Business Law Newsletters

Benefits of a Nonprofit Corporation

A “nonprofit” corporation may seem like a misnomer if activities of the corporation generate a profit. However, if the objective of the nonprofit corporation is not to make a profit but to achieve charitable, educational, religious, literary, or scientific goals, then those profits normally would not be subject to federal taxation. This feature of a nonprofit corporation has led to use of the term “501(c)(3) corporation” in recognition of the section of the Internal Revenue Code that provides for the exemption from taxation.

Corporate Creditors

Generally, directors do not owe a fiduciary duty to a corporate creditor when that creditor has contracted exclusively with the corporation. However, a director may owe a fiduciary duty to a corporate creditor to protect the corporate assets when the corporation becomes insolvent.

Directors’ Ignorance of Corporate Affairs

To carry out fully their duties and responsibilities to shareholders and the corporation, directors must be reasonably familiar with the workings of the corporation and have a general knowledge of how the corporation conducts its business. Directors are not expected to have superior knowledge about all business and financial aspects of the corporation, but they are assumed to have competent knowledge of the duties they have taken on when named to the board.

Investor Suitability Requirements for Broker Dealer Recommendations

Broker dealers may make investment recommendations to investors only if the broker dealer first determines that the recommended investment would be suitable for the investor. Suitability depends upon the investor’s tolerance for risk, other investments, income, net worth, financial requirements, and investment objectives.

Reporting Requirements for Public Company Insiders

Officers, directors, and beneficial owners of more than 10 percent of the shares of a public company must report their ownership of shares of the company to the Securities and Exchange Commission. Company officers and directors are considered corporate insiders. Beneficial holders of more than 10% of a class of a company’s equity securities registered under Section 12 of the Securities Exchange Act also are considered corporate insiders. Such insiders are required to report their holdings to the Commission when they first acquire company stock and when changes in their ownership occur.