What is the Difference Between Non-Profit Corporations and Tax Exempt?

Non-profit corporations are everywhere. In Arizona, there are about 40,000 non-profit corporations. Typically they are engaged in charitable, religious or scientific activities. They look like the local food bank, church, and Rotary club. In this article, we will examine the process of forming and operating an Arizona non-profit corporation.

Difference between Non-profit and Tax Exempt

Non-profit status is a state law concept. Non-profit status may make an organization eligible for certain benefits, such as state sales, property and income tax exemptions. Although most federal tax-exempt organizations are also non-profit organizations, organizing as a non-profit corporation at the state level does not automatically grant the organization exemption from federal income tax. To qualify as exempt from federal income taxes, an organization must meet the requirements set forth in the Internal Revenue Code. For more information on tax exempt organizations and applying for tax-exempt status, please go to www.irs.gov/charities.

Incorporation

One or more persons may incorporate a non-profit corporation. A non-profit corporation may be either tax exempt or non-tax exempt. The incorporators must file articles of incorporation and a certificate of disclosure with the Arizona Corporation Commission. The articles of incorporation must contain:

1. a corporate name
2. a brief statement of the character of affairs that the corporation initially intends to conduct
3. the name and address of the initial directors
4. the name, address and signature of the statutory agent
5. the street address of the corporation
6. the name and address of each incorporator
7. whether or not the corporation will have members
8. any provision elected by the incorporators; and
9. the signature of each incorporator. The articles of incorporation may contain other provisions, but only the nine items listed are required

The certificate of disclosure must set forth specific information regarding all of the initial officers, directors, trustees and incorporators. The required information relates generally to prior felony convictions, fraud, and bankruptcy. The certificate of disclosure must be signed by all of the incorporators and contain a declaration by each signer that the signer swears to its contents under penalty of law. A person who intentionally makes any untrue statement of material fact or withholds any material fact with regard to the information required in the certificate, except for information regarding other corporations, is guilty of a felony.

The filing fee for an Arizona non-profit corporation is $40.00 for regular filing, and $95 for expedited filing. The fee must be paid when the articles of incorporation and certificate of disclosure are filed. For additional information on the filing process and for forms, the reader is advised to visit the Corporation Division’s Web site, www.azcc.gov, or call the Phoenix office: (602) 542-3026, or the Tucson office: (520) 628-6560.

Within 60 days after the commission has approved the filing, a copy of the articles of incorporation must be published. An affidavit evidencing the publication must be filed with the commission within 90 days after the approval date. Once that is done, the incorporation process is complete.

Organization and Operation of the Non-profit Corporation

After incorporation, the board of directors must hold a meeting to complete the organization of the corporation by appointing officers, adopting bylaws, and carrying on any other business brought before the meeting. The bylaws of the corporation may contain any provision for regulating and managing the affairs of the corporation that is not inconsistent with law or the articles of incorporation.

The articles of incorporation or bylaws may establish criteria or procedures for the admission of members and continuation of membership. No person shall be admitted as a member without his consent. A non-profit corporation is not required to have members, however.

Members

A member of a corporation is not personally liable for the acts, debts, liabilities or obligations of the corporation. A member may, however, become liable to the corporation for dues, assessments, and fees (e.g., members of a homeowners association). A member is deemed to have agreed to the liability if, at the time the member becomes a member, there exists a provision of the articles of incorporation, the bylaws, the declaration of a condominium or a planned community or a resolution adopted by the board authorizing or imposing dues, assessments or fees. A home buyer may implicitly consent to liability for dues, assessments and fees.

Unless otherwise provided in the articles of incorporation or bylaws, a corporation with members must hold a membership meeting annually. It may hold regular membership meetings at the times stated in the bylaws. A corporation with members may also hold a special meeting of the members, if the meeting is properly called and noticed. Any action that the corporation may take at any annual, regular, or special meeting of members may be taken without a meeting if the corporation delivers a written ballot to every member entitled to vote on the matter, unless the use of written ballots is prohibited or limited by the articles of incorporation or bylaws.

Directors and Officers

Each corporation must have a board of directors. A board of directors must consist of at least one person. The number of directors will be specified in the articles of incorporation or bylaws. All corporate powers are required to be exercised by or under the authority of its board of directors; and the affairs of the corporation must be managed under the direction of the board. The articles of incorporation or bylaws may prescribe qualifications for directors. A director need not be a resident of Arizona unless the articles or bylaws so require. If the corporation has members, the members will elect the directors. If the corporation does not have members, the directors will be elected or appointed as provided in the articles of incorporation or bylaws. Each director generally serves a term of one year. A director may resign at any time by delivering written notice to the board of directors, its presiding officer or the corporation.

A corporation must have the officers described in its articles of incorporation or bylaws or appointed by the board of directors. The same individual may simultaneously hold more than one office in a corporation (e.g., secretary and treasurer). Each officer must perform the duties set forth by the bylaws, the duties prescribed by the board of directors, or by direction of an officer appointed by the board to prescribe the duties. An officer may resign at any time by delivering notice to the corporation. A board of directors may remove any officer at any time with or without cause.

Standards of Conduct for Directors and Officers

The duties of a director and an officer must be discharged

1. in good faith
2. with the care that an ordinarily prudent person in a like position would exercise under similar circumstances
3. in a manner the director or officer reasonably believes to be in the best interests of the corporation

A director or officer is not liable for any action taken as a director or officer or any failure to take any action if his duties were performed in compliance with the foregoing standards of conduct.

A corporation is authorized to indemnify (to secure against loss) a director or officer in certain cases, and it is required to do so in other cases, all as set forth in the statutes (A.R.S. Sections 10-3850 through 10-3858). In addition, a corporation may purchase insurance on behalf of its officers and directors. This type of insurance is frequently referred to as “errors and omissions” insurance and it typically covers most actions taken as a director or officer or any failure to take action.

Records and Reports

A corporation is required to keep as permanent records minutes of all 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. A corporation must also maintain appropriate accounting records, and a record of its members. These and other records must be kept at the corporation’s principal office, its known place of business, or at the office of its statutory agent. Subject to certain limitations, any person who has been a member of record for at least six months may inspect and copy any of the corporation’s records.

Every corporation is required to file an annual report and certificate of disclosure with the Arizona Corporation Commission, and to pay an annual fee. The annual fee is $10. Annual report instructions and forms are available online at the commission’s Web site, www.cc.state.az.us/divisions/corporations/annrpts/arinstruct.asp. Failure to file the annual report constitutes grounds for administrative dissolution of the corporation.