Common Nonprofit Corporation Formation Mistakes

by Richard Keyt, Arizona nonprofit corporation attorney

I am an Arizona business law attorney who has formed 9,870+ Arizona nonprofit corporations and limited liability companies since I started counting in 2001. I wrote this article because time and time again people who form a do-it-yourself nonprofit corporation or who hire a document preparer (licensed or unlicensed) to form the Arizona charitable organization contact me because of formation problems. The following is my list of the most common mistakes people who are not nonprofit corporate lawyers make when they create an Arizona not for profit corporation. The mistakes are not listed in any particular order.

The best way to avoid all of the mistakes is to hire me to form your Arizona nonprofit corporation for $1,297 by submitting my online formation questionnaire.

1. For Corporations Whose Known Place of Business is not in Maricopa or Pima County: Failure to publish the Articles of Organization in a newspaper approved by the Arizona Corporation Commission. Arizona Revised Statutes Section 10-3203.D states: “Within sixty days after the commission approves the filing, a copy of the articles of incorporation shall be published unless the corporation’s known place of business is in Maricopa or Pima County. An affidavit evidencing the publication may be filed with the commission.” Although Arizona law no longer requires the corporation to file proof of newspaper publication with the Arizona Corporation, the failure to publish the Articles of Incorporation as required by Arizona law means that the corporation was not validly formed, and the ACC will terminate its existence if it becomes aware of the failure to publish. I recommend that the corporation obtain an affidavit of publication and file it with the ACC so that proof of publication will be on the public record.

2. Publishing the Articles of Incorporation in a newspaper in a county other than Maricopa County. Arizona law requires the corporation’s Articles of Incorporation to be published in a newspaper of general circulation in the county of the corporation’s known place of business for three consecutive publications. See Arizona Revised Section 10-3203.D and Section 10-140.41. If the person who prepares your corporation’s Articles of Incorporation inserts an address in the document that states the corporation’s place of business in Arizona is outside of Maricopa or Pima County it could cost your corporation $400 or more of unnecessary publication fees. In the spring of 2012 we published the Articles of a nonprofit organization that had its business address in Yuma County, which has only one ACC approved newspaper that routinely rips off the people of Yuma County for excessive publication fees. The paper charged us $585 after giving a 10% charity discount to publish what the Arizona Capital Times would have published in Maricopa County for $85. Solution for out of Maricopa & Pima County nonprofit corporations: Adopt a temporary office in Maricopa or Pima County so you can put in the Articles of Incorporation that the corporation’s address is in Maricopa County or Pima County. You then publish the Articles in Maricopa County or Pima County, then file a change of address form with the Arizona Corporation Commission to change the address to where you want it to be.

3. Failure to Have a Minimum of Three Members on the Board of Directors. Arizona nonprofit law requires that nonprofit corporations have at least one member of the Board of Directors. However, if your nonprofit corporation intends to become a tax-exempt charity the IRS requires that the corporation have at least three members who are not related. If the Board has related Directors such as a husband and wife or siblings or parent and child, then the Board of Directors would have to have a minimum of five members three of who could not be related to the related pair. For example, if the corporation has a three member Board that includes a husband and wife, the IRS will reject its application to be a tax-exempt charity because the husband and wife would have control of the nonprofit corporation. The IRS does not want charities to be controlled by a person or group.

4. Failure of the Board of Directors to hold an organizational meeting. Arizona Revised Statutes Section 10-3205 states: “After incorporation the board of directors shall hold an organizational meeting at the call of a majority of the directors to complete the organization of the corporation by appointing officers, adopting bylaws, and carrying on any other business brought before the meeting.” This meeting is required by Arizona law. The board of directors of all new Arizona nonprofit corporations must hold an organizational meeting and appoint officers and adopt Bylaws. The failure of the board of directors to have this meeting subjects them to liability for breach of fiduciary duty and damages. If your corporation did not hold this meeting, do it now and document the meeting with minutes or an Action by Unanimous Consent. The failure to hold the organizational meeting could also be used by a court to pierce the corporate veil and hold the directors and officers personally liable for the debts of the corporation.

5 Failure of the Board of Directors to Appoint Officers. The officers of the corporation are the President (required), Vice-President, Secretary and Treasurer. The latter three officers are optional. Every Arizona nonprofit corporation must have at least one officer, i.e., a President. Arizona Revised Statutes Section 10-3840.A states “A corporation shall have the officers described in its articles of incorporation or bylaws or appointed by the board of directors in accordance with the articles of incorporation or bylaws.”

6. Failure of the Board of Directors to adopt Bylaws. Arizona Revised Statutes Section 10-3205 requires the board of directors to adopt Bylaws. Bylaws are not optional. The nonprofit corporation must have Bylaws not only because Bylaws are required by Arizona law, but because the Bylaws are the internal governing rules of the corporation. The Bylaws set forth how the board of directors and the officers will be selected and their duties. Without Bylaws there are no rules for governing the corporation.

7. Misunderstanding that the nonprofit corporation is a tax-exempt organization. The mere fact a corporation is formed as an Arizona nonprofit corporation does not mean it does not have to pay federal and state income taxes. To be a tax-exempt organization, the nonprofit corporation (unless it is a bona fide church) must file an IRS Form 1023, 1023EZ or 1024, pay the filing fee and obtain a tax-exempt letter from the IRS.

8. Failure of the Board of Directors to hold an annual and special meetings. Although Arizona nonprofit corporation law does not require that the board of directors hold annual or special meetings in my opinion as a business lawyer who has formed 9,300+ Arizona companies it is a big mistake not to do so. The board of directors has the legal obligation to run the nonprofit corporation. Directors have fiduciary duties to the corporation. The failure to hold regular meetings and document important action taken or to be taken by the corporation can lead to conflicts among board members, litigation, holding board members liable for the debts of the corporation and other bad things.

9. For Tax-Exemption Nonprofit Corporations Only: Failure to Include Language in the Articles of Incorporation Required by the IRS. If you want your Arizona nonprofit corporation to be a tax-exempt charitable organization do not form the corporation with the Arizona Corporation Commission’s form Articles of Incorporation. If you use the ACC’s form, the IRS will reject the corporation’s application to become a tax-exempt charity because the ACC’s form Articles of Incorporation lacks the text required by the IRS.

10. For Tax-Exemption Nonprofit Corporations Only: Failure of the Board of Directors to adopt the four policies the IRS likes the nonprofit corporations to have. The IRS strongly recommends that every tax-exempt organization that files IRS Form 990 adopt the following four policies: Conflicts of Interest Policy, Whistle Blower Policy (recommended to avoid violating criminal provisions of the federal Sarbanes Oxley law), Document Retention & Destruction Policy (recommended to avoid violating criminal provisions of the federal Sarbanes Oxley law) and a Joint Venture Policy, Gift Acceptance Policy, Travel & Expense Reimbursement Policy, Compensation Policy and . All tax-exempt organizations must file an IRS Form 990-N (when annual receipts are $25,000 or less), IRS Form 990 or 990-EZ (when annual receipts are more than $25,000) or IRS Form 990-FP (foundation). IRS Form 990 asks the organization if it has adopted each of the above policies. The following text are actual questions asked in Part VI.B of the 2020 IRS Form 990, the corporation’s annual Return of Organization Exempt for Income Tax:

12a Did the organization have a written conflict of interest policy?

12b Were officers, directors, or trustees, and key employees required to disclose annually interests that could give rise to conflicts?

12c Did the organization regularly and consistently monitor and enforce compliance with the policy?

13 Did the organization have a written whistleblower policy?

14 Did the organization have a written document retention and destruction policy?

15 Did the process for determining compensation of the following persons include a review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision?

16 Did the organization invest in, contribute assets to, or participate in a joint venture or similar arrangement with a taxable entity during the year? If “Yes,” did the organization follow a written policy or procedure requiring the organization to evaluate its participation in joint venture arrangements under applicable federal tax law, and take steps to safeguard the organization’s exempt status with respect to such arrangements.

Many knowledgeable people believe that a tax-exempt organization that lacks any of these policies has a higher risk of IRS scrutiny and risk of audit.

When we form a nonprofit corporation that intends to become a tax-exempt charity we also prepare the above four policies and three additional policies, which are:

Executive Compensation Policy
Gift Acceptance Policy
Travel and Expense Reimbursement Policy

Questions about Arizona Nonprofit Organizations?

If you have any questions about Arizona nonprofit corporations call me, Arizona nonprofit attorney Richard Keyt at 480-664-7478 or send me an email at [email protected]. I don’t charge for questions about forming Arizona nonprofit corporations.

How to Hire the Keyts to Form Your Nonprofit Corporation for $1,297

We form new Arizona nonprofit corporations within 24 hours of getting all of your information, getting paid and the president digitally signing the DocuSign version of the Articles of Incorporation that we email to the president.

To hire Arizona nonprofit lawyer Richard Keyt and his son former CPA and nonprofit attorney Richard C. Keyt to provide 28 services, prepare up to 16 documents and form your Arizona nonprofit corporation for $1,297 (including all costs: $75 ACC expedited filing fee, $100 corporate minute book & seal and $10 postage) select one of the following options:

Option 1: Phone Method: Give us your information over the phone.

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Common Nonprofit Corporation Formation Mistakes (2024)