Starting a North Carolina Nonprofit
Starting a North Carolina Nonprofit is actually very easy to do, but there are a ton of formalities you'll have to follow if you want to be recognized as a 501(c)(3) or specific requirements for other industries. This purpose of this article is to guide you through the basics of starting a nonprofit in North Carolina, with later articles explaining what is needed for 501(c)(3) and other expansions of a nonprofit corporation.
A nonprofit corporation is a state-level entity created for the purpose of being a not-for-profit company. These can be charities but do not have to be. The major requirement to be a nonprofit is that none of the profit of the company can go to the owners of the company. The company is allowed to have a profit and use it for other purposes, but it cannot go to the owner as profit.
A common misconception is that donations made to a nonprofit are tax-deductible. They are only tax deductible if that nonprofit is also recognized as a 501(c)(3) or other entity that allows tax deductions at the federal level.
Articles of Incorporation
First, we must start with the Articles of Incorporation. The Articles of Incorporation are the backbone of any corporation. These pages define the limits of what the corporation is allowed to do, like how the Constitution defines what our government is allowed to do. Similarly, the Articles of Incorporation are able to be changed, but it is a more difficult process than changing the bylaws or procedures of the corporation.
The Articles are the "supreme law" of the corporation, and they cannot be overruled by the Bylaws or company procedures. When in conflict, the Articles win; however, they will still succumb to State and Federal laws.
Because of their strict and powerful nature, most people (myself included) use the Articles of Incorporation to broadly state the rules of the company while using the Bylaws to expand upon and make them clearer. For example, the Articles may state the Board of Directors must have at least five members. The Bylaws can then state the Board of Directors shall have nine members because nine is at least five. The Articles can state that the Board of Directors is responsible for some task while the Bylaws will describe how that task will be completed.
So, why do we use Articles of Incorporation for much of anything? Because there are some required provisions that states will want to see in order to approve your Corporation, and there are also some provisions you want strictly construed so they cannot change frequently. We will first take a look at some of the required provisions here in North Carolina. Most states will have the same or similar requirements.
- Name - The Corporation's name isn't supposed to change; however, sometimes there are reasons why the name must change. If that happens, the state wants to know first before you're allowed to change it to ensure you're not taking someone else's name or using a name that is forbidden.
- Address of the Corporation - The address can change, but the state needs to know when it does for a couple of reasons. The first reason is they want to know where to mail reminders for things like annual reports and fees due and where to mail the certificate stating the corporation has been founded. The second reason is they need this address for jurisdictional reasons. If someone sues your company, your jurisdictional domicile for a company will be this address.
- Registered Agent - The state needs you to have a registered agent who lives within the state of North Carolina. This is important because this person will be the one who receives any lawsuits on your behalf. It has to be someone who lives within North Carolina because the state needs jurisdiction over that person in case of lawsuits.
- Incorporators - The state wants to know who the incorporators are and where they live. This is useful for them to mail the certificate of formation as well as another way to reach someone in case of questions. This requirement also helps cut back on fraud.
- Dissolution - North Carolina requires one provision that isn't required in for-profit corporations, the dissolution provision. They are basically asking you to put down that upon dissolution of the corporation, no amounts will go to the owners, directors or members of the corporation and instead the assets will go to some other nonprofit or charitable purpose. This is actually a provision required by the IRS for any company seeking 501(c)(3) charitable organization status.
The following are provisions that aren't required, but should be in your articles to ensure their strict compliance.
- Authorize Bylaws - In order for your bylaws to have any authority, they must be given that power by the Articles of Incorporation. It's a common mistake to just assume they have the power you think they have without using the Articles to outline what power they will be granted.
- Amending and Modifying Bylaws - You can always make assumptions as to how the Bylaws will be amended or modified, but if these processes are outlined in the Articles, you will have a clear understanding of how this will work. This is especially beneficial for Directors who did not take part in forming the corporation. They'll want clear rules, and you can make them here.
- Amending and Modifying Articles - Similarly, you should have a provision in place on how to amend or modify the Articles of Incorporation. Typically, you make this harder than modifying the Bylaws because the corporation has to go through more red tape in order to actually modify the Articles of Incorporation.
- Adding and Removing Directors - Because of the strict nature of the Articles, the process for adding and removing directors should be in the Articles of Incorporation. Directors, especially newer ones, will want clear rules on how they can be added and for what reasons they can be removed.
- Fiscal Year - This shouldn't ever change unless there is a really good reason to do so. Therefore, it should be in the Articles of Incorporation.
- Effective Date of Articles - Sometimes, you'll want to specify a later date in which the corporation will be starting. This is vital to be put in the Articles and not the Bylaws because it is something the state will have to be on notice for.
- Manager Team - If your corporation wants a CEO, President, Treasurer or any other type of manager, the authority to create a managing or executive team should be made clear in the Articles. You do not need to define every position because that can be done in the Bylaws, but saying the Board of Directors has the authority to appoint managers or executives to manage the day to day operations is important.
- Conflict of Interest Policy - This one is required if you're going to file for a 501(c)(3), but otherwise, it is still a good idea. You need to establish that no Director can vote him or herself a profit. If there ever is a time where a Director may profit from a decision, that Director must make known the conflict and abstain from voting on it.
- Indemnification - Many corporations now have a policy about indemnifying their directors, executives, members or agents in case of a lawsuit that arises in the course of their fulfillment of a duty to the corporation. This means the corporation can hire legal counsel to represent the director, reimburse the director in case he or she loses the trial, or pay for settlements out of court. It is entirely up to the corporation to decide what they would like to include in the indemnification clause, but if you have one, it should be in the Articles of Incorporation.
Once you finish the Articles of Incorporation, you mail them in with the $60 check to the Department of the Secretary of State of North Carolina. It will take anywhere from a few days to a few weeks to get the certificate back stating your nonprofit is formed, but North Carolina is quick compared to most states.
We've already addressed Bylaws briefly, but in these, you'll be able to go into far greater details the rules and operations of a company. It is typical to have entire chapters of the bylaws dedicated to one Article from the Articles of Incorporation. For example, the power invested in the executives Article will run several chapters as you outline the duties, rights and responsibilities of each position. There's really no way for me to tell you what to put in your Bylaws because these rely heavily on the finer details of your company and how you'd like to see it run. I can, however, tell you these take many meetings with the directors to develop. You'll want to take them section by section to decide how you want things to run.
Fortunately, the bylaws can change very easily. I typically allow them to change with a majority vote at any regular Board of Directors meeting or through a majority vote of all directors through email or some other mechanism. Silence, of course, is a vote 'no' in my books, but the good news is that you can make your own rules in the bylaws. Another piece of good news is that the state will have no reason to ever see your bylaws unless there's a trial or administrative proceeding specifically concerning them. That said, you shouldn't put anything in them you'd like to hide. I was just pointing out that they're not public record, so others won't come looking at them. Furthermore, you cannot put anything in them that is contrary to state or federal law or the Articles of Incorporation.
After you get your certificate from the state back saying you've formed a nonprofit, you should go to the irs.gov website and file for an EIN, employer identification number. It takes about five minutes and is a very easy to use questionnaire that you run through. At the end of the questionnaire, you're assign an EIN for the company. Print this page off and save it somewhere safe with the rest of your corporation documents.
With your certificate and EIN, you can open up a business bank account and other business accounts. You're official and can begin transacting business as your nonprofit, but remember to let people know you're the nonprofit and not yourself personally. This can cause problems if the people you work with think they're working with you personally and not the nonprofit.
This article was written for educational purposes only and is not to be used as legal advice, nor does this article create an attorney client relationship. If you need legal advice, or are looking for an attorney client relationship, please contact us or another attorney.
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