Nonprofit Organizations: To Incorporate or Not to Incorporate?

By David K. Fries and Jason Gregoire

[This article originally appeared in the Local Government Center’s Affiliate Link Newsletter, July 2008.]

While many nonprofit organizations choose to incorporate, others remain unincorporated. There are important differences between these two forms in the area of liability for individuals or groups who belong to the nonprofit organization and perform management functions for it. This article provides some analysis on this issue and describes the steps for incorporating a nonprofit organization in New Hampshire.

Liability of Members of Nonprofit Organizations

A nonprofit organization may have all kinds of liabilities. These would include the organization’s contractual or transactional liabilities (for example, liabilities to employees, landlords, vendors and service providers) as well as its liabilities for negligence or injuries to third parties (for example, liabilities to a third party who is injured in the course of the conduct of the organization’s affairs or to someone who slips and falls on its premises).

Under New Hampshire law, individuals or groups who belong to unincorporated nonprofit organizations and perform management functions for it may be personally liable for the liabilities of the organization. They are personally liable for the unincorporated organization’s debts if they authorize, assent to, or ratify the underlying transactions. Therefore, the creditors of the unincorporated nonprofit organization may be able to make claims against the personal assets of these individuals or groups.

If a nonprofit organization is incorporated and properly maintained and operated, the individuals or groups who belong to it and perform management functions for it generally have no personal liability for the debts and liabilities of the corporation. The nonprofit corporation’s creditors only have access to the corporation’s assets for satisfaction of their claims, and not to the personal assets of its these individuals or groups.

Forming and Maintaining a Nonprofit Corporation under New Hampshire Law

In order to incorporate a nonprofit corporation under New Hampshire law, at least five incorporators must complete, sign and file Articles of Agreement in accordance with the governing statute (NH RSA 292) with both the New Hampshire Secretary of State’s office and the clerk of the town or city in which the mailing address of the corporation is listed. The Articles of Agreement contain information such as the name, address and purpose of the organization, must conform to the requirements set forth in the statute, and must be filed on Form NP-1. This form can be downloaded on the New Hampshire Secretary of State’s Corporate Division Web site at: https://www.sos.nh.gov/corporate. Once the filing fees are paid and the Articles of Agreement are recorded by both the Secretary of State and the town or city, the nonprofit corporation will be formed.

Once the corporation is formed, it must file a report with the Secretary of State’s office every five years thereafter in order to maintain its existence. The report must be filed on the form required and contain the following information: (a) the signature of the president or other officer of the corporation; (b) the corporation’s principal address; and (c) the names and addresses of all the officers and directors or the governing board of the corporation. There is also a filing fee to be paid when the report is filed (currently $25.00). If the corporation fails to file this report in timely fashion, the State will dissolve the corporation and the organization will become an unincorporated nonprofit organization. In many cases, the organization may revive the dissolved corporation by filing a certificate of revival with the Secretary of State and paying the required filing fee.

In order to maintain the limited liability protection of the nonprofit corporation, the entity must abide by corporate formalities. Examples of these include holding board and member meetings, following its bylaws and charter, holding itself out to the public as being a corporation, signing documents in the corporation’s name, keeping bank accounts in the corporation’s name, and keeping proper corporate books and records.

Conclusion

Whether an organization or association is incorporated or unincorporated, it is important to realize the consequences of each form. Knowing the status of the organization is important for liability reasons and tax purposes. Most nonprofit organizations will want to be incorporated for protection against member liability. Each organization should consult its legal and tax advisors for guidance on these matters. It is important to recognize that being a nonprofit organization (incorporated or unincorporated) does not automatically mean that the organization is exempt from federal, state or other taxes. That is a separate issue and must be determined with reference to relevant tax law.