Vol. 6, No. 6, Pg. 21. SCULPTING A NONPROFIT CORPORATION.

• Author: By Martin C. McWilliams Jr., Frank W. Cureton and Shawn Flanagan

South Carolina Lawyer

1995.

Vol. 6, No. 6, Pg. 21.

SCULPTING A NONPROFIT CORPORATION

21SCULPTING A NONPROFIT CORPORATIONBy Martin C. McWilliams Jr., Frank W. Cureton and Shawn Flanagan22Last spring's session of the General Assembly is remembered for providing South Carolina with two new forms of doing business that limit ownership liability--limited liability companies and limited liability partnerships. Largely lost in the excitement over these new forms is another major accomplishment of the legislature: South Carolina's new Nonprofit Corporation Act (Act), found at Title 33, Chapter 31 of the South Carolina Code, 1976, which became effective with Governor Carroll Campbell's signature last June.

The Act, a project of the South Carolina Law Institute, is complete with Official Comments and South Carolina Reporters' Comments. It is modeled on the ABA/ALI Revised Model Nonprofit Corporation Act (Model Act). The Model Act, in turn, was designed as a companion to the ABA/ALI Revised Model Business Corporation Act, a version of which South Carolina adopted as the Business Corporation Act of 1988. Those familiar with the Business Corporation Act will therefore feel comfortable finding their way around in the Act.

WHAT IS A NONPROFIT?

First and foremost, a nonprofit corporation is a corporation with all that entails, including limited liability for its members and, if desired, perpetual existence. Like a business corporation, it is chartered by the General Assembly by delegation of authority to the Secretary of State. Nonprofits differ from business corporations in two fundamental ways. First, the nonprofit form is designed for entities that do not operate for profit but for "eleemosynary" purposes, to use the traditional description. The second difference is closely related to the first--unlike business corporations, nonprofits are not owned by shareholders seeking a return on investment.

Despite these fundamental differences, for many years South Carolina's nonprofits have been governed largely by the Business Corporation Act. The former South Carolina Nonprofit Corporation Act contained only about 25 sections; anything not addressed directly by these few sections was governed by the Business Corporation Act. In other words, South Carolina nonprofits were governed by a statute designed to accommodate profit-making institutions owned by return-minded investors. This was a bad fit and caused plenty of confusion.

The new Act is comprehensive and completely free-standing, requiring reference to no other statute. Because the Act is a first cousin to the Business Corporation Act and uses many of the same terms (including, for example, the standard of care for directors), it is likely that the Act will be construed with reference to cases decided under parallel provisions of the Business Corporation Act. Nevertheless, given the differing purposes of the two statutes, there is scope for differing judicial interpretation of identically worded provisions.

It is important to remember that a nonprofit is not necessarily tax exempt. An eleemosynary enterprise organizing as a nonprofit has a number of significant benefits, including limited liability for members, but one of these benefits is not tax exemption. Exemption from tax can be determined only by reference to the relevant tax statutes and regulations.

The concept of the nonprofit corporation was initially conceived to accommodate truly eleemosynary enterprises, such as churches, charities and institutions organized for the public benefit. Over time, however, the nonprofit form has come to provide a home for many additional categories of enterprise, including country clubs, fraternities and after-hours drinking clubs. The disparity of purposes to which the nonprofit form has been applied has baffled those trying to draft a statute encompassing all such purposes in a sensible way.

For example, it was undoubtedly the view of the original drafters of nonprofit statutes that the members of nonprofits would have no financial stake in the nonprofit, so that the issuance of shares of stock would be inappropriate. Nevertheless, it has long been treated as an open question in South Carolina whether a nonprofit could, in fact, issue shares; many have done so despite the seeming clarity of the words of Code § 33-31-10, "The Secretary of State may issue certificates of incorporation to any nonprofit corporations having no capital stock . . . ." This question and many others have mercifully been put to rest by the Act.

FORMATION OF NONPROFITS

The new Act simplifies the formation of nonprofits. Several years ago the requirement that the sheriff's approval be obtained was eliminated; the new Act also dispenses with the requirement for making publication. Formation under the Act is accomplished in the same way as is formation of a business corporation, by filing brief, fill-in-the-blank articles of incorporation with the Secretary of State. As with a business corporation, existence begins when the Secretary stamps the articles with the date and time of their filing.

A nonprofit's articles look much like those of a business corporation, with the exception of three important decisions that must be made before filing the articles. The statutory requirements for nonprofit articles, found at Code § 33-31-202, require that the articles indicate (i) whether the corporation will have "members," (ii) whether it will be a public benefit, mutual benefit or religious corporation, and (iii) what provisions...