The problem: When people in a community come together to form a historical society, or a “Friends of” group to care for a local historic building, they typically do so out of a wish to give back to the community and help preserve things of value to the community. But when they begin to raise money, manage volunteers and take more responsibility for their mission, they get concerned about being sued for what they are doing. And rightfully so. Insurance can provide a great measure of protection – but who is the insured? And what else should they do to protect themselves and their project or mission?

Incorporation: Corporations are legal entities that allow people to come together, for profit or nonprofit, and limit their personal liability in that venture. The corporation, duly formed under state law, provides limited liability for it owners, members, officers and directors. In our economic system, the state wants to encourage individuals and groups to take initiative, and one of the ways to encourage that is to protect them under the legal fiction of a separate person – the corporation – which is the party responsible for any wrongs committed in pursuing the organization’s goals. If the corporation has done something for which it may be sued, it is the corporation, and not its individual owners, members, directors, officers or employees who are sued. For acts legitimately done under the protective umbrella of the corporation, they are not held personally liable, except in extraordinary cases. That is the main reason to incorporate.

​

Profit vs. Non-Profit Corporations: State law makes distinctions between for-profit vs. non-profit corporations. A for-profit corporation has owners, who are issued shares of stock entitling them to share in the profits of the corporation. A non-profit corporation may have the same business aims – to grow and provide goods and services to the public – but to the extent it takes in more income than it pays out in expenses, that “profit” cannot be distributed to the organization’s members or management team. It must be ploughed back into the charitable purposes of the corporation. So generally, a non-profit does not issue shares of stock. Instead it has either “members” or simply a self-perpetuating board of directors. Its governing legal instruments should make clear that it is organized as a non-profit, and that no member or directors are entitled to share in the financial success of the organization.

​

How to Incorporate: To incorporate, you file articles of incorporation with the Pennsylvania Corporations Bureau. One section of the articles deals with whether you will or won’t have members, so decide in advance. The articles must contain particular language if you will also be seeking to qualify with the IRS as a Section 501(c)(3) non-profit (see QUALIFYING AS A 501(C)(3) ORGANIZATION WITH THE IRS). There is a filing fee (currently $125), costs to advertise (ballpark $250), a minute book and seal ($75) and an attorney’s fee (shop this and perhaps find an attorney in your community to volunteer). There are companies and online forms for those who want to “do it yourself”, but remember that the limited liability protects those who do things right, but not necessarily those who do things wrong.

​

Next Steps: Once the articles of incorporation are approved by the State, you advertise your filing, order a minute book, and take the preliminary steps to get your Corporation going: adopt bylaws that govern the management of the company’s affairs, formalize who your initial members are (if applicable), elect rectors, appoint officers, and open a bank account. Now you are ready to put the corporation into gear. BYLAWS GUIDE IN PROGRESS

​

Who Should be on the Board? You should have a cross-section of the community to provide input as your board. But certain professions can help to anchor a board by providing professional advice on a volunteer basis. It is helpful to have one or more attorneys, accountants, and insurance agents. If you are managing a property, then you should also seek out a realtor and/or a property management professional. Contractors and trades people can be invaluable, in doing work that they can do, but also understanding the work that may need to be done and suggesting local businesses who may provide those services at fair prices. You should also see if your local government would be willing to provide some kind of liaison, to help and advise on how the local government can help in your mission. You also need people who can write well – and take great photos - to help publicize your events; and people who can help get that message out – a public relations person, and people comfortable with social networking. And it helps to have as many creative people as you can find – to propose events and activities, and bring their enthusiasm to the tasks.

​

Protecting your Limited Liability: Since the corporation is a separate legal entity, you cannot take money out of the corporation for your personal expenses. For those people who abuse the corporation by using it for their personal purposes, there is a doctrine called “piercing the corporate veil” which can be used to impose personal liability on the corporation’s members, directors or officers who commit that type of abuse. To protect against that, the directors should adopt written resolutions that put in place controls so that corporate funds are only spent on corporate purposes. Only an officer can write checks, and the expenses must be for legitimate corporate purposes. Another office or director or an outside accountant should review the financial records on some periodic basis to determine that controls are being respected. Officers and directors may be reimbursed for costs they incur on behalf of the corporation, but it is better practice for the corporation to pay those items directly out of its own funds. As the Company grows, it may also hire employees, and may pay employees, officers and directors, if specifically permitted by decision of the board or members. All decisions like that should be reflected in the Company’s minute book. Recognizing that the corporation is a separate entity from its members and directors, securing its funds from use for other than corporate purposes, and keeping written records that document all significant corporate decisions, are the simplest ways to protect your limited liability.

​

What is a Section 501(c)(3) designation? Even though you are a non-profit, that does not mean that people who give you money can take a tax deduction on their federal tax return. The only organizations that can offer that are those who have applied to the IRS to be a qualified 501(c)(3) public charity under the Internal Revenue Code. See “QUALIFYING AS A 501(C)(3) ORGANIZATION WITH THE IRS” for an overview.

Soliciting Money as Charity: If you are going to solicit as a charitable organization, you should be aware of the state registration requirements . Small charities have lesser responsibilities. Larger charities spending more time on that effort need to register and provide annual reports. GUIDE IN PROGRESS

​

Taxes and Tax Returns: GUIDE IN PROGRESS

​

For Further Information:

Pennsylvania Corporations Bureau: Overview * Form of basic articles of incorporation * Registering as Charity *

Last updated: March 2020

REMINDER: Tax information becomes outdated with each day and each new tax year. Legal advice varies with each situation. This information is a simple summary, given in good faith, but is not guaranteed. Consult your tax advisor for your particular situation.