Quick Overview of Setting Up and Maintaining Your Corporate Records
1. Thank you for considering our firm, 24 Hour Group, to start your new nonprofit or acquiring an established nonprofit.
2. Take a few minutes to read the enclosed Memorandum on maintaining your corporate formalities.
3. Consider signing up for our Ongoing Support and Maintenance Program under «Nonprofit Maintenance» section.
4. Be sure to calendar your filing deadlines for your annual state and federal filings.
5. Keep your Corporate Records up to date such as Board Minutes, Tax Filings, and Annual compliance filings for future reference and possible inspection.
6. Thank you again. We wish you the greatest success in carrying out the mission of your nonprofit.
Memorandum on Operation of California Nonprofit Corporation
The purpose of this message is to discuss certain procedures and operations relevant to a newly formed California nonprofit corporation. The summaries below are not a complete analysis of the areas discussed but are intended to give a basic understanding of California corporation law and the procedures you should follow. Because this discussion is general in nature, it should not be relied upon as complete information regarding these matters, but rather should be used as a general guide. Please feel free to contact our office regarding any questions you may have. Further, you should maintain the attached records in a binder in your main business office.
1. Articles of Incorporation
A California corporation is considered to be in existence when its Articles of Incorporation have been filed with the Secretary of State’s office. The Articles are very brief as law only requires minimum information on the form itself: the name of the corporation, a statement of purpose, the name and address of the corporation’s initial agent for service of process. The Articles we filed or will file for your nonprofit contains this information.
California law allows a corporation to amend the Articles in any way it desires, so long as the amendment is lawful at the time the corporations chooses to add it to the Articles. Before the Board of the corporation has been appointed, the Articles may be amended by a writing signed by a majority of the incorporators, if the directors have not been elected or not listed in the Articles, or by a majority of the directors if they have been elected or have been listed. Once the Board has been nominated, the Articles generally may be amended or repealed by approval of the Board. If an amendment is adopted, the corporation must file a Certificate of Amendment with the Secretary of State to make the amendment effective.
The Bylaws of the corporation set forth various corporate procedures and matters affecting the governance of the nonprofit corporation. The Bylaws set forth in general terms the responsibilities of the directors and corporate officers, the number of directors, the manner of calling meetings of the directors, the maintenance of corporate records, the voting procedures, and other general corporate matters. Think of the Bylaws as «the corporate Bible» because it sets forth the rules that the State of California mandates for a nonprofit corporation.
Bylaws generally may be adopted, amended, or repealed by the Board; however, the Bylaws may limit the Board’s powers in this respect.
3. Following Corporate Formalities
Corporate status generally shields the officers, operators, and organizers of the nonprofit corporation from individual liability for the acts of the corporation. Courts allow this corporate privilege to exist generally as long as the corporation remains properly organized and completely separate as a legal entity. If a court finds that the corporate privilege has been abused, the corporate entity may be disregarded for the purpose of remedying the specific abuse and the operators or officers may be liable for the corporation’s acts relating to that abuse. In the nonprofit context it is essential that the nonprofit be operated exclusively for its nonprofit purpose and not for the benefit of its organizers, officers, etc.
The legal theory upon which personal liability is based is generally called the «alter ego doctrine». An individual attacking the corporate status to achieve personal liability will try to «pierce the corporate veil» to prove that the corporation is merely an agent of the individual(s) behind it. An individual trying to pierce the corporate veil and assert the alter-ego doctrine must generally prove two things: first, that there is a unity of interest and ownership between the corporation and the nonprofit corporation’s operators or officers, such that the corporation and the officers are no longer separate entities; and second, that an injustice or fraud will occur, if the corporation’s actions are treated solely as the acts of the corporation.
A corporation can reduce the possibility that the individual officers or other employees or volunteers will be subject to liability for the corporation’s actions by following the guidelines below:
(a) The corporation should ensure that it is adequately capitalized from its organization to enable it to carry on its operations.
(b) The corporation should obtain insurance to cover all of its insurance needs. I would suggest that the corporation consider coverage including general liability insurance, fire and casualty insurance, life and disability insurance for key personnel, and workers’ compensation insurance.
(c) The corporation should observe all post-formation corporate formalities, including but not limited to, holding annual or more regular directors’ meetings; keeping minutes of such meetings and clear records of all corporate activities; maintaining up to date Bylaws at the nonprofit offices; maintaining separateness in dealings between the corporation and the directors, including requiring full disclosure of any competing interest; and assuring approval of the corporation’s transactions by the directors as appropriate.
(d) The officers and other authorized persons should execute all letters, contracts or other documents, signed on behalf of the corporation, in the corporation’s name rather than in their individual capacity. The best way to do this is to use a signature block for documents that should look like this:
ABC Inc. By: John Doe, President
(e) The nonprofit’s funds should not be commingled with the funds of the officers, employees, volunteers or any other entity involved with the corporation. The corporation should maintain separate operations and records from those of other entities and persons involved with the nonprofit.
(f) All tax payments and tax filing should be timely made. It is advisable that the nonprofit have an accountant that specializes in nonprofit accounting.
4. Actions by the Board of Directors
The business and affairs of the corporation are handled by the Board of Directors and all corporate powers must be exercised by or under the Board’s direction. The Board is to make decisions as a Board; the individual directors should not act alone. The Board should make decisions involving corporate policy, election of officers and determination of the officers’ duties and compensation, adoption, amendment or repeal of the Bylaws, participation in various business transactions, execution of material leases and contracts, determination of the corporation’s budget, borrowings, and other major corporate transactions. The officers of the nonprofit corporation carry out the day to day operations of the corporation pursuant to the direction and policies established by the Board.
The Board’s actions are generally taken at meetings of the Board, at which a quorum is present. These meetings may either be regular meetings of the Board or special meetings. Regular meetings are set in the Bylaws or are fixed by the Board and require no notice. Special meetings, which require notice, may be called by the authorized corporate officials. The corporation’s Bylaws should be consulted concerning when notice must be given. Directors can waive notice by executing a waiver of notice and consent to meeting. The Secretary should keep the minutes of the meetings and any written unanimous consents in the corporate Minute Book.
One of the most important prohibitions regarding the Board of Directors is that the Board may not be comprised of more than 49% of interested persons. By interested persons California Law defines interested persons as those having a financial stake in the nonprofit, such as being employed by or contracted with the nonprofit as a vendor or nonprofit association.
5. Books, Records, Minutes and Inspections
The corporation should keep records, consents, notices, and minutes of the meetings of Board of Directors, and committees of the Board in a Minute book. The Minute Book should be kept and maintained at the corporation’s principal executive office.
Each director has the absolute right at any reasonable time, to inspect and copy all the books, records and documents of the corporation.
6. Annual Filings with the Secretary of State
Within 90 days of filing its original Articles of Incorporation and annually thereafter, a corporation must file with the Secretary of State an information statement «Statement by Nonprofit Corporation» which states the names and addresses of the corporation’s chief executive officer, secretary and chief financial officer; the address of the corporation’s principal business office in the state; and a statement describing the principal business office of the corporation. The statement must also designate an agent for service of process in the state.
7. Registration with the Attorney General’s Office and Annual Audit requirement
Your nonprofit organization will also have to register with the California Attorney General’s office using form CT-1. In the event that your nonprofit has annual revenue in excess of two million dollars, it will need comply with an audit requirement.
8. Employer Federal Taxpayer Identification Number «EIN»
A new business is required to obtain an EIN from the IRS. The Number must be used on various federal tax returns and documents. Application must be filed as soon as possible after the nonprofit begins or in time to include the number on any tax return or any other document filed with the IRS.
Please note that this memorandum is merely intended as a summary of various corporate and tax procedures, of which a new nonprofit corporation should be aware. It is intended as a helpful guide for you to keep in your master file. However, this introduction is not a comprehensive legal guide nor is tit to be relied upon for any particular case and the law frequently changes. We undertake no responsibility to keep this memorandum up to date with current law. You should rely on the expertise of your accountant and legal advisers to assure compliance with the law.
by Thomas Wrobel