September 2, 2009
Robert Berkey
12 Lakeshore Drive
Clarksville, IN 47129
Re: Post-formation Corporate Issues at Suburban Christian Church
Dear Mr. Berkey:
You have retained this office to render a legal opinion regarding your concerns about the Trustees of the Church’s compliance with Suburban’s formative corporate documents. Upon reviewing the applicable documentation, I have concluded that your concerns have some merit. The purpose of this letter is to summarize the Trustee’s legal duties on this important topic.
Most people have heard that forming a corporation provides "limited liability" -- that is, it limits your personal liability for business debts. However, there is more to creating and running a corporation than filing a few papers. You will need to keep good records to handle the more complicated corporate tax return and, in order to retain your limited liability, you must follow corporate formalities involving decision making and record keeping. In short, the board has to be organized. If members treat the corporation as an extension of their personal affairs, they run the risk of personal liability.
Directors and officers owe a corporation and its members the basic fiduciary duties of care and loyalty. They may not engage in conduct that will either harm the corporation or breach its trust. They are required to act diligently and prudently in managing the corporation's affairs, to pay attention and to inform themselves, actively to participate in board discussions, and to use reasonable and independent judgment. With respect to honoring corporate documents, these duties can be broken down as follows:
1. Corporate Oversight. Directors are responsible for all aspects of the corporation’s operations. In properly fulfilling their duties as directors, they must:
· ensure the objects of the corporation are properly carried out
· ensure the corporation does not undertake activities outside its corporate objects
· provide adequate authority for the activities that the corporation does undertake
· set long-range objectives and strategic plans for the corporation
· ensure the corporation’s financial stability and overall performance
· hire and supervise management and staff to do the day-to-day work of the corporation
2. Duty of Care. Directors of a not-for-profit non-charitable corporation are held to a common law subjective standard of care:
· directors need to ask: what level of skill and care can reasonably be expected from a person with my knowledge and experience?
· the standard is different depending on the director’s knowledge and experience (eg. lawyers, accountants)
· however, the minimum expectation would be the level of care expected from a “reasonably prudent person”
3. Corporate Authority. A corporation’s authority is defined by the corporate objects set out in its Articles of Incorporation, Bylaws, and other governing documents. Generally speaking:
· the activities of the corporation can only be undertaken within the parameters of the corporate objects
· where directors act outside the scope of their authority contained in the governing documents by undertaking activities that are outside the authority of the corporation’s objects, they may be found potentially liable for the consequences of such decisions or actions
· such potential liability for lack of corporate authority arises under the common law, tort,
contract and statute
· where necessary, amendments to the governing documents should be made by the corporation
In some circumstances, courts can rule that a corporation does not really exist and that its owners should not be shielded from personal liability for their acts. On the positive side, restoring Suburban’s corporate compliance may not be as difficult as it sounds. If the Trustees would like us to answer questions regarding any point made in this letter, we would gladly oblige. In any case, I trust they will now pay closer attention to your stated concerns.
Sincerely,
George W. Cochran
