Nonprofit Organizations Law and Policy Third Edition - Libraries ...

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30 OVERVIEW OF THE NONPROFIT SECTOR CH. 1 A member of an unincorporated nonprofit association signed a contract on behalf of the association to construct a building that would contain offices for the association. The association later is without sufficient funds to pay the building contractor. The contractor has threatened to file suit against the association member who executed the contract on behalf of the association. Would the contractor have a cause of action against the member in a state that had adopted the Uniform Unincorporated Nonprofit Association Act? NOTE The National Conference on Commissioners on Uniform State Laws revised the 1996 Uniform Unincorporated Nonprofit Association Act in 2008. The Revised Uniform Unincorporated Nonprofit Association Act includes more default rules for unincorporated associations and has provisions for internal governance, fiduciary duties, dissolution and mergers, among others. The 2008 Act was intended to be compatible with uniform laws enacted for unincorporated associations in Canada and Mexico. II C. NONPROFIT CORPORATION Most nonprofit organizations seek corporate status. The law relating to nonprofit corporations is more defined and more flexible than that relating to trusts and unincorporated associations. Further, because most nonprofit corporations are tax exempt, the double taxation factor, which has discouraged incorporation of for-profit entities, has not been a problem. 1. Model Nonprofit Corporation Acts Several states have adopted, either in whole or in modified form, the Model Nonprofit Corporation Act, which was drafted originally in 1952 by the Committee on Corporate Laws of the Section of Corporation, Banking and Business Law of the American bar Association. The Act was revised in 1964 to make it more compatible with the Model Business Corporation Act. The intent of the drafters of the Model Act was that decisions interpreting the Business Corporation Act would become applicable and helpful in interpreting provisions of the Model Act. I2 The committee adopted the Revised Model Nonprofit Corporation Act in 1987, which was patterned after the 1984 Model Business Corporation Act. The Revised Act classified nonprofit corporations into public benefit corporations and mutual benefit corporations. It incorporated legal standards applicable to corporate directors in determining legal liability of nonprofit corporations (discussion in Chapter 3). 11. The 2008 Uniform Act is available at www.nccusl.org. 12. See copies of Model Nonprofit Corporation Act and Revised Model Corporation Act at :3 Marilyn Phelan, Nonprofit Organizations, Apps. A and B.
SEC. II ORGANIZATIONAL STRUCTURE 31 The American Bar Association adopted the Model Nonprofit Corporation Act, Third Edition in 2008. The Third Edition incorporated many provisions of the Model Business Corporation Act, Third Edition, that was adopted by the American Bar Association in 2002. The Third Edition Model Nonprofit Corporation Act does not classify nonprofit corporations into public benefit and mutual benefit corporations. We refer extensively in this text to the original Model Nonprofit Corporation Act and the 1987 Revised Model Nonprofit Corporations Act to illustrate principles relating to nonprofit corporations. These two acts, and principally the original Model Act, established the basic concepts for incorporated nonprofit organizations. In addition, most of the states have adopted one of these two acts, or provisions from these acts, to establish the law within the state that is applicable to nonprofit corporations. Drafters of the Model Acts recognized that nonprofit corporations may have incidental income or profit in performing their nonprofit purposes. Because a minority of the drafters of the original Model Act thought a nonprofit corporation should have any permitted purpose not prohibited in its bylaws, the Model Act provided an alternative purpose section that would permit a nonprofit corporation to be organized for any lawful purpose. The drafters of the original act were of the opinion there would be a safeguard through § 26 of the Act, which provides that no dividends can be paid and that no part of the income of a corporation can be distributed to members, directors, or officers, except as reasonable compensation for services rendered. There are common elements of all state statutes governing nonprofit corporations. Most states prohibit nonprofit corporations from issuing stock, and although state statutes do not prohibit a nonprofit corporation from making a profit, all state statutes prohibit nonprofits from paying dividends. Most state statutes provide for payment of a reasonable compensation to officers and directors and for the payment of other noncash benefits to their members. Most states prohibit charitable nonprofit corporations from distributing their assets upon dissolution except to charitable organizations. Some states provide standards of conduct for officers and directors and some provide immunity from liability for volunteers in certain circumstances. (See discussion in Chapter 3.) State nonprofit corporate statutes provide benefits of limited liability for members, centralized management, and, in many states, standards relating to liability of officers and directors. Standards of conduct applicable to directors of nonprofit corporations make it less likely that directors will be subject to liability for their inadvertent acts than trustees of trusts and members of associations and, thus, provide additional reason to incorporate a nonprofit organization. (See discussion in Chapter 3.) 2. Status of a Nonprofit Corporation as a Charitable Trust The property of a nonprofit organization that is exempt from federal taxation under § 501(c)(3) of the Internal Revenue Code is held for a
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