Imagine I’m working with a great new client named Daphne. She wants to found a nonprofit organization to assist at-risk youth in her local community and across Iowa. This is a hypothetical memo I would send to Daphne outlining the steps of what it takes to form a nonprofit in the state of Iowa. (Note, if you’re looking to form a 501(c)(3) it’s best work with a qualified attorney for advice and counsel specific to your situation and goals.)
Good afternoon! I very much enjoyed our phone conversation of this morning, where we discussed your intent to begin a nonprofit to assist at-risk youth. Certainly this is an noble mission and I have no doubt that you could make a big impact. I also acknowledge you are very busy and don’t have the time to allocate to dealing with all of the documentation. So, I’m here to take this stress off of your plate!
Let’s recap some details regarding the process for founding a nonprofit organization. These steps will set your public charity up for the best possible success.
Main Steps to a 501(c)(3)
To recap what we talked over, forming a 501(c)(3) involves four steps:
drafting and editing bylaws, with new board members then voting in favor of the bylaws in a duly authorized meeting;
applying for an Employer Identification Number (EIN); and
drafting, reviewing, and editing the IRS non-exempt status application, known as IRS Form 1023, as well as all the supporting materials IRS Form 1023 requires.
By far, the most difficult and time-consuming of the four steps is the IRS Form 1023. You should definitely review the form immediately, so you can gain a sense of the level of detail and involvement it requires.
How much does it cost?
While my regular hourly rate can go up to $300 per hour, I often have agreed with clients to perform all the legal work required to successfully begin a nonprofit for a flat fee of $4,800. I typically bill this over the span of five months, i.e., five easy payments of $980, due on, say, the first of each of the months.
Additionally, as you would expect, this matter will necessitate payment of filing fees to governmental agencies, such as the Iowa Secretary of State’s Office and the IRS. (The Iowa Secretary of State has a $20 filing fee, and the IRS 1023 Form has a $850 or $400 filing fee depending on the amount of gross revenue expectations). Of course, clients are solely responsible for payment of all such governmental fees.
How long does this take?
It usually takes a few months to pull all the paperwork together, including and especially Form 1023. I’ve had, however, ambitious clients who wanted to do it much faster, and I was able to accommodate. The flat fee includes as many conferences with me as you reasonably need for us to complete steps 1-4, above.
Benefits of Nonprofit Formation
Daphne, the benefits of a 501(c)(3) are many and include:
Tax exemption/deduction
Organizations that qualify as public charities under Internal Revenue Code 501(c)(3) are eligible to be completely exempt from payment of corporate income tax. Once exempt from this tax, the nonprofit will usually be exempt from similar state and local taxes.
Even better: if an organization has obtained 501(c)(3) tax exempt status, an individual’s or company’s charitable contributions to this entity are tax-deductible.
Eligibility for public and private grants
Nonprofit organizations can solicit charitable donations from the public. Many foundations and government agencies limit their grants to public charities.
Being able to offer donors income tax charitable deductions for donations, as well as eligibility for public and private grants, are probably the two major reasons folks want to obtain 501(c)(3) status.
Formal structure
A nonprofit organization exists as a legal entity and separate from its founder(s). Incorporation puts the nonprofit’s mission and structure above the personal interests of individuals associated with it.
Limited liability
Under the law, creditors and courts are limited to the assets of the nonprofit organization. The founders, directors, members, and employees are not personally liable for the nonprofit’s debts. There are exceptions. A person cannot use the corporation to shield illegal or irresponsible acts on his/her part. Also, directors have a fiduciary responsibility; if they do not perform their jobs in the nonprofit’s best interests, and the nonprofit is harmed, they can be held liable.
Focus your giving
With charitable giving flowing through a central nonprofit organization, and not through, say, a for-profit business, it’s easier to focus the giving on a singular mission. A for-profit business may be easily pulled away from a charitable mission by the pet causes of lots of different customers, clients, vendors, and employees. A nonprofit should be much less susceptible to such pressure.
Responsibilities of Forming & Managing a Nonprofit
Of course, there are serious responsibilities that come along with creating and running a nonprofit. These can’t be overstated, and include:
Cost
Creating a nonprofit organization takes time, effort, and money. Plus, keeping a nonprofit on track, compliant, and successful also requires great care.
Paperwork
A nonprofit is required to keep detailed records and submit annual filings to the state and IRS by stated deadlines to keep its active and exempt status.
Shared control
Although one who creates a nonprofit may want to shape his/her creation, personal control is limited. A nonprofit organization is subject to laws and regulations, including its own articles of incorporation and bylaws. A nonprofit is required to have a Board of Directors, who in turn determine policies.
Scrutiny by the public
A nonprofit is dedicated to the public interest, therefore its finances are open to public inspection. The public may obtain copies of a nonprofit organization’s state and federal filings to learn about salaries and other expenditures. Nonprofits must be transparent in nearly all their actions and dealings.
Continue the discussion
I hope this information is helpful to you as you begin this journey. It won’t always be easy (although I will attempt to make it as simple as possible for you!), but it will be worthwhile.
I would enjoy the opportunity to be of service to you. Thank you for your time and attention. If you have any questions or concerns, please contact me. As I told you this morning, I offer anyone/everyone a free one-hour consultation. Simply reach out to me anytime via my cell, 515-371-6077, or my email, gordon@gordonfischerlawfirm.com.
https://www.gordonfischerlawfirm.com/wp-content/uploads/2018/01/rawpixel-com-423665.jpg24183804Gordon Fischerhttps://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/GFLF-logo-300x141.pngGordon Fischer2021-06-15 09:00:062021-06-08 13:25:33How to Form a 501(c)(3) Organization
At times nonprofits that share highly similar missions, goals, and the like can be consolidated to maximize impact. So, in Iowa, what’s the process of a legal merger between two nonprofits?
Definition of Terms: What’s a Merger
Like many legal terms, the word “merger” is capable of multiple definitions. A merger can mean an asset acquisition; partnership; parent-subsidiary relationship; umbrella organization; and, of course, an outright merger.
Asset Acquisition: Assets of an organization are transferred to another entity, but the organization itself is not acquired.
Partnership: A relationship in which two or more organizations pool money, skills, and/or other resources and share risk and reward, in accordance with mutually agreed-upon terms.
Parent-Subsidiary: A relationship in which two separate corporations are maintained after a merger, with one (the “parent”) being a member corporation with its only member being the other corporation (the “subsidiary”).
Umbrella: An overarching organization that holds several smaller organizations under it, each participating in the same branding and organizational structure as the umbrella, for the purpose of gaining efficiencies, improving and expanding available administrative services, and coordinating programs to better and/or more widely serve the community.
Outright merger: The process of combining two or more organizations into one organization.
The Iowa statute which governs nonprofits is known as the Iowa Revised Nonprofit Corporation Act (“RINCA”) and can be found at Iowa Chapter 504. RINCA has a specific subchapter on mergers, Subchapter XI. Here’s a list of the major sections:
504.1102 Limitations on mergers by public benefit or religious corporations.
504.1103 Action on plan by board, members, and third persons
504.1104 Articles of merger
504.1105 Effect of merger
504.1106 Merger with foreign corporation
504.1107 Bequests, devises, and gifts
RINCA Definition of Terms
RINCA continually refers to nonprofit as “corporations.” To prevent confusion, and for simplicity’s sake, I change this and refer to “nonprofits.”
Also, RINCA discusses three kinds of nonprofits: religious, mutual benefit, and public benefit.
“Religious nonprofits,” just as you would expect, refer to nonprofits with a sole or primary purpose that is religious in nature.
“Mutual benefit nonprofits” work for the betterment of a select group of members, rather than for the benefit of the public. The most obvious type of mutual benefit nonprofit is a membership organization, such as a union, business chamber of commerce, or homeowner’s association.
Most nonprofits fall into the third category — “public benefit” nonprofits. This would include nonprofits like the Girl Scouts, Red Cross, and Iowa Public Radio.
Also, RINCA repeatedly refers to “foreign” nonprofits. Foreign nonprofits are simply nonprofits organized under other state laws; states other than Iowa.
RINCA continually refers to nonprofit articles of incorporation and bylaws. Usually, in a phrase like, “Unless the articles of incorporation or bylaws provide otherwise . . . . ” RINCA very often defers to the nonprofit’s own governing documents. In that way, RINCA acts as a “gap filler,” providing rules where nonprofits’ governing documents are silent or ambiguous.
RINCA begins quite sensibly by stating that nonprofits may merge. Nonprofits may merge, IF a proper plan of merger is properly approved.
What’s a plan of merger? A plan of merger must contain all of the following:
(1) The name of the nonprofits;
(2) The terms and conditions of the planned merger; and
(3) The manner and basis, if any, of converting the memberships of each nonprofit into memberships of the surviving nonprofit.
A plan of merger may include any of the following:
(1) Any amendments to the articles of incorporation or bylaws of the surviving corporation to be affected by the planned merger.
(2) Other provisions relating to the planned merger.
Step Two: Approval of Plan of Merger
Who Approves the Plan of the Merger
Precisely who has the right or obligation to approve the plan of merger? The Iowa Code starts to answer that question with the common phrase, “unless . . . . the articles or bylaws impose other requirements . . . ” and then goes on to say: . . . a plan of merger for a corporation must be approved by all of the following to be adopted:
(1) The board
(2) The members, if any, by two-thirds of the votes cast or a majority of the voting power, whichever is less.
(3) In writing by any person or persons whose approval is required by a provision of the articles authorized by section 504.1031 for an amendment to the articles or bylaws.
OK, so of course the Board of Directors approve the plan of merger, makes perfect sense. What about (2) & (3) above?
Members’ Approval
Who are the “members”? That term, “members,” has a very specific meaning under RINCA.
RINCA defines “members” as: “Member” means a person who on more than one occasion, pursuant to the provisions of a corporation’s articles or bylaws, has a right to vote for the election of a director or directors of a corporation, irrespective of how a member is defined in the articles or bylaws of the corporation. A person is not a member because of any of the following:
(1) The person’s rights as a delegate.
(2) The person’s rights to designate a director.
(3) The person’s rights as a director.
Note, again, very unusual for RINCA, that the definition of a “member” is given by RINCA, period, irrespective of how a member is defined in the articles or bylaws of the corporation. And, under RINCA, a member is someone who has a right to vote for directors.
Third Person’s Approval
As to who approves the plan of merger, RINCA goes further, however, to include:
. . . a plan of merger for a corporation must be approved by all of the following to be adopted:
. . . In writing by any person or persons whose approval is required by a provision of the articles authorized by section 504.1031 for an amendment to the articles or bylaws.
What is this Section 504.1031? That section reads as follows:
504.1031 Approval by third persons. The articles of a corporation may require that an amendment to the articles or bylaws be approved in writing by a specified person or persons other than the board. Such a provision in the articles may only be amended with the approval in writing of the person or persons specified in the provision.
So, nonprofits looking to merge must look to their own Articles to see if any third persons must also approve the plan of merger.
How Does the Board and Members Approve the Plan of Merger
According to RINCA, there are three different ways that a plan of merger can be approved:
(1) at a membership meeting;
(2) by “written consent;” or
(3) by written ballot.
Each of these has different requirements.
Requirements for Membership Meeting, at Which Plan of Merger is to be Approved
If the board seeks to have the plan approved by the members at a membership meeting, the following requirements must be met:
(1) Notice to its members of the proposed membership meeting in accordance with Section 504.705.
(2) The notice must also state that the purpose, or one of the purposes, of the meeting is to consider the plan of merger and contain or be accompanied by a copy or summary of the plan.
(3) The copy or summary of the plan for members of the surviving nonprofit shall include any provision that, if contained in a proposed amendment to the articles of incorporation or bylaws, would entitle members to vote on the provision.
(4) The copy or summary of the plan for members of the disappearing nonprofit shall include a copy or summary of the articles and bylaws which will be in effect immediately after the merger takes effect.
What is sufficient “notice” under Section 504.705?
Under RINCA, nonprofits must give notice, consistent with its bylaws, and in a fair and reasonable manner. Helpfully, RINCA provides a description of when a notice is fair and reasonable.
Notice is fair and reasonable if all of the following occur:
(a) The corporation notifies its members of the place, date, and time of each annual, regular, and special meeting of members not more than sixty (60) days and not less than ten (10) days, or if notice is mailed by other than first-class or registered mail, not less than thirty (30) days, before the date of the meeting.
(b) Again, the notice of a meeting includes a description of the plan of merger.
(c) Again, the notice of a special meeting includes a description of the purpose for which the meeting is called, e.g., approval of the plan of merger.
Requirements for Merger is to be Approved by Written Consent
Under RINCA, nonprofits may take action by “written consent.” In other words, action by written consent refers to a person’s right to act by written consent instead of a meeting, e.g., a signed document.
Written consent can be limited or even prohibited by a nonprofit’s articles or bylaws of the corporation. Here’s a potential problem: the action must be approved by members holding at least eighty percent (80%) of the voting power. That is a high bar.
Requirements for Merger to be Approved
By Written Consent or Ballot
Whether approval by written consent or written ballot, both share some requirements. If a nonprofit seeks to have the plan of merger approved by the members by written consent or written ballot:
(1) The material soliciting the approval shall contain or be accompanied by a copy or summary of the plan of merger.
(2) The copy or summary of the plan for members of the surviving corporation shall include any provision that, if contained in a proposed amendment to the articles of incorporation or bylaws, would entitle members to vote on the provision.
(3) The copy or summary of the plan for members of the disappearing corporation shall include a copy or summary of the articles and bylaws which will be in effect immediately after the merger takes effect.
Email for Written Consents or Written Ballots
Can email be used for either written consents or written ballots? Yes! (The issue with email and written consents is the requirement of a signature; the issue of email and ballots is the “checkmark” or “X”).
Unless prohibited by the articles or bylaws, a written ballot may be delivered, and a vote may be cast on that ballot by electronic transmission. Electronic transmission of a written ballot shall contain or be accompanied by information indicating that a member, a member’s agent, or a member’s attorney authorized the electronic transmission of the ballot.
The last sentence simply means there must be an indication that the returned ballot was from the member to whom it was emailed (a block signature, etc.).
Step Three: Prepare Articles of Merger
Let’s assume a plan of merger has been approved pursuant to RINCA, specifically, Iowa Code Sections 504.1101 and 504.1103 (and the Iowa Code provisions set forth therein). Next step? Articles of merger.
The articles of merger must contain all of the following:
(1) The names of the parties to the merger.
(2) If the articles of incorporation of the survivor of a merger are amended, or if a new corporation is created as a result of the merger, the amendments to the articles of incorporation of the survivor or the articles of incorporation of the new nonprofit.
(3) If the plan of merger required approval by the members of a nonprofit that was a party to the merger, a statement that the plan was duly approved by the members.
(4) If the plan of merger did not require approval by the members of the nonprofit that was a party to the merger, a statement to that effect.
(5) If approval of the plan by some person or persons other than the members of the board is required a statement that the approval was obtained. (This is the “approval by third persons” (Section 504.1031) discussed above).
Articles of merger must be signed on behalf of each party to the merger by an officer or other duly authorized representative. (But only to be signed after the plan of merger is approved).
Step Four: File Articles of Merger with the Iowa Secretary of State
Articles of merger must be delivered to the Iowa Secretary of State for filing by the survivor of the merger. If there are other filings resulting from the merger, say, new and revised Articles of Incorporation, these may be filed as a “combined filing.”
Once the articles of merger are successfully filed, the merger is complete.
Step Five: Recognize the Legal Effect of Merger
Upon a successful merger, all the following occur:
(1) Every other party to the merger merges into the surviving nonprofit and the separate existence of every nonprofit except the surviving corporation ceases.
(2) The title to all real estate and other property owned by each party to the merger is vested in the surviving nonprofit without reversion or impairment subject to any and all conditions to which the property was subject prior to the merger.
(3) The surviving nonprofit has all the liabilities and obligations of each party to the merger.
(4) A proceeding (e.g., a lawsuit) pending against any party to the merger may be continued as if the merger did not occur or the surviving corporation may be substituted in the proceeding for the nonprofit whose existence ceased.
(5) The articles of incorporation and bylaws of the surviving nonprofit are amended to the extent provided in the plan of merger.
“Bequests, Devises, and Gifts”
An interesting side note: RINCA’s subchapter on merger contains a provision about “bequests, devises, and gifts.” Bequests are property left to someone by a decedent through his or her will. A devise is the same, only given through a trust. The term “gifts” here means “charitable gifts.”
Any bequest, devise, gift, grant, or promise contained in a will or other instrument of donation, subscription, or conveyance, that is made to a constituent corporation and which takes effect or remains payable after the merger, inures to the surviving corporation unless the will or other instrument otherwise specifically provides.
That’s really pretty great, right? So, if someone should leave property (cash, stock, bonds, real estate, whatever) through a will or trust, or just about any other way, to a “non-surviving” nonprofit after a merger with a surviving nonprofit, the property will go directly, without question, to the surviving nonprofit (unless specific instructions are left to the contrary).
Is your Iowa nonprofit considering a merger? Please contact me via email (gordon@gordonfischerlawfirm.com) or on my cell phone (515-371-6077). I’d be happy to discuss the Iowa laws on merger with you anytime. I offer a free, one-hour consultation for all.
Estate planning is all about strategy—leaving the right assets and inheritances to the right beneficiaries; timely distributions of the estate; and avoiding as many taxes and fees as possible. Another strategic move is deciding whether you and your spouse should use the same lawyer, or whether you should each have your own lawyer.
If you are married, please note you have the option of hiring separate attorneys for your estate planning needs.
Though the goals of most married persons are the same when it comes to wills, trusts, and estate planning, some married individuals (especially individuals who have children from prior marriages) have differing views on the ownership of property and beneficiaries, and naming executors, trustees, and guardians.
Likewise, some married individuals have private information they do not wish to share with their spouse — information that may be essential to the estate planning process that would have to be disclosed to the attorney and, therefore, disclosed to the spouse if I am representing both spouses.
Additionally, sometimes married individuals have “awkward” questions they wish to ask the attorney — questions they would not be comfortable asking in the presence of their spouse, such as how a divorce might affect their estate plan.
By obtaining separate attorneys, you would be able to:
share in confidence any secrets or private information with your attorney that may be important to the estate planning process;
ask in confidence whatever questions you may have; and
receive completely confidential advice and counsel.
If represented jointly, you will be waiving and losing all three of the above rights with respect to your spouse.
If you decide to obtain separate attorneys, this firm would be pleased to represent either one of you separately. If you are married and decide you would like this firm to represent both of you, then complete this Estate Plan Questionnaire jointly (please do notfill out two separate forms).
Joint Representation
For many married couples, joint representation is a likely choice. The benefits are obvious; joint representation can be cost-effective and can be more efficient since you can work together on a single Estate Plan Questionnaire in preparation to meet with the estate planning lawyer. Another advantage is that the joint representation somewhat forces open and honest communication between you as a couple as you make decisions on beneficiaries (such as children and grandchildren), executors, and disposition of property.
It’s important for your lawyer to avoid conflicts of interest, so they can uphold and respect your attorney-client privilege. If you choose to have joint representation you may waive the conflict of interest clause so that you may be represented together. Or, of course, you can seek separate legal counsel and not sign such a clause.
This communication is critical if you opt for joint representation. Without it, disaster can strike mid-meeting with the lawyer if couples disagree about which child is most responsible in terms of estate execution or how much of a trust fund each beneficiary should receive at age 18.
Individual Representation
There are times when it is best for each spouse to seek separate legal counsel. One such time is when there are different interests that are at odds with each other. For example, if one or both people have children from a previous marriage/relationship that will be named as beneficiaries. There can be conflicting interests between stepparents and stepchildren when it comes to the estate. Additionally, if you both have your own individual estate planning lawyer, you may have more freedom to voice individual concerns, without having to audit your opinions in accordance with your partner’s desires.
Have questions? Need more information? A great place to start is by downloading my Estate Plan Questionnaire, or feel free to reach out at any time; my email is Gordon@gordonfischerlawfirm.com and cell phone is 515-371-6077.
https://www.gordonfischerlawfirm.com/wp-content/uploads/2017/09/toa-heftiba-295065.jpg26243936Gordon Fischerhttps://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/GFLF-logo-300x141.pngGordon Fischer2021-06-13 09:00:102021-06-08 13:16:01Estate planning for Married Couples: Avoid Conflicts of Interest
How to Form a 501(c)(3) Organization
From Gordon's Desk..., NonprofitsImagine I’m working with a great new client named Daphne. She wants to found a nonprofit organization to assist at-risk youth in her local community and across Iowa. This is a hypothetical memo I would send to Daphne outlining the steps of what it takes to form a nonprofit in the state of Iowa. (Note, if you’re looking to form a 501(c)(3) it’s best work with a qualified attorney for advice and counsel specific to your situation and goals.)
To: Daphne Downright – SENT VIA EMAIL
From: Gordon Fischer (gordon@gordonfischerlawfirm.com)
Subject: How to Form a 501(c)(3) Nonprofit
Date: April 13, 2019
Dear Daphne:
Good afternoon! I very much enjoyed our phone conversation of this morning, where we discussed your intent to begin a nonprofit to assist at-risk youth. Certainly this is an noble mission and I have no doubt that you could make a big impact. I also acknowledge you are very busy and don’t have the time to allocate to dealing with all of the documentation. So, I’m here to take this stress off of your plate!
Let’s recap some details regarding the process for founding a nonprofit organization. These steps will set your public charity up for the best possible success.
Main Steps to a 501(c)(3)
To recap what we talked over, forming a 501(c)(3) involves four steps:
By far, the most difficult and time-consuming of the four steps is the IRS Form 1023. You should definitely review the form immediately, so you can gain a sense of the level of detail and involvement it requires.
How much does it cost?
While my regular hourly rate can go up to $300 per hour, I often have agreed with clients to perform all the legal work required to successfully begin a nonprofit for a flat fee of $4,800. I typically bill this over the span of five months, i.e., five easy payments of $980, due on, say, the first of each of the months.
Additionally, as you would expect, this matter will necessitate payment of filing fees to governmental agencies, such as the Iowa Secretary of State’s Office and the IRS. (The Iowa Secretary of State has a $20 filing fee, and the IRS 1023 Form has a $850 or $400 filing fee depending on the amount of gross revenue expectations). Of course, clients are solely responsible for payment of all such governmental fees.
How long does this take?
It usually takes a few months to pull all the paperwork together, including and especially Form 1023. I’ve had, however, ambitious clients who wanted to do it much faster, and I was able to accommodate. The flat fee includes as many conferences with me as you reasonably need for us to complete steps 1-4, above.
Benefits of Nonprofit Formation
Daphne, the benefits of a 501(c)(3) are many and include:
Tax exemption/deduction
Organizations that qualify as public charities under Internal Revenue Code 501(c)(3) are eligible to be completely exempt from payment of corporate income tax. Once exempt from this tax, the nonprofit will usually be exempt from similar state and local taxes.
Even better: if an organization has obtained 501(c)(3) tax exempt status, an individual’s or company’s charitable contributions to this entity are tax-deductible.
Eligibility for public and private grants
Nonprofit organizations can solicit charitable donations from the public. Many foundations and government agencies limit their grants to public charities.
Being able to offer donors income tax charitable deductions for donations, as well as eligibility for public and private grants, are probably the two major reasons folks want to obtain 501(c)(3) status.
Formal structure
A nonprofit organization exists as a legal entity and separate from its founder(s). Incorporation puts the nonprofit’s mission and structure above the personal interests of individuals associated with it.
Limited liability
Under the law, creditors and courts are limited to the assets of the nonprofit organization. The founders, directors, members, and employees are not personally liable for the nonprofit’s debts. There are exceptions. A person cannot use the corporation to shield illegal or irresponsible acts on his/her part. Also, directors have a fiduciary responsibility; if they do not perform their jobs in the nonprofit’s best interests, and the nonprofit is harmed, they can be held liable.
Focus your giving
With charitable giving flowing through a central nonprofit organization, and not through, say, a for-profit business, it’s easier to focus the giving on a singular mission. A for-profit business may be easily pulled away from a charitable mission by the pet causes of lots of different customers, clients, vendors, and employees. A nonprofit should be much less susceptible to such pressure.
Responsibilities of Forming & Managing a Nonprofit
Of course, there are serious responsibilities that come along with creating and running a nonprofit. These can’t be overstated, and include:
Cost
Creating a nonprofit organization takes time, effort, and money. Plus, keeping a nonprofit on track, compliant, and successful also requires great care.
Paperwork
A nonprofit is required to keep detailed records and submit annual filings to the state and IRS by stated deadlines to keep its active and exempt status.
Shared control
Although one who creates a nonprofit may want to shape his/her creation, personal control is limited. A nonprofit organization is subject to laws and regulations, including its own articles of incorporation and bylaws. A nonprofit is required to have a Board of Directors, who in turn determine policies.
Scrutiny by the public
A nonprofit is dedicated to the public interest, therefore its finances are open to public inspection. The public may obtain copies of a nonprofit organization’s state and federal filings to learn about salaries and other expenditures. Nonprofits must be transparent in nearly all their actions and dealings.
Continue the discussion
I hope this information is helpful to you as you begin this journey. It won’t always be easy (although I will attempt to make it as simple as possible for you!), but it will be worthwhile.
I would enjoy the opportunity to be of service to you. Thank you for your time and attention. If you have any questions or concerns, please contact me. As I told you this morning, I offer anyone/everyone a free one-hour consultation. Simply reach out to me anytime via my cell, 515-371-6077, or my email, gordon@gordonfischerlawfirm.com.
Warmest regards,
Gordon Fischer
Gordon Fischer Law Firm, P.C.
Make a Nonprofit Merger Happen
NonprofitsAt times nonprofits that share highly similar missions, goals, and the like can be consolidated to maximize impact. So, in Iowa, what’s the process of a legal merger between two nonprofits?
Definition of Terms: What’s a Merger
Like many legal terms, the word “merger” is capable of multiple definitions. A merger can mean an asset acquisition; partnership; parent-subsidiary relationship; umbrella organization; and, of course, an outright merger.
Asset Acquisition: Assets of an organization are transferred to another entity, but the organization itself is not acquired.
Partnership: A relationship in which two or more organizations pool money, skills, and/or other resources and share risk and reward, in accordance with mutually agreed-upon terms.
Parent-Subsidiary: A relationship in which two separate corporations are maintained after a merger, with one (the “parent”) being a member corporation with its only member being the other corporation (the “subsidiary”).
Umbrella: An overarching organization that holds several smaller organizations under it, each participating in the same branding and organizational structure as the umbrella, for the purpose of gaining efficiencies, improving and expanding available administrative services, and coordinating programs to better and/or more widely serve the community.
Outright merger: The process of combining two or more organizations into one organization.
Iowa Revised Nonprofit Corporation Act
The Iowa statute which governs nonprofits is known as the Iowa Revised Nonprofit Corporation Act (“RINCA”) and can be found at Iowa Chapter 504. RINCA has a specific subchapter on mergers, Subchapter XI. Here’s a list of the major sections:
RINCA, Iowa Code Chapter 504, Subchapter XI: Merger
504.1101 Approval of plan of merger
504.1102 Limitations on mergers by public benefit or religious corporations.
504.1103 Action on plan by board, members, and third persons
504.1104 Articles of merger
504.1105 Effect of merger
504.1106 Merger with foreign corporation
504.1107 Bequests, devises, and gifts
RINCA Definition of Terms
RINCA continually refers to nonprofit as “corporations.” To prevent confusion, and for simplicity’s sake, I change this and refer to “nonprofits.”
Also, RINCA discusses three kinds of nonprofits: religious, mutual benefit, and public benefit.
Also, RINCA repeatedly refers to “foreign” nonprofits. Foreign nonprofits are simply nonprofits organized under other state laws; states other than Iowa.
Articles of Incorporation and Bylaws
RINCA continually refers to nonprofit articles of incorporation and bylaws. Usually, in a phrase like, “Unless the articles of incorporation or bylaws provide otherwise . . . . ” RINCA very often defers to the nonprofit’s own governing documents. In that way, RINCA acts as a “gap filler,” providing rules where nonprofits’ governing documents are silent or ambiguous.
Step One to Merger: Plan of Merger
RINCA begins quite sensibly by stating that nonprofits may merge. Nonprofits may merge, IF a proper plan of merger is properly approved.
What’s a plan of merger? A plan of merger must contain all of the following:
(1) The name of the nonprofits;
(2) The terms and conditions of the planned merger; and
(3) The manner and basis, if any, of converting the memberships of each nonprofit into memberships of the surviving nonprofit.
A plan of merger may include any of the following:
(1) Any amendments to the articles of incorporation or bylaws of the surviving corporation to be affected by the planned merger.
(2) Other provisions relating to the planned merger.
Step Two: Approval of Plan of Merger
Who Approves the Plan of the Merger
Precisely who has the right or obligation to approve the plan of merger? The Iowa Code starts to answer that question with the common phrase, “unless . . . . the articles or bylaws impose other requirements . . . ” and then goes on to say: . . . a plan of merger for a corporation must be approved by all of the following to be adopted:
(1) The board
(2) The members, if any, by two-thirds of the votes cast or a majority of the voting power, whichever is less.
(3) In writing by any person or persons whose approval is required by a provision of the articles authorized by section 504.1031 for an amendment to the articles or bylaws.
OK, so of course the Board of Directors approve the plan of merger, makes perfect sense. What about (2) & (3) above?
Members’ Approval
Who are the “members”? That term, “members,” has a very specific meaning under RINCA.
RINCA defines “members” as: “Member” means a person who on more than one occasion, pursuant to the provisions of a corporation’s articles or bylaws, has a right to vote for the election of a director or directors of a corporation, irrespective of how a member is defined in the articles or bylaws of the corporation. A person is not a member because of any of the following:
(1) The person’s rights as a delegate.
(2) The person’s rights to designate a director.
(3) The person’s rights as a director.
Note, again, very unusual for RINCA, that the definition of a “member” is given by RINCA, period, irrespective of how a member is defined in the articles or bylaws of the corporation. And, under RINCA, a member is someone who has a right to vote for directors.
Third Person’s Approval
As to who approves the plan of merger, RINCA goes further, however, to include:
. . . a plan of merger for a corporation must be approved by all of the following to be adopted:
. . . In writing by any person or persons whose approval is required by a provision of the articles authorized by section 504.1031 for an amendment to the articles or bylaws.
What is this Section 504.1031? That section reads as follows:
504.1031 Approval by third persons. The articles of a corporation may require that an amendment to the articles or bylaws be approved in writing by a specified person or persons other than the board. Such a provision in the articles may only be amended with the approval in writing of the person or persons specified in the provision.
So, nonprofits looking to merge must look to their own Articles to see if any third persons must also approve the plan of merger.
How Does the Board and Members Approve the Plan of Merger
According to RINCA, there are three different ways that a plan of merger can be approved:
(1) at a membership meeting;
(2) by “written consent;” or
(3) by written ballot.
Each of these has different requirements.
Requirements for Membership Meeting, at Which Plan of Merger is to be Approved
If the board seeks to have the plan approved by the members at a membership meeting, the following requirements must be met:
(1) Notice to its members of the proposed membership meeting in accordance with Section 504.705.
(2) The notice must also state that the purpose, or one of the purposes, of the meeting is to consider the plan of merger and contain or be accompanied by a copy or summary of the plan.
(3) The copy or summary of the plan for members of the surviving nonprofit shall include any provision that, if contained in a proposed amendment to the articles of incorporation or bylaws, would entitle members to vote on the provision.
(4) The copy or summary of the plan for members of the disappearing nonprofit shall include a copy or summary of the articles and bylaws which will be in effect immediately after the merger takes effect.
What is sufficient “notice” under Section 504.705?
Under RINCA, nonprofits must give notice, consistent with its bylaws, and in a fair and reasonable manner. Helpfully, RINCA provides a description of when a notice is fair and reasonable.
Notice is fair and reasonable if all of the following occur:
(a) The corporation notifies its members of the place, date, and time of each annual, regular, and special meeting of members not more than sixty (60) days and not less than ten (10) days, or if notice is mailed by other than first-class or registered mail, not less than thirty (30) days, before the date of the meeting.
(b) Again, the notice of a meeting includes a description of the plan of merger.
(c) Again, the notice of a special meeting includes a description of the purpose for which the meeting is called, e.g., approval of the plan of merger.
Requirements for Merger is to be Approved by Written Consent
Under RINCA, nonprofits may take action by “written consent.” In other words, action by written consent refers to a person’s right to act by written consent instead of a meeting, e.g., a signed document.
Written consent can be limited or even prohibited by a nonprofit’s articles or bylaws of the corporation. Here’s a potential problem: the action must be approved by members holding at least eighty percent (80%) of the voting power. That is a high bar.
Requirements for Merger to be Approved
By Written Consent or Ballot
Whether approval by written consent or written ballot, both share some requirements. If a nonprofit seeks to have the plan of merger approved by the members by written consent or written ballot:
(1) The material soliciting the approval shall contain or be accompanied by a copy or summary of the plan of merger.
(2) The copy or summary of the plan for members of the surviving corporation shall include any provision that, if contained in a proposed amendment to the articles of incorporation or bylaws, would entitle members to vote on the provision.
(3) The copy or summary of the plan for members of the disappearing corporation shall include a copy or summary of the articles and bylaws which will be in effect immediately after the merger takes effect.
Email for Written Consents or Written Ballots
Can email be used for either written consents or written ballots? Yes! (The issue with email and written consents is the requirement of a signature; the issue of email and ballots is the “checkmark” or “X”).
Unless prohibited by the articles or bylaws, a written ballot may be delivered, and a vote may be cast on that ballot by electronic transmission. Electronic transmission of a written ballot shall contain or be accompanied by information indicating that a member, a member’s agent, or a member’s attorney authorized the electronic transmission of the ballot.
The last sentence simply means there must be an indication that the returned ballot was from the member to whom it was emailed (a block signature, etc.).
Step Three: Prepare Articles of Merger
Let’s assume a plan of merger has been approved pursuant to RINCA, specifically, Iowa Code Sections 504.1101 and 504.1103 (and the Iowa Code provisions set forth therein). Next step? Articles of merger.
The articles of merger must contain all of the following:
(1) The names of the parties to the merger.
(2) If the articles of incorporation of the survivor of a merger are amended, or if a new corporation is created as a result of the merger, the amendments to the articles of incorporation of the survivor or the articles of incorporation of the new nonprofit.
(3) If the plan of merger required approval by the members of a nonprofit that was a party to the merger, a statement that the plan was duly approved by the members.
(4) If the plan of merger did not require approval by the members of the nonprofit that was a party to the merger, a statement to that effect.
(5) If approval of the plan by some person or persons other than the members of the board is required a statement that the approval was obtained. (This is the “approval by third persons” (Section 504.1031) discussed above).
Articles of merger must be signed on behalf of each party to the merger by an officer or other duly authorized representative. (But only to be signed after the plan of merger is approved).
Step Four: File Articles of Merger with the Iowa Secretary of State
Articles of merger must be delivered to the Iowa Secretary of State for filing by the survivor of the merger. If there are other filings resulting from the merger, say, new and revised Articles of Incorporation, these may be filed as a “combined filing.”
Once the articles of merger are successfully filed, the merger is complete.
Step Five: Recognize the Legal Effect of Merger
Upon a successful merger, all the following occur:
(1) Every other party to the merger merges into the surviving nonprofit and the separate existence of every nonprofit except the surviving corporation ceases.
(2) The title to all real estate and other property owned by each party to the merger is vested in the surviving nonprofit without reversion or impairment subject to any and all conditions to which the property was subject prior to the merger.
(3) The surviving nonprofit has all the liabilities and obligations of each party to the merger.
(4) A proceeding (e.g., a lawsuit) pending against any party to the merger may be continued as if the merger did not occur or the surviving corporation may be substituted in the proceeding for the nonprofit whose existence ceased.
(5) The articles of incorporation and bylaws of the surviving nonprofit are amended to the extent provided in the plan of merger.
“Bequests, Devises, and Gifts”
An interesting side note: RINCA’s subchapter on merger contains a provision about “bequests, devises, and gifts.” Bequests are property left to someone by a decedent through his or her will. A devise is the same, only given through a trust. The term “gifts” here means “charitable gifts.”
Any bequest, devise, gift, grant, or promise contained in a will or other instrument of donation, subscription, or conveyance, that is made to a constituent corporation and which takes effect or remains payable after the merger, inures to the surviving corporation unless the will or other instrument otherwise specifically provides.
That’s really pretty great, right? So, if someone should leave property (cash, stock, bonds, real estate, whatever) through a will or trust, or just about any other way, to a “non-surviving” nonprofit after a merger with a surviving nonprofit, the property will go directly, without question, to the surviving nonprofit (unless specific instructions are left to the contrary).
Is your Iowa nonprofit considering a merger? Please contact me via email (gordon@gordonfischerlawfirm.com) or on my cell phone (515-371-6077). I’d be happy to discuss the Iowa laws on merger with you anytime. I offer a free, one-hour consultation for all.
Estate planning for Married Couples: Avoid Conflicts of Interest
Estates & Estate Planning, Wills, Trusts & EstatesEstate planning is all about strategy—leaving the right assets and inheritances to the right beneficiaries; timely distributions of the estate; and avoiding as many taxes and fees as possible. Another strategic move is deciding whether you and your spouse should use the same lawyer, or whether you should each have your own lawyer.
If you are married, please note you have the option of hiring separate attorneys for your estate planning needs.
Though the goals of most married persons are the same when it comes to wills, trusts, and estate planning, some married individuals (especially individuals who have children from prior marriages) have differing views on the ownership of property and beneficiaries, and naming executors, trustees, and guardians.
Likewise, some married individuals have private information they do not wish to share with their spouse — information that may be essential to the estate planning process that would have to be disclosed to the attorney and, therefore, disclosed to the spouse if I am representing both spouses.
Additionally, sometimes married individuals have “awkward” questions they wish to ask the attorney — questions they would not be comfortable asking in the presence of their spouse, such as how a divorce might affect their estate plan.
By obtaining separate attorneys, you would be able to:
If represented jointly, you will be waiving and losing all three of the above rights with respect to your spouse.
If you decide to obtain separate attorneys, this firm would be pleased to represent either one of you separately. If you are married and decide you would like this firm to represent both of you, then complete this Estate Plan Questionnaire jointly (please do not fill out two separate forms).
Joint Representation
For many married couples, joint representation is a likely choice. The benefits are obvious; joint representation can be cost-effective and can be more efficient since you can work together on a single Estate Plan Questionnaire in preparation to meet with the estate planning lawyer. Another advantage is that the joint representation somewhat forces open and honest communication between you as a couple as you make decisions on beneficiaries (such as children and grandchildren), executors, and disposition of property.
It’s important for your lawyer to avoid conflicts of interest, so they can uphold and respect your attorney-client privilege. If you choose to have joint representation you may waive the conflict of interest clause so that you may be represented together. Or, of course, you can seek separate legal counsel and not sign such a clause.
This communication is critical if you opt for joint representation. Without it, disaster can strike mid-meeting with the lawyer if couples disagree about which child is most responsible in terms of estate execution or how much of a trust fund each beneficiary should receive at age 18.
Individual Representation
There are times when it is best for each spouse to seek separate legal counsel. One such time is when there are different interests that are at odds with each other. For example, if one or both people have children from a previous marriage/relationship that will be named as beneficiaries. There can be conflicting interests between stepparents and stepchildren when it comes to the estate. Additionally, if you both have your own individual estate planning lawyer, you may have more freedom to voice individual concerns, without having to audit your opinions in accordance with your partner’s desires.
Have questions? Need more information? A great place to start is by downloading my Estate Plan Questionnaire, or feel free to reach out at any time; my email is Gordon@gordonfischerlawfirm.com and cell phone is 515-371-6077.