similar circumstances and (3) in a manner he or she reasonably believes to be in the best interests of the corporation. These “fiduciary duties” are discussed in more detail in the South Carolina LawForChange summary of Governance Principals. Section 33-31-834 of the South Carolina Nonprofit Corporation Act provides that all directors, trustees and other members of governing bodies of South Carolina nonprofit corporations are immune from suit arising from the conduct of the affairs of the corporation unless their misconduct is willful, wanton or grossly negligent.
The South Carolina Nonprofit Corporation Act (in Sections 33-31-850 et seq.) permits a South Carolina nonprofit corporation to indemnify a director against liability if the director (i) conducted himself or herself in good faith, (ii) reasonably believed (a) in the case of conduct in his or her official capacity, that the conduct was in the best interest of the corporation and (b) in all other cases was at least not opposed to the corporation’s best interest and (iii) in the case of criminal proceedings, had no reasonable cause to believe his or her conduct was unlawful. A South Carolina nonprofit corporation may not indemnify a director (1) in connection with a derivative proceeding in which the director was found to be liable to the corporation or (2) in connection with any other proceedings where the director is found to have received an improper personal benefit. Unless limited by its articles of incorporation, a South Carolina nonprofit corporation may indemnify its officers and employees to the same extent as it may indemnify its directors. Unless the corporation’s articles of incorporation provide otherwise, a South Carolina nonprofit corporation must indemnify a director or officer for his or her defense costs and expenses if he or she was wholly successful on the merits in defending himself or herself. South Carolina nonprofit corporations may purchase director and officer liability insurance.
Mergers, Acquisitions and Dissolution
The South Carolina Nonprofit Corporation Act (Sections 33-31-1101 et seq.) permits a South Carolina nonprofit corporation to merge with (i) a for-profit corporation, (ii) another nonprofit corporation, (iii) a limited liability company, (iv) a partnership or (v) a limited partnership, subject to the limitation that the approval of the Court of Common Pleas of Richland County (one of the two counties in which the state capital of Columbia is located) in a proceeding in which the South Carolina Attorney General has been given written notice is required for a public benefit or religious corporation to engage in a merger generally in which the surviving entity will not be a public benefit, religious or similar nonprofit entity. Unless the articles of incorporation or bylaws require a greater vote or voting by class, any plan of merger must be approved (a) by the corporation’s board of directors, (b) if the corporation has members, by two-thirds of the votes cast by members or a majority of the voting power of members, whichever is less, and (c) any third party whose approval is required by any provision of the corporation’s articles of incorporation. If the corporation does not have members or any members entitled to vote on a merger, the dissolution must be approved by a majority of directors then in office. If a plan of merger is properly approved, articles of merger must be filed with the South Carolina Secretary of State.
Under Sections 33-31-1401 et seq. of the South Carolina Nonprofit Corporation Act, a South Carolina nonprofit corporation may be dissolved (unless the articles of incorporation or bylaws require a greater vote or voting by class) with the approval of (i) the board of directors, (ii) if the corporation has members, by two-thirds of the votes cast by members or a majority of the voting power of members, whichever is less, and (iii) any third party whose approval is required by any provision of the corporation’s articles of incorporation. If the corporation does not have members or any members entitled to vote on dissolution, the dissolution must be approved by a majority of directors then in office. At any time after dissolution is authorized, the corporation may then dissolve by delivering articles of dissolution to the South Carolina Secretary of State. A public benefit or religious corporation must give written notice of its intent to dissolve to the South Carolina Attorney General at or before the time it delivers articles of dissolution to the South Carolina Secretary of State. No assets may be transferred or conveyed by the public benefit or religious corporation in dissolution until 20 days after it has given such notice to the Attorney General unless the Attorney General earlier consents in writing to the dissolution or the transfer of assets.
Recordkeeping, State Reports and State Taxes
The South Carolina Nonprofit Corporation Act (Sections 33-31-1601 et seq.) requires a nonprofit corporation to keep minutes of the meetings of its members and board of directors, a record of all actions taken by the members or directors without a meeting and a record of all actions taken by committees of the board of directors. Nonprofit corporations must also maintain “appropriate accounting records” and a record of its members in a form that permits preparation of a list of the names and addresses of all members in alphabetical order by class and the number of votes each is entitled to cast. A nonprofit corporation must keep at its principal office copies of (1) its articles of incorporation (with all amendments), (2) its bylaws (with all amendments), (3) resolutions adopted by the board of directors relating to member classes and rights, (4) minutes of all member meetings and actions for the past 3 years, (5) all written communications to members generally within the past 3 years, (6) a list of the names and business or home addresses of its current directors and officers and (7) the most recent report of each type that it is required to file with the South Carolina Secretary of State.
The South Carolina Nonprofit Corporation Act also requires nonprofit corporations (except as provided in the articles or bylaws of a religious corporation) to provide, upon written demand from one of its members or from the South Carolina Attorney General, the corporation’s latest annual financial statements (including a fiscal-year-end balance sheet and statement or operations for that year). If the financial statements are reported on by a public accountant, the accountant’s report must accompany the financial statements. If the nonprofit corporation indemnifies or advances expenses to a director in a derivative action, the corporation must report the indemnification or advance of expenses in writing to its members with or before notice of the next meeting of members.
South Carolina Income Tax
South Carolina’s income tax law is designed to “piggyback” on federal income tax law. Accordingly, nonprofit corporations which are recognized as exempt from federal income taxation under Section 501(c)(3) of the Internal Revenue Code are exempt from South Carolina income taxes. Nonprofit corporations not recognized as exempt for federal income tax purposes, and therefore taxable as C-corporations for federal income tax purposes, are also taxed as C-corporations for South Carolina income tax purposes. Exempt corporations are taxable in South Carolina on any unrelated business taxable income which is taxed at the federal level.
South Carolina Property Tax
Nonprofit corporations which are recognized as exempt for federal income tax purposes are also generally exempt from property tax on property used in the performance of the corporation’s exempt purpose. Also, exempt corporations are entitled to a limited exemption from property tax on real property held for future use so long as the property does not generate rental or other income. Property held for investment or rental by an exempt corporation is subject to property tax. A number of specific property tax exemptions apply to various named charitable organizations.
South Carolina Sales Tax
Nonprofit corporations which are recognized as exempt for federal purposes may sell items free of sales tax so long as the net proceeds are used exclusively for the organization’s exempt purpose. Sales to nonprofit corporations are generally not exempt.
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
Web site of the Office of the South Carolina Secretary of State www.scsos.com.
South Carolina Association of NonProfit Organizations (SCANPO) www.scanpo.org.