STATE ASSOCIATION GOVERNANCE - NATA
STATE ASSOCIATION GOVERNANCE
Incorporation (Tax Exempt ( Status Antitrust Laws ( Record Retention
Insurance Needs ( Legal Counsel
Incorporation
Because state athletic training organizations are not governed by NATA, they may want to consider incorporation. Incorporation creates an artificial legal entity composed of individual members but having its own existence apart from its members for purposes of organization, operations, liability, longevity, and holding property.
Benefits of incorporation
An incorporated nonprofit association has most of the advantages of an incorporated business enterprise. When an association is not incorporated, the individual members, directors, or officers of the group may be held personally liable for the activities of the organization. If a legal claim is brought against an unincorporated nonprofit association that results in a legal judgment against the group, the personal assets (such as houses or cars) of the individual members, directors, or officers may be used to pay the judgment. Incorporation acts as a liability shield in most instances unless the member, director, or officer is involved in the wrongdoing.
Incorporation protects association members from personal liability for association obligations and from liability if association directors, officers, or staff violate the law in working on behalf of the group. As an example, NATA and state athletic training organizations may engage in grass roots efforts. An advocacy initiative could draw one of our associations into an unwanted lawsuit. Incorporating can support directors and officers in defending the lawsuits and protect them from personal liability.
Furthermore, incorporated nonprofit associations are often viewed as more credible. Many groups find that the government and other industry groups take them more seriously if they are incorporated.
By comparison, unincorporated associations have no separate existence of their own. Although they are not subject to any reliable set of governing rules, it is within the government’s discretion to hold unincorporated associations to the same standards applied to incorporated entities.
Other factors of relevance
Some legal and practical aspects of associations are not affected by the legal status of the entity. For example, the tax status of an association is unrelated to incorporation. Tax status is determined by the organization of an association: (1) whether it is organized as a nonprofit or a for-profit; (2) the type of revenue received; and (3) the activities engaged in. Nonprofit, tax-exempt benefits are granted to qualifying incorporated and unincorporated associations alike.
Incorporation has no bearing on the application of antitrust laws to associations. Violations of the antitrust laws can be alleged against association members and against the association itself, regardless of the legal status of the entity.
Individual members who engage in certain wrongful acts, such as negligent conduct, can also be held personally liable for their acts even though the association is incorporated.
Employment standards, discrimination laws and requirements concerning withholding of income taxes for employees apply to associations whether incorporated or not.
Finally, when state and local taxation is levied upon an association, it is usually unaffected by the group’s corporate status.
Those organizing an association or considering incorporating one should weigh the positive and negative points of incorporation. In most instances, the advantages will outweigh the disadvantages.
Steps to incorporate
Associations can elect to become legal corporations at the time they are organized or after they
have been in existence for a number of years. When an association seeks incorporation, a comprehensive plan for what the association will be – and what it will be doing – should be formulated and documented. Here are some of the procedural issues and steps.
1. The place of incorporation must be chosen (usually the state in which the association will conduct its business).
2. The individuals who will act as incorporators must be identified.
3. The association name, purposes, membership, dues, budgets, and similar matters should be determined and articulated in writing at the outset.
4. The governing documents of the association must be drafted and adopted. (These are the articles of incorporation, bylaws and, if desired, some other association policy and procedures document.)
Articles of Incorporation and Bylaws
Articles of incorporation serve as an agreement between the organization and the state in which the organization incorporates. Articles of incorporation establish the legal basis for an association’s separate corporate existence. (Articles must be filed and approved by the proper state office and appropriate fees paid before the articles become effective.) By approving the articles, the state grants individual legal status to the association. In return, by virtue of the articles, the association has agreed to abide by the state’s rules governing corporate operations.
Articles of incorporation need to be as general as possible while accurately and adequately providing for organization and governing. This is because state legal requirements for amending the articles can be burdensome and time-consuming to fulfill. For example, amending articles may require a majority or two-thirds vote of the membership, which takes time and money to obtain. Amendments would most likely have to be filed and approved by the proper state office just as the original articles were, which may involve legal fees. Consequently, articles of incorporation should be concise. Include detailed provisions in bylaws or in another association policy and procedure document that is more easily amendable.
An association should have at least two principal concerns in preparing or revising articles of incorporation. First, the purpose of the group should be clearly described – this is important for both tax and antitrust reasons. Secondly, at least minimal guidelines of the organization and governing of the association should be stated in the articles.
Articles are the primary law of the association. They are used to establish the general organization and governing of the association. Bylaws – the secondary law of the association – are rules adopted and maintained to define and direct an association’s internal structure and management. Bylaws complement an association’s articles of incorporation and are used to detail how the association is structured and how it is to be run.
State law determines how to form a nonprofit corporation. Accordingly the requirements for what provisions must be included in the articles of incorporation, the agency and the filing fee differ from state to state. States usually provide a sample format, instructions and related information for drafting articles of incorporation. Most are available online at .
Although not all states require them for incorporated or unincorporated associations, a nonprofit organization should have bylaws because of their usefulness in management operations.
Bylaws may be viewed as constituting the terms of an agreement between an association and its members. The agreement will ordinarily be honored and enforced in a court of law. Bylaws describe the relationships, and the rights and obligations of members, directors, officers, and staff. Procedures for election of directors, admission of members, signature authority, and other important points of governance are set forth in the bylaws.
Bylaws provide the ground rules for how the association will be run, and can be invaluable in avoiding or resolving differences among those who are part of the association or who deal with it. For all of these reasons, bylaws are well worth the effort involved in adopting, reviewing and updating them when necessary.
Once a state (or district) association is incorporated, an organizational meeting should be held during which officers are elected, bylaws are approved, and other start-up activities are undertaken.
Tax Exempt Status
Every state association should qualify as a tax-exempt “business league” under Section 501c(6) of the Internal Revenue Code. This means that once application is made and the IRS has determined the organization is tax exempt, the organization may, in general, realize and accumulate income without the burden of federal income taxes. Tax-exempt status is regarded by the government as an exception to the norm. To maintain exempt status under the tax laws, associations must comply with IRS rules governing exemptions at all times.
A 501(c)(6) tax-exempt organization must possess and maintain the following characteristics:
1. It must be an association of persons having some common business interest and its purpose must be to promote this common business interest;
2. It must be a membership organization and have a meaningful extent of membership support;
3. It must not be organized for profit;
4. No part of its net earnings may inure to the benefit of any private shareholder or individual;
5. Its activities must be directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons;
6. Its primary activity does not consist of performing particular services for individual persons; and
7. Its purpose must not be to engage in a regular business of a kind ordinarily carried on for profit, even if the business is operated on a cooperative basis or produces only sufficient income to be self-sustaining.
Associations should seek professional counsel to ensure compliance with applicable tax laws and regulations. This is especially important for lobbying activities and expenditures.
The association may, however, still be subject to federal income taxes when it realizes income from activities not related to the purpose for which the tax exemption was originally granted. This is called “unrelated business income tax” (often referred to as “UBIT”). Such a tax, for example, is imposed on net revenues for advertising placed in association publications.
A tax-exempt association, depending on the tax laws of the jurisdiction where it is located or organized, may be required to pay local taxes on real estate or personal property and other taxes. Although 501C(3) charitable entities are exempt from taxes on goods and services, 501C(6) organizations, like the state associations, must pay sales tax.
Donations to 501(c)(6) organizations are not tax-deductible as charitable contributions, although dues or member fees may be tax-deductible if they qualify as ordinary and necessary business expenses.
To obtain recognition as a tax-exempt organization, the association must file IRS Form 1024. Once the tax exemption has been granted, the association must file IRS Form 990 each year unless its annual gross receipts are less than $25,000. Associations with UBIT in excess of $1,000 must also file IRS Form 990-T.
Antitrust Laws
The purpose of antitrust laws is to promote free competition. These laws have been described as the rules by which the game of business is played. Following is a brief summary of antitrust laws as they relate to association organization and operation.
The Sherman Act prohibits contract combinations and conspiracies in restraint of trade. It also prohibits monopolization and attempts and conspiracies to monopolize. The Act is enforced by the U.S. Department of Justice, state attorney general offices and private persons.
The Federal Trade Commission Act sets down broad prohibitions against unfair competition and unfair or deceptive acts or practices. It establishes the Federal Trade Commission, a governmental agency empowered to administer and enforce the Act.
The Clayton Act contains specific prohibitions against price discrimination, exclusive dealing arrangements, corporate acquisitions and interlocking directorates.
Antitrust laws apply to both national and state associations and their members just as they do to any other group of persons or firms. Consequently, association activities are judged by the same antitrust standards as other entities.
Antitrust concerns are important for nonprofit organizations, especially business and professional organizations. When competitors join together to set standards, operate certification programs, provide guidelines for industry operations, or simply discuss common problems, the federal government grows suspicious of opportunities for price fixing, group boycotts, and other antitrust violations.
To avoid antitrust problems, nonprofit organizations must educate their leadership and their members about the risks involved in certain activities. Knowledgeable legal counsel or staff should be present when competitors get together to discuss business issues. Legal counsel should review meeting minutes to prevent activities that might give rise to antitrust liability. It is wise to err on the side of caution to avoid investigation by the Department of Justice or the Federal Trade Commission.
Record Retention
All associations, whether national or state, are required to maintain a number of records and files. This is best addressed by a record retention policy. Generally, records should be retained until all pertinent federal and state statutes have expired.
Any record retention policy or program should begin with a cataloging of the items which the organization is required by law to retain. These laws vary from state to state. State nonprofit incorporation laws often stipulate which documents must be retained.
Financial records, minutes, and lists of members’ names and addresses usually must be kept indefinitely. The IRS and other regulatory entities specify how long tax and employment records must be retained. The IRS specifically requires organizations that have federal income tax exempt status to maintain records (usually for seven years) and to make them available for inspection by IRS agents.
Association contracts, insurance policies, deeds, leases, trademark or patent registration certificates and similar documents should be maintained while they are in effect and for a period of time after they expire in order to protect the rights of the association under the documents. Claims based on these types of documents made after a certain number of years specified in applicable statute of limitations are not likely to be successful.
In the antitrust arena, once an association has any knowledge of an investigation by the federal or state governments in which antitrust law violations are being considered, great caution should be exercised before any association files or records are destroyed, lest the association be accused of obstructing justice.
Assuming that retention of a particular document is not required by law, an association need not retain the document beyond its usefulness.
Insurance Needs
Virtually all areas of association activity or involvement could be made the basis of some type of claim by a company or individual that considers itself or himself harmed by the association or its officers or directors. State associations should consult legal counsel and insurance advisors to determine appropriate coverage.
State associations should obtain a comprehensive general liability policy that pays defense costs and damages for claims involving bodily injury or property damage that the insured would be legally obligated to pay due the insured’s negligence. Discussions about insurance needs should include whether protection is needed for serving alcohol and for providing transportation.
Directors and officers’ liability insurance is intended to protect the directors and officers of the association against claims alleging a breach of duty to the association. Coverage varies based on carrier but these types may involve adverse employment actions, harassment, discrimination, antitrust, defamation, libel and slander. (Claims alleging bodily injury or property damage are excluded by this form of insurance.) In addition to the directors and officers of the organization, most nonprofit D&O policies cover employees, the entity itself and in many cases volunteers acting at the direction of the association.
State associations may consider fidelity bonding for officers or employees who handle funds or property for the association. This type of bonding covers dishonest acts of individuals in these positions.
Legal Counsel
To prevent problems, legal counsel should be utilized when preparing documents to be filed before state and federal regulatory entities or when developing association policy and procedures. Legal counsel can provide guidance on incorporation, antitrust issues, and tax exemptions.
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