As Vermonters, we all feel that special pride when we come together to serve our local communities. Whether it is a charity to help feed the hungry, a school to educate children, or a new religious congregation, the first step in making these activities a reality is the creation of a nonprofit corporation. All around us, nonprofit corporations are making a daily difference in the quality of our lives. While not every nonprofit corporation has a charitable purpose, all nonprofit corporations have one thing in common: they exist to serve the needs of people. This guide is designed to provide insight and answers to some of the basic legal issues involved in creating and operating a nonprofit corporation. Before we dive into the specifics, it is helpful to understand three basic principles:
1. A nonprofit corporation, like any other business entity, is regarded by the law as a
"person." Certainly not a human person, but a person nonetheless. By thinking of a
nonprofit corporation as a person, it is easier to understand why creating a nonprofit
corporation is a matter of legal forms and procedures. The nonprofit corporation must be
"born." This is done by filing articles of incorporation and a fee with the Corporations
Division of the Secretary of State's Office. By filing the articles of incorporation, you are
requesting that a certificate of incorporation be issued. When the Corporations Division
issues the certificate of incorporation the nonprofit corporation has a name, birth date,
place of business, and the legal status to own property.
2. A nonprofit corporation has to comply with both Vermont tax statutes and the federal
government Internal Revenue Service tax statutes. This means that a nonprofit
corporation, although born at the Office of the Secretary of State, will need to get from
the IRS an "Employer Identification Number." The EIN is the business equivalent of a
person's social security number and, like a person's social security number, it is required
information when a nonprofit corporation goes about its business. While a nonprofit
corporation does not make a profit to share with shareholders as do for-profit
corporations, many nonprofit corporations generate income, own property, pay wages,
and have bank accounts. All of these activities require that the nonprofit corporation
have an EIN.
The law of nonprofit corporations is published in Title 11B of the Vermont Statutes Annotated. The law establishes how to create a nonprofit corporation, and sets forth certain basic principles regarding how a nonprofit corporation operates. While this guide can give you basic information on how to satisfy the law, it is not meant to be a comprehensive explanation of all that is required. If you plan on forming a nonprofit corporation, there is no substitute for a careful reading of Title 11B even if you plan on having professional help from an attorney.
A nonprofit corporation is a formal organization of people committed to a particular purpose. Purposes may vary, but their basis is some greater good, either of the society as a whole or for a defined community of interest, and not for the individual profit of those involved. Unlike for profit corporations, a nonprofit corporation has no shareholders, and nonprofit corporations do not distribute profits. There are two kinds of nonprofit corporations under state law--public benefit nonprofit corporations and mutual benefit nonprofit corporations.
A public benefit corporation is the kind of nonprofit most people think of--it is a charity. The public benefit nonprofit corporation exists to provide a particular public benefit such as a public library, an adult day center, or an arts council. Typically, it is a public benefit nonprofit corporation that will obtain 501(c)(3) tax exempt status from the IRS. In furtherance of its charitable mission, if a public benefit corporation dissolves, then all of its property must go to a another public benefit nonprofit corporation. The Vermont Attorney General has the authority to take a public benefit nonprofit corporation to court to ensure that it is being operated in the public interest.
> In contrast, a mutual benefit nonprofit corporation is formed solely for the benefit of its members. An example of a mutual benefit nonprofit corporation is a golf club. Individuals pay to join the club, memberships may be bought and sold, and any property owned by the club is distributed to its members if the club dissolves. The club can decide, in its corporate bylaws, how many members to have, and who can be a member. Generally, while it is a nonprofit corporation, a mutual benefit corporation is not a charity. Because it is not a charity, a mutual benefit nonprofit corporation cannot obtain 501(c)(3) status. If there is a dispute as to how a mutual benefit nonprofit corporation is being operated, it is up to the members to resolve the dispute since the corporation exists to solely serve the needs of the membership and not the general public.
http://www.sec.state.vt.us/corps/forms/artsprof.htm The simple answer is that you fill-out a form, entitled "Articles of Incorporation," and file it with the Corporations Division along with the $75.00 fee. A form that is properly completed and includes the filing fee is all that is needed to "give birth" to a nonprofit corporation. You can contact the Corporations Division at (802) 828-2386, or by writing to Corporations Division, Office of the Secretary of State, 128 State Street - Drawer 09, Montpelier, Vermont 05633-1101. The office is physically located at the 128 State Street.
The person or persons who complete the Articles of Incorporation form are called the nonprofit corporation's "incorporators." These are the people who have come together to fulfill a public or mutual benefit by means of creating a nonprofit corporation. By completing and signing the form as the incorporators, and after the issuance of the certificate of incorporation, the nonprofit corporation exists under Vermont law. While one incorporator is enough, usually there are more since the incorporators often serve as the nonprofit corporation's initial board of directors. The board of directors are the people who have the legal authority to determine how the nonprofit corporation will fulfill its purpose, including who it employs. The nonprofit corporation will also need a name, and of course the incorporators must also decide whether the nonprofit corporation will be a public benefit or mutual benefit nonprofit corporation.
> If you are forming a public benefit nonprofit corporation, and anticipate that the corporation will seek 501(c)(3) tax exempt status from the IRS, then how you fill-out the Articles of Incorporation is extremely significant. The IRS will only grant 501(c)(3) status to nonprofit corporations that function as a charity. This charitable purpose must be stated right in the Articles of Incorporation. There is standard language which achieves this charitable purpose, and the IRS makes this boilerplate language readily available in an extremely helpful IRS publication entitled "Publication 557, Tax-Exempt Status for Your Organization." Publication 557 sets out the mandatory public purpose language that must appear in a nonprofit corporation's Articles of Incorporation if it is to obtain 501(c)(3) tax exempt status. While it is best to get it done right the first time, if a mistake is made in the Articles of Incorporation, it can always be fixed by the filing of an amendment and the payment of a $25.00 fee.
In addition to coming up with a unique name, the name must include the word "corporation," "incorporated," "company," or "limited," or the abbreviation "corp.," "inc.," "co.," or "ltd." The name cannot use the word "cooperative" or an abbreviation of that word since they are reserved for specialized types of nonprofit corporations.
Model bylaws are posted on our web site and are available upon request from the Corporations Division to use as a guide. Each nonprofit corporation is different, so the model bylaws available from us are just an example. Each nonprofit corporation needs to evaluate its mission, consider how it wants to fulfill that mission, and then adopt bylaws which carry out the mission. The good thing is that the bylaws are an internal governance document; bylaws are not filed with the Corporations Division. The bylaws are for the use of the nonprofit corporation and ought to be read and understood by everyone involved. As new board of directors begin their service, it is vital that they read the bylaws. It is the entire board of directors responsibility to keep the bylaw up-to-date in a corporate book which contains the nonprofit corporation's other important documents like the articles of incorporation, certificate of incorporation, and IRS 501(c)(3) approval letter.
Under the nonprofit corporation statute in Title 11B, there are various ongoing filing
requirements, as well as special rules if certain events happen in the "life" of the nonprofit
corporation. If these requirements are not met, or certain events happen, then the certificate of
incorporation issued to your nonprofit corporation may be revoked. Examples of when a
certificate of incorporation may be revoked are: failing to pay fees within 60 days after they are
due; failing to file the biennial report with our office within 60 days after it is due; being without
a registered agent or registered office in Vermont for 60 days or more; failing to notify our office
within 120 days that your registered agent or registered office has been changed; or failing to
notify our office that your registered agent has resigned or is deceased.
In addition, whether a board of director has complied with the Standards of Conduct defined by law is a factual question. While a board of director may ultimately be found not liable in a lawsuit, this does not mean that he or she cannot be sued personally for actions taken as a member of the board of directors. For this reason, many nonprofit corporations purchase directors and officers liability insurance. Although this insurance can be expensive, especially for the start-up public benefit nonprofit corporation, it can be well worth the expense if the nonprofit corporation or one of its board of directors is ever sued.
This guide can be a first step to help you understand what is required to form a non-profit corporation. However, we advise that you consult with an attorney and/or accountant as you draft your articles of incorporation and decide what type of tax status to seek.
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