– E.B. (Tennessee)

This article will explore some common myths regarding non-profit corporations.

What Is a Non-Profit Corporation?

A non-profit corporation is a corporate entity that has been established under certain federal regulations. The United States Code, title 26, Section 501, states that certain non-profit organizations, if they qualify, are exempt from paying federal income taxes.

Common Features of Non-Profits and For-Profits

Corporations that exist on a “for-profit” basis, such as Ford Motor Company, and non-profit corporate entities, such as the North American Riding for the Handicapped Association, share some common characteristics, such as:

      * Shareholders, officers, directors, and members of these entities are generally protected from personal liability for any debts or obligations that the entity may incur in its business operations.

      * Both entities can earn profits from their corporate activities. In fact, many non-profit corporations earn very substantial profits.

      * Both entities have a board of directors.

Different Features

Here are some of the differences between for-profit and non-profit corporations:

      * Profits. People who invest in for-profit corporations can be entitled to receive a share of the corporations’ profits. By comparison, those who contribute to non-profit entities do not receive a share of profits.

      * Stock. For-profit corporations issue shares of stock to those who have become eligible by investing money, valuable goods, property, or past services to the entity. By comparison, non-profit corporations generally cannot issue stock to their shareholders and they do not distribute income to their officers, directors, and members.

      * Taxes. Many non-profit associations are exempt from paying federal income taxes. To receive federal tax-exempt status under the Internal Revenue Code, Section 501(c)(3), however, non-profit corporations must limit their purposes to religious, charitable, scientific, testing for public safety, literary, educational, fostering national or amateur sports competition, or preventing cruelty to children or animals.

      * Postage savings. Non-profit entities might qualify for reduced postage rates.

      * Tax benefits for those who donate. In many cases, those who donate money or things (such as used cars) to qualified non-profit entities can deduct the donation from their federal income taxes.

Myths Regarding Non-Profit Corporations

Myth: Non-profit entities cannot be sued

Fact: They can be sued

Non-profit entities can be, and sometimes are, sued. The old rule of “charitable immunity” began well over 150 years ago under British law, when charitable corporations could not be sued by people who claimed to be injured from their activities. In recent years, this theory has become largely obsolete.

Myth: Non-profit entities need no insurance

Fact: They may need several types of insurance coverages

Because non-profit entities face the risk of being sued, they can protect themselves with insurance. The need for any coverage depends on the group’s activities, its state laws, and other factors. Here are some coverages available:

      * Director’s and Officer’ Liability (often called “D & O” insurance). This coverage generally protects directors and officers from a claim or suit relating to the entity’s management. For example, the coverage would likely apply if the board of directors, in good faith, decided to fire an employee but later got sued.

      * General Liability. This insurance will protect against claims or suits that arise out of the entity’s business activities. While these policies typically protect the entity only, you can ask your insurance agent to extend coverage to protect the volunteers, as well.

      * Worker’s Compensation. This insurance would address claims by employees who were hurt on the job.

      * Commercial Automobile Insurance. This insurance would be important for non-profits that own vehicles.

      * Medical Coverage. Groups can buy medical coverage to protect volunteers who are hurt while helping out.

      * Event Insurance. Event coverage might be needed if a group’s General Liability policy does not cover its events.

Myth: Non-profit corporations cannot make a profit

Fact: Many non-profit entities earn huge profits but cannot share them with their officers, directors, and members

Non-profit corporations can raise tremendous amounts of money, and many raise millions of dollars each year. However, non-profit corporations cannot distribute their income or profits to their officers, directors, and members.

This article does not constitute legal advice. When questions arise based on specific situations, direct them to a knowledgeable attorney.

About the Author

Julie I. Fershtman is an attorney with 19 years of experience who gets results for her clients. In 2004, alone, she won 3 jury trials, 2 appeals, and a major federal court case, all on equine-related cases. An independent lawyer rating service gives her its highest rating. She can be reached at (248) 851-4111, ext. 160. To learn more, visit www.equinelaw.net and www.equinelaw.info.

Protect yourself by reading Ms. Fershtman’s books. In plain and simple language the books help you avoid legal disputes. MORE Equine Law & Horse Sense sells for $22.95 + $5 shipping and handling, and Equine Law & Horse Sense sells for $17.95 + $5 shipping and handling. Order both books together for $42.90, first-class shipping included. Michigan residents add 6% sales tax. To order, call Horses & The Law Publishing at 866- 5-EQUINE, a toll-free number. Or, mail check or money order to Horses & The Law Publishing, P.O. Box 250696 Franklin, MI 48025-0696.