Chapters may choose to operate as an incorporated or unincorporated entity. It is strongly recommended that chapters incorporate since this option provides the most legal protection from personal liability. The following discussion outlines the various legal rights associated with chapter incorporation as well as details about unincorporated status.
A corporation is recognized as a separate legal entity that is distinct from its members. One of the most significant and compelling reasons for incorporating is to protect association members from personal liability for association obligations. Most not-for-profit corporate statutes permit not-for-profit corporations to indemnify its directors and officers against liability and expenses arising out of claims or proceedings if the director or officer acted in good faith and in a manner reasonably believed to be in the best interests of the corporation. Many indemnification statutes permit a corporation to purchase insurance to provide such indemnification.
A corporation may have perpetual existence so that changes in membership affect either its continuity nor its right to retain assets and records.
Many states have adopted comprehensive and workable statutes for the operation of not-for-profit corporations. These statutes generally provide for a more orderly administration of the corporation’s affairs and clearer lines of authority.
Incorporation is psychologically desirable, because individuals and firms are used to dealing with corporations and their formal structure and stability.
Not-for-profit corporation statutes require corporations to comply with formalities to which unincorporated associations are not subject. Although requirements can involve additional expenses, they are not a significant financial burden.
Articles of incorporation must be filed with the proper state agency in the state of incorporation. It is not necessary to incorporate in the state in which most activities take place, but it is advised. Doing so avoids the additional expense and administrative burden of qualifying to do business as a foreign not-for-profit corporation.
Articles of incorporation confer the chapter’s corporate existence. Although state requirements vary, generally the articles state: chapter name, statement of purpose, duration of existence, initial board of directors, principal place of business, location of registered office, name of registered agent and a statement regarding rights granted to different classes of members. The articles must also comply with federal tax laws.
To avoid confusion, references to the American College of Surgeons should indicate the status of the chapter as a separate and distinct legal entity. Legal counsel must always be used when drafting and filing these articles to ensure compliance with state laws.
A chapter must also adopt bylaws that govern its internal affairs. The bylaws must be consistent with the articles of incorporation and state law. See Appendix C for a set of sample bylaws.
The legal attributes of an unincorporated association are not precise because the relationship of an association, its members and the public has not been well defined in most states either by statute or court decision. In some instances an association will be treated as a separate legal entity but more often it is regarded as a membership partnership.
Individuals acting on behalf of an unincorporated chapter may be held personally responsible for the activities of the chapter. Whether an unincorporated association can indemnify its directors and officers and to what extent and under what circumstance is unclear.
An unincorporated association may also choose perpetual existence in its articles of association, but lack of clear legal guidelines on this subject creates uncertainties in many states.
Few states have statutes that govern unincorporated associations those that do provide inadequate or incomplete guidelines. Moreover, it is often unclear which jurisdiction’s laws apply to the association and its members.
If a chapter chooses to organize as an association, it should draft articles of association and bylaws. Although these documents may not be required by state law, they will be required by the IRS. As there is no statute governing unincorporated associations, articles of association must be more extensive and detailed than articles of incorporation.
The articles of association should include:
- The organization’s purposes and powers
- Qualifications and rights of members and the manner of electing and expelling members
- By whom and how the organization shall be managed
- The relationship between those who manage the organization and disposition of assets
- Provisions for meetings of management and members
- Provisions for liquidation and dissolution of organization and disposition of assets
- Procedure for adopting and amending articles of association
- Association’s perpetual existence despite death or withdrawal of any members
- Principal place of business and state whose laws govern operations
Note: If a chapter does not incorporate it does not relieve a chapter of its responsibility to obtain a determination of its tax-exempt status from the IRS, nor does it affect the requirement that the chapter file Form 990 with the IRS.
