The purpose statement for the nonprofit will become a key focus of the newly incorporated nonprofit organization. Its founders, directors will refer to the purpose statement when developing the services of the nonprofit and begin to promote public awareness of the nonprofit’s goals and objectives. Major funding sources, both private and public, will form their first impressions of the nonprofit by reading its purpose statement. For these reasons, caution should be used when crafting the purpose statement so that it does not incorporate overly general or vague language. For example, if an nonprofit states in its articles or incorporation that “the purposes are to be exclusively charitable and educational” but provides no other guidance, the statement of purpose will likely create confusion.
Note, a poorly developed purpose statement will typically delay approval of the nonprofit corporation with these government agencies. Delays also generally interfere with the founders’ ability to raise the funds necessary to support the initial operations of the nonprofit. Therefore, a well-crafted and concise purpose statement is a valuable asset as the founders (or initial Board of Directors) establish the nonprofit and begin soliciting resources from donors and other interested parties. The purpose statement should be approximately fifty words and must be simple, understandable, and concise. Again, a superficial or exhaustive purpose statement will only create problems for the nonprofit in both the pre-planning and post-organizational stages.
Naming the Nonprofit Corporation
Like any other business, naming the nonprofit organization can be a challenge. Nonprofit corporations registered in South Carolina must have names that are distinguishable from any other corporate name in the records of the Secretary of State. Our Charleston attorneys organizing nonprofits in South Carolina have found that certain terms are frequently used in describing churches and charities and founders typically lean towards using these same terms. This often leads to considerable difficulty and frustration in obtaining a name that is both suitable for the nonprofit and available. Our law firm has extensive experience in helping various business entities determine whether a business name is available for use.
Moreover, nonprofit corporation that will invest substantial resources in the goodwill of a corporate name should conduct a comprehensive state and federal trademark search. Simply because the founders find that the name they wish to use is available on the South Carolina registered business database, this does not mean it the name is available under federal and state trademark law. Any person looking to establish a new nonprofit corporation in South Carolina should engage a trademark attorney to conduct a thorough screening of the proposed corporate name on all state trademark databases and the federal database to ensure the name is available for use. Our law firm offers such comprehensive trademark search services for an affordable, reasonable fee – generally based on two hours of attorney time. In any case, a comprehensive search will alert the founders that the corporate name they have chosen is conflicting because of its similarity to another name already in use in an overlapping jurisdiction.
Public Benefit, Religious or Mutual Benefit Corporation Designation
The Nonprofit Act require that the founders designate whether the nonprofit corporation is a public benefit, religious or mutual benefit corporation. Choosing the appropriate category is very important to determine which portions of the Act will apply to the corporation.
Public benefit corporations are defined by the Act as any corporation statutorily required to be a public benefit corporation or any corporation which is not organized primarily or exclusively for religious purposes but is recognized as exempt under Section 501(c)(3) of the Internal Revenue Code or is organized for a public or charitable purpose and that upon dissolution must distribute its assets to a public benefit corporation, the United States, a state, a person that is recognized as exempt under Section 501(c)(3) of the Internal Revenue Code – SC Code Ann. § 33-31-1706(a)(1), (3) and (4); SC Code Ann. § 33-31-140(30).
Public benefit corporations may effect their corporate purposes through a board of directors, and are not required to have members. If the public benefit corporation has members, the members cannot have an economic interest in the corporation. In other words, unlike a South Carolina for profit corporation, the members cannot sell or transfer their membership interests when the members are terminated or resign.
A mutual benefit corporation is defined by the Act as any corporation statutorily required to be a mutual benefit corporation or any corporation not fitting within the definitions of public benefit or religious corporations. Mutual benefit corporations are organized to benefit a specific group of persons, such as college fraternities and sororities, sports clubs, rotary clubs and other special interest groups. The majority of mutual benefit corporations have members.
Religious corporations are defined by the Act as any corporation which is required by statute to be a religious corporation or any corporation organized primarily or exclusively for religious purposes. Religious corporations are generally subject to the same rules as public benefit corporations. The religious doctrine governing the affairs will generally control to the extent required by the Constitution of the United States or the Constitution of South Carolina, or both – SC Code Ann. § 33-31-180. The Act provides more flexibility to religious corporations in their governance, organization and structure as compared to the other designations discussed above.
Member vs Non-Member Nonprofit Organizations
Nonprofit corporations in South Carolina fall into two categories: (i) those without members, such as charitable service organizations, schools, and agencies that serve the larger community as whole, and (ii) membership organization that have a defined group of beneficiaries, such as churches, rotary clubs and other social clubs. As noted above, nonprofit corporations such as churches, social clubs, societies, trade associations, etc are organized to serve its members. These nonprofits are typically organized because of group of likeminded individuals joined together to form a charitable organization from which they also will receive some form of benefit or service.
Nonprofit Corporation Organizational Documents
The Articles of Incorporation sets forth the nonprofit corporate charter giving legal existence to the new entity. The Articles of Incorporation are the cornerstone of the organization and care should be exercised to complete them properly. This is especially true for those nonprofit corporations which will seek tax exempt status with the IRS. (Nonprofits seeking 501(c)(3) status are required to file their Articles and Bylaws with their tax exempt application to the IRS).
The Articles will also identify those persons who will serve as the initial board of directors. The Act requires that three or more initial directors be named in the Articles. Directors must be natural persons who will institute certain policies and make corporate decisions. There is no legal requirement that a director be a South Carolina resident and directors may reside anywhere, although the nonprofit Bylaws may specify such residency.
The Articles must answer three key questions:
Will the corporation be a public benefit corporation, religious, or mutual benefit corporation
Will the corporation have members?
Is there a dissolution provision which identifies the distribution of assets upon the dissolution of the corporation.
The Act requires that all nonprofits shall have established bylaws. The Act allows flexibility on how bylaws are to be written and structured. The nonprofit bylaws are an important instrument to the organizations long-term success. Without have a good set of properly drafted bylaws, the directors, officers, members, etc may not have the appropriate guidelines to control and operate the nonprofit corporation.
An important optional provision to include in the Articles is a statement of limited purpose for tax exempt status. A statement of the corporations purpose must be included in the Articles if the corporation plans to seek tax exempt status under IRS § 501(c)(3).
Additionally, any nonprofit corporation that intends to solicit funds from the public must register or qualify for an exemption under the South Carolina Solicitation of Charitable Funds Act before any funds are solicited and comply with its reporting requirements.
Contact our Charleston Corporate Lawyers
If you are starting a new nonprofit corporation in South Carolina and need guidance with its organization, please contact our law firm by giving us a call, filling out the contact form to your right, or sending one of our lawyers an email.