Last Updated: October 2013
RHODE ISLAND FORMS OF ORGANIZATION
Adler Pollock & Sheehan PC
Susan Leach DeBlasio, Steve Geanacopoulos, Hans Lundsten,
and John Russell
Table of Contents
1. Nonprofit Corporations
2. For-Profit Corporations
3. Limited Liability Companies
4. Low Profit Limited Liability Companies
5. Joint Ventures
6. Partnerships, Limited Partnerships and Registered Limited Liability Partnerships
7. Sole Proprietorships
8. New Forms of “Hybrid’ Organizations
9. Resources
The most common legal form of organization utilized by the social sector is the nonprofit
corporation although for-profit corporations, limited liability companies, joint ventures and
various kinds of partnerships, including limited partnerships, are increasingly being used-typically to accommodate plans to earn revenues or access capital markets. Each of these forms
of organization has advantages and disadvantages and sometimes, with the help of experienced
counsel, they are used in combination to maximize strengths and minimize weaknesses of a
particular form. The following chart provides a high-level overview of various organizational
forms that can be used in the social sector. More detailed descriptions of each form follow in the
subsequent text.
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Nonprofit
501(c)(3)
Corporation
For-Profit
Corporation
Formation
File articles or certificate
of incorporation
(containing specific info
required by IRS) with
state and pay filing fee.
File application on Form
1023 with IRS for taxexempt status unless the
entity’s normal gross
receipts are not more than
$5,000 and the entity is
not a private foundation.
Recruit directors, draft
bylaws and hold
organizational meeting.
Take steps to comply with
license, tax and
employment law/regs. and
state solicitation rules.
File articles or certificate
of incorporation with state
and pay filing fee. Decide
on board of directors,
draft bylaws, hold
organizational meeting
and issue stock. Take
steps to comply with
license, tax and
employment laws/regs.
Management and
Control
Liability
Managed by directors Members, directors,
who appoint officers officers and employees
to run day-to-day
are generally not liable
operations as specifiedfor debts and
obligations of the
in bylaws. Some
nonprofit corporations corporation, including
have members (like for unlawful acts of
others involved in the
shareholders) who
affairs of the
elect directors.
corporation. They can
be held liable for
injuries due to their
own misconduct but
some states provide
limited immunity to
such persons and also
to volunteers.
Managed by the
shareholders or by
directors that are
elected by
shareholders.
Directors appoint
officers to run dayto-day operations as
specified in bylaws.
Shareholders are
generally not liable for
debts and obligations
of the corporation,
including for unlawful
acts of others involved
in the business. Unless
indemnified by the
corporation, directors,
officers and employees
can be held liable for
injuries caused by their
own acts or failures to
act.
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Tax Factors
Generally exempt
from federal and
state taxes if receive
501(c)(3) exemption.
Liable for tax on
unrelated business
income, and other
taxes such as
property and sales
(unless local and
state exemptions
apply). Donors can
deduct contributions
Capital and Loans
Can accept charitable
donations and grants.
Eligible for program
related investments
(PRIs) by foundations.
Can borrow money and
issue debt instruments
but cannot raise capital
by issuing stock.
A C Corporation is
subject to corporate
tax on net income. If
net income is paid to
shareholders as
dividends, the
individual
shareholders are
taxed. If a
corporation elects to
be a S corporation
and meets several
criteria, it can
receive “pass
through” taxation but
it is still subject to
the Rhode island
minimum corporate
tax of $500.
Can raise capital by
issuing stock (equity) and
by borrowing money
through loans or other
debt instruments.
Corporation may be able
to accept PRIs from
foundations in the form
of loans or equity.
Management and
Formation
Control
Liability
See for-profit
B Corp (a for- See for-profit corporation See for-profit
corporation. The B corporation.
profit
Corp license requires
corporation
the corporation to
with a social
incorporate specific
mission that is
socially beneficial
licensed to use
performance
the trade name
standards into its
“B
governing
Corporation”)
documents and
operating principles.
LLC
File articles of
organization or certificate
of formation with state
and pay filing fee.
Negotiate and execute
operating agreement. Take
steps to comply with
license, tax and
employment law/regs.
Flexible structure
Same as a corporation.
like a partnership
with management
responsibilities
specified in
operating agreement
(usually
management
committee or single
manager).
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Tax Factors
See for-profit
corporation.
Capital and Loans
See for-profit
corporation. A B Corp
should be in a better
position to attract PRIs
from foundations in the
form of loans or equity.
Usually not taxed as
an entity because
most LLCs choose
“pass through”
treatment whereby
the member/owners
report profits and
losses on personal
tax returns but would
be subject to the
Rhode Island annual
minimum corporate
tax of $500 and
obligated to withhold
Rhode Island tax
non-resident
members share of
Rhode Island source
income . Taxexempt
member/owners treat
their share of income
as exempt or subject
to unrelated business
taxable income,
depending on the
character of the
income.
Can raise capital through
contributions by
member/owner.
Otherwise, same as forprofit corporation.
Management and
Formation
Control
L3C (low-profit Similar to LLC but must See LLC
be formed for a charitable
LLC)
or educational purpose.
Only permitted in certain
states (e.g., VT, IL,
MI,UT,ME, RI, WY)
Liability
Same as a corporation
Tax Factors
See LLC.
Capital and Loans
Same as for-profit
corporation except L3C
enabling legislation is
written to comply with
PRI regs and is thus
intended to attract equity
or debt investments by
foundations.
No filing requirements
Partners have equal, Partners are personally Generally not taxed Can raise capital through
Partnership
unless limited partnership full control unless
liable for the debts and as an entity. Partners contributions by partners
(LP) or limited liability
otherwise specified obligations of the
report profits and
and by borrowing money
partnership (LLP), but
in partnership
partnership, including losses on personal
through loans or other
partners should sign
agreement.
for unlawful acts of
tax returns.
debt instruments.
partnership agreement.
other partners and
Take steps to comply with
employees. Risk can be
name, license, tax and
limited by creating an
employment law/regs.
LP or LLP.
Owner has full
Owner is liable for all Not taxed as an
Owner provides funds for
Sole Proprietor No filing requirements.
Has no legal existence
control.
debts and obligations, entity. Owner reports capital investment and
apart from owner. Take
including for unlawful business profits and owner can borrow money
steps to comply with
acts of employees.
losses on personal
through loans or other
d/b/a name, license, tax
tax return.
debt instruments.
and employment law/regs.
1. Nonprofit Corporations
a. Overview
The Rhode Island Nonprofit Corporation Act governs the formation, operation and
dissolution of nonprofit corporations in the state of Rhode Island. The statutory
provisions are set forth at Rhode Island General Laws §§ 7-6-1 through 108. A nonprofit
corporation in Rhode Island is managed by its board of directors and operated by its
officers and employees. Instead of shareholders, a nonprofit corporation may, but is not
required to, have members. Nonprofit corporations, of course, are specifically organized
not to earn profits. No part of the income or surplus of a Rhode Island nonprofit
corporation may be distributed to its members, directors or officers; reasonable
compensation, however, may be paid for services rendered.
A nonprofit corporation has an existence of its own, independent of the terms of office or
employment of members, directors, or officers. It can sue or be sued in its own name and
can own real estate in its own name.
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b. Advantages of Incorporation: pros and cons of nonprofit vs. for-profit
The principal advantage of incorporation is that it protects the shareholders or members
from personal liability for the obligations and liabilities of the corporation, including
unlawful actions of officers, directors, and staff acting on its behalf. In addition,
incorporation establishes continuity; corporations (both nonprofit and for-profit) are
subject to a body of statutes that provide very specific guidance as to their formation and
operation; and incorporation brings stature to the organization and implies stability.
Where profit is not a goal, and the enterprise can be funded without the need for access to
capital markets, the nonprofit corporation is the preferred vehicle for pursuing social
objectives. Although nonprofit corporations are not prohibited from engaging in
commercial activities, the directors of a nonprofit corporation are duty-bound to devote
primary attention to the promotion of the social mission of the corporation rather than the
production of net income.
On the other hand, if access to capital markets is needed, a for-profit corporation (or
limited liability company, discussed below) is likely to be the preferred option because
nonprofit corporations cannot issue capital stock. The directors of a for-profit
corporation, however, owe strict duties to the shareholders to maximize profits and value.
Unless the directors and managers can tie the social mission of their for-profit
corporation directly to its business purpose, therefore, they can be sued for breach of their
duties to shareholders and for misuse of corporate assets if they focus too much on the
social mission and forego profits. This problem can be avoided where all shareholders
agree to pursue a social mission or devote a percentage of revenues to charitable causes,
but such agreements may be temporary because a change in control—or a drop in
earnings—can lead to amendment or abrogation of shareholder agreements.
c. Formation
A nonprofit corporation attains its separate legal status through the filing and approval by
the Rhode Island Secretary of State of its articles of incorporation. This document is in
essence a contract between the state and the nonprofit corporation in which Rhode Island
grants individual legal status to the corporation in exchange for the corporation’s
commitment to follow its rules.
One or more persons (as incorporators), whether or not residents of Rhode Island, may
form a nonprofit corporation in Rhode Island by completing, signing, and filing the
articles of incorporation (by hard copy or electronically) with the Secretary of State
(www.sos.ri.gov). The articles must include the name of the corporation (which must be
distinguishable from other entities on record with the Secretary of State), the period of its
duration (which can be in perpetuity), the not-for-profit purpose, the registered agent and
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address, the number of directors (which must be a minimum of three) and their names
and addresses, and the names and addresses of the incorporators. The filing fee is
$35.00. The articles may also include any other provisions that are not inconsistent with
the Rhode Island Nonprofit Corporation Act, including provisions that eliminate or limit
the personal liability of a director for a breach of his or her duty as a director except for
certain specific violations. Amendments to the articles of incorporation must be signed
by the president or a vice president and the secretary or an assistant secretary, and filed
with a filing fee of $10.00, and must include the name of the corporation, the proposed
amendment (as recommended by the directors and approved by the members, if any, with
the dates of any meetings or consent actions).
If the nonprofit corporation intends to obtain exemption from federal and state income
taxation, the articles of incorporation must conform with applicable statutes and
regulations (discussed below).
Click here for sample articles of incorporation with an approved 501c3 “tax-exempt”
purpose section for the social sector.
d. Management and Control
Once the nonprofit corporation has been established, the initial board of directors must
meet (in person or by consent) to ratify the acts in connection with the initial formation of
the corporation and adopt bylaws which set forth the rules and procedures governing the
decision-making process of the board of directors and the general operation and
management of the corporation consistent with the applicable statutes of Rhode Island
and the articles of incorporation.
Typically, the bylaws of a nonprofit corporation contain provisions governing member,
director, and officer qualifications, powers, and duties; voting; filling of vacancies;
meetings; property holding and transfer; indemnification of directors and officers;
committees; bank accounts; fiscal year audits and financial reports; conflicts of interest;
and amendment and dissolution procedures.
Click here for a sample set of bylaws of a nonprofit corporation in the social sector.
e. Liability of Members, Directors and Officers
The articles of incorporation of a nonprofit corporation may eliminate or limit the
personal liability of a director to the corporation or its members for monetary damages
for breach of the director’s duty as a director, except:
i)
for any breach of the director’s duty of loyalty to the corporation or its
members;
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ii)
iii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; or
for any transaction from which the director derived an improper personal
benefit.
A nonprofit corporation has the power to indemnify any person by reason of the fact that
the person is or was a director if:
i)
ii)
iii)
he or she conducted himself or herself in good faith;
he or she reasonably believed, in the case of conduct in his or her official
capacity, that his or her conduct was in the best interests of the corporation,
and in all other cases, unless he or she received an improper personal benefit,
that his or her conduct was at least not opposed to its best interests; and
in the case of criminal proceedings, he or she had no reasonable cause to
believe his or her conduct was unlawful.
In addition, any person who serves as a volunteer of a nonprofit corporation is not liable
to any other person based solely on his or her conduct in carrying out his or her duties
unless such conduct constituted malicious, willful, or wanton misconduct. Rhode Island
also specifically exempts directors, officers, employees, agents, and volunteers from
liability for bodily injury incurred by a person while participating in any athletic or sports
event sponsored by the nonprofit corporation, provided the person or his or her parent or
guardian has signed a written waiver of liability and acknowledged the assumption of
risk.
A corporation may also indemnify officers, employees, and agents, and advance expenses
to them, to the extent provided by the articles of incorporation, bylaws, vote, or contract.
Any director or officer who signs any articles, report, application, or other document filed
with the Secretary of State which is known to such director or officer to be false in any
material respect is guilty of a misdemeanor and subject to a fine up to $500.00.
Any persons who assume to act as a nonprofit corporation without the authority to do so
are jointly and severally liability for all debts and liabilities incurred or arising from such
actions.
f. Mergers, Acquisitions and Dissolution
Any two (2) or more legal entities, including a nonprofit and a for-profit corporation,
limited partnership, or limited liability company, may merge or consolidate into one of
the entities. Domestic nonprofit corporations may also merge or consolidate with foreign
legal entities, if the merger or consolidation is permitted by the laws of the other state.
Each corporation must adopt a plan of merger, including the terms and conditions of the
merger or consolidation. The members, if there are members and they are entitled to
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vote, must approve a recommendation by the board of directors to merge or consolidate.
If there are no members or no members entitled to vote, then the board of directors adopts
the plan of merger or consolidation. Following the approval by the members, if any, or
the board of directors, the officers must file articles of merger or consolidation with the
Rhode Island Secretary of State, and the Rhode Island Secretary of State will then issue a
certificate of merger or consolidation. The filing fee for the articles of merger or
consolidation is $25.00 for a merger or consolidation with another nonprofit corporation,
$50.00 for a merger or consolidation with a limited partnership, or $100.00 for merger
with a for-profit corporation or limited liability company.
A nonprofit corporation may also dissolve and wind up its affairs. The members, if there
are members and they are entitled to vote, must approve a recommendation by the board
of directors to dissolve. If there are no members or no members entitled to vote, then the
board of directors must approve the dissolution. If there are assets, then the assets are
first used to pay the liabilities and obligations of the corporation. Assets that are received
and held by the corporation subject to limitations permitting their use only for charitable,
religious, benevolent, educational, or similar purposes, must be conveyed to one or more
domestic organizations engaged in substantially similar activities as the dissolving
corporation. Any other assets are distributed in accordance with the provisions of the
articles of incorporation or bylaws. In most cases, a plan of distribution is required to be
adopted in the same manner as the articles of dissolution. The officers must file articles
of dissolution with the Rhode Island Secretary of State with a filing fee of $10.00, and the
Rhode Island Secretary of State then issues a certificate of dissolution. The superior
court also has the power to liquidate the assets of a nonprofit corporation for a number of
reasons, such as if the directors are deadlocked in the management of the corporation, and
irreparable injury is occurring or likely to occur, or the directors’ activities are illegal,
oppressive, or fraudulent, or the members are deadlocked, or the corporate assets are
being misapplied, or the corporation is not able to carry out its purposes.
g. Recordkeeping, State Reports and State Taxes
A nonprofit corporation must file an annual report with the Rhode Island Secretary of
State in June each year with a filing fee of $20.00, listing the names and addresses of its
officers and directors. Nonprofit corporations must keep correct and complete books and
records of account and also minutes of all proceedings of members, if any, boards of
directors, and committees having any of the authority of the board of directors. At its
principal office in Rhode Island or at its registered office in this state, the nonprofit
corporation must maintain a record of the names and addresses of its members (if any)
entitled to vote. Any member or his or her agent may inspect the books and records of a
nonprofit corporation “for any proper purpose at any reasonable time.”
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Charitable trusts are specifically also regulated by the Department of Attorney General.
These laws are set forth at Rhode Island General Laws §§ 18-9-1 through 17. "Charitable
trusts,” as defined in this statute, means “any fiduciary relationship with respect to
property arising as a result of a manifestation of an intention to create it and subjecting
the person by whom the property is held to equitable duties to deal with the property for
charitable, educational, or religious purposes.” Charitable trusts must file an initial
registration statement with the Attorney General, with a filing fee of $50.00, and any
fiduciary holding property for the trust must file each year on or before July 1 a written
report (on either the form supplied by the Attorney General or the Form 990 filed with
the Internal Revenue Service) with the Attorney General for the last preceding fiscal year
of the trust, showing the property held and administered, the receipts and expenditures in
connection with the trust, the names and addresses of the beneficiaries of the trust, and
any other information that the Attorney General may require. The filing fee is $50.00. In
addition, the Attorney General must be provided with notice with respect to all court
proceedings which affect charitable trusts in the state of Rhode Island, such as cy-pres
proceedings, petitions to amend charitable trusts, petitions to amend the articles of
incorporation or bylaws of a nonprofit corporation, and other cases of equity. The
Administrator of the Charitable Trusts Unit of the Attorney General reviews all such
matters and participates in petitions and other litigation. There are substantial penalties
for failure to comply with these laws.
In general, a nonprofit corporation need not file any tax returns with the Rhode Island
Division of Taxation unless it has earned “unrelated business income.” In any such case,
the nonprofit corporation must file a Form RI-1120C three and a half months after the
end of its fiscal year with the Rhode Island Division of Taxation.
A nonprofit corporation may be exempt from sales and use taxes. The nonprofit
corporation may file Form “Application For Certificate Of Exemption For An Exempt
Organization From The Rhode Island Sales and Use Tax” and the 501(c)(3)
Determination Letter from the Internal Revenue Service with the Rhode Island Division
of Taxation. There is a $25.00 filing fee. Income tax exemption is automatic for any
nonprofit corporation that has received such a determination letter from the Internal
Revenue Service. Rhode Island state law exempts certain property from taxation used
by certain types of nonprofit corporations for schools and religious purposes.
Generally, nonprofit corporations that are also tax-exempt organizations must file an
annual information return with the Internal Revenue Service. Tax-exempt organizations
that have annual gross receipts not normally in excess of $25,000 are not required to file
the annual information return, but may be required to file an annual electronic notice on
Form 990-N. In addition, churches and certain religious organizations, certain state and
local instrumentalities, and other organizations are excepted from the annual return filing
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requirement. The Internal Revenue Service publishes Publication 557, Tax-Exempt
Status for Your Organization, which is helpful in this area. In addition, Publications
4221-PC and 4221-PF explain the filing and recordkeeping rules that apply to section
501(c)(3) tax-exempt public charities and private foundations respectively. Tax-exempt
organizations, other than private foundations, must file Form 990, Return of Organization
Exempt From Income Tax, or Form 990-EZ, Short Form Return of Organization Exempt
From Income Tax. The Form 990-EZ is designed for use by small tax-exempt
organizations and nonexempt charitable trusts. An organization may file Form 990-EZ,
instead of Form 990, only if it satisfies certain thresholds relating to its gross receipts
during the year and its total assets (as shown in the balance sheet of Form 990-EZ) at the
end of the year. All private foundations exempt under 501(c)(3) must file Form 990-PF,
Return of Private Foundation. Form 990, Form 990-EZ, or Form 990-PF must be filed
by the 15th day of the 5th month after the end of the organization's accounting period.
The tax-exempt status of any organization that has failed for three consecutive years to
fulfill these filing requirements will be revoked by the IRS.
h. Insurance
Nearly every type of activity by a nonprofit corporation can become the target of some
kind of a claim by a firm or an individual that alleges damage or injury by the corporation
or individuals responsible for it (i.e., directors, officers or employees). Even if the claim
is without merit, the costs of defending against the claim can be very substantial.
To encourage qualified individuals to accept positions as directors and officers, many
nonprofit corporations purchase insurance to cover director and officer (D&O) liability.
In addition, most responsible nonprofit corporations purchase a basic comprehensive
general liability policy that covers liability for accidents in the corporation’s offices, at
sponsored meetings and the like.
Liability insurance for nonprofit corporations is often a very complicated matter.
Consultation with an experienced and knowledgeable agent or consultant is essential in
order to obtain the right coverage at the lowest premium.
i. Resources
Oleck and Stewart, Nonprofit Corporations, Organizations & Associations (PrenticeHall, 1994, Cum. Supp. 2002)
Jacobs, Jerald A., Association Law Handbook (ASAE & The Center for Association
Leadership 4th ed., 2007)
Nonprofit Governance and Management (American Bar Association and American
Society of Corporate Secretaries, 2002)
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Guide to Nonprofit Corporate Governance in the Wake of Sarbanes-Oxley (American
Bar Association Section of Business Law, 2005)
Guidebook for Directors of Nonprofit Corporations (American Bar Association Section
of Business Law 2d ed., 2002)
Volume 18, No. 6, American Bar Association Section of Business Law, Business Law
Today, July/August 2009: Our mini-them: Nonprofit Organizations.
Takagi, Gene. “Nonprofit Bylaws - Common Issues” Nonprofit Law Blog
http://www.nonprofitlawblog.com/home/2009/09/nonprofit-bylaws-common-issues.html
2. For-Profit Corporations
a. Using For-Profit Corporations to Pursue Social Objectives
The for-profit form of organization can be used as a vehicle for conducting a business
that has a social mission or objective. The for-profit form of organization may be
preferable to the nonprofit form in certain situations where the ability to raise capital by
selling shares in the organization is perceived to be desirable or essential to the growth of
the business. However, if a for-profit corporation is used, it is important to ensure (1)
that the corporation's articles of incorporation specify the social mission as the purpose,
or one of the purposes, of the organization and (2) that the revenues, net profits and other
resources of the business be dedicated to the social mission only as and to the extent
approved by all shareholders; otherwise, directors of the corporation could be sued for
breach of their fiduciary duties owed to shareholders.
Though incorporating a social mission in the purpose of the organization would authorize
the corporation to pursue social objectives, it would not require the corporation to do
so—only the shareholders/owners have this power. And unless all shareholders agree to
pursue social aims, dissenters could sue the corporation’s directors and managers for
failing to operate the corporation in the best economic interests of the shareholders.
A shareholders’ agreement is probably the best way to address this problem. Such an
agreement, entered into by all shareholders and the corporation, would require the
corporation to be managed and operated so as to pursue specified social objectives
thereby overriding fiduciary duties and similar legal principles that govern “normal”
behavior of for-profit corporations.
But even the most skillfully drafted shareholders’ agreement is not a perfect solution
because agreements can always be abrogated and amended and the owners of the shares
can change via sale, gift or inheritance. Moreover, a tightly drafted shareholders’
agreement which makes it difficult to respond to business changes over time would tend
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to render the for-profit corporation much less attractive to investors (potential new
shareholders).
b. Formation
The Rhode Island Business Corporations Act (Chapter 1.2 of Title 7 of the General Laws
of Rhode Island) (herein referred to as "RIBCA") governs the formation, operation and
dissolution of for-profit corporations in Rhode Island. A for-profit corporation is formed
when one or more individuals, acting as incorporator or incorporators, prepare, sign and
file with the Rhode Island Secretary of State articles of incorporation. The individual or
individuals acting as the incorporator or incorporators need not meet any residency or
citizenship requirements. According to §202 of the RIBCA, the articles of incorporation
must contain the following:
i)
a corporate name which is distinguishable from the name of any other entity
on file with the Rhode Island Secretary of State and which must contain the
word "corporation", "company", "incorporated", or "limited", or an
abbreviation of one of such words;
ii) the total number of shares which the corporation has authority to issue;
iii) the address of the corporation's initial registered office in the State of Rhode
Island, which may be, but need not be, the same as the corporation's place of
business;
iv) the name of the corporation's initial registered agent at the initial registered
office (the registered agent may be an individual resident in the State of
Rhode Island, an entity formed in the State of Rhode Island, or a foreign entity
authorized to transact business in Rhode Island);
v) the name and address of the incorporator(s).
In addition, the articles of incorporation may contain other optional provisions, not
inconsistent with law, which the incorporators elect to set forth in the articles of
incorporation for the regulation of the internal affairs of the corporation. In the case of a
corporation which intends to engage in a social mission or objective, it would be
advisable to include a provision which identifies the social mission or objective as the
purpose, or one of the purposes, of the corporation. Permissible optional provisions also
include a provision which names the initial directors of the corporation. The official
form of the Articles of Incorporation (Form No. 100) is available online at the website of
the Rhode Island Secretary of State at: www.sec.state.ri.us/corps.
The incorporators may file the articles of incorporation with the Rhode Island Secretary
of State in either paper format or by electronic transmission, and the articles must be
accompanied by all the required filing fees. The legal existence of the corporation
commences when the Secretary of State certifies that the instrument has been filed by
endorsing upon the signed instrument the word "filed" and the date and time of its filing.
Articles of incorporation will not be accepted for filing unless accompanied by both a
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filing fee of $70.00 and a license fee based on the number of shares (but not less than
$160.00) which the corporation is authorized to issue. The formula for calculating the
license fee is set forth in §1602(c) of the RIBCA.
c. Management and Control
Except as may be otherwise provided in the RIBCA or in the articles of incorporation, the
business and affairs of a corporation are managed by the board of directors. The board of
directors of a corporation consists of one or more members. The number of directors is
fixed by, or in the manner provided in, the articles of incorporation or the bylaws.
Directors need not be residents of Rhode Island or shareholders of the corporation unless
the articles of incorporation or bylaws require it. The articles of incorporation or bylaws
may prescribe other qualifications for directors. Although the directors have broad
authority to manage the business and affairs of a corporation, certain actions including
the election of directors, mergers, sale of all or substantially all assets of the corporation,
and dissolution of the corporation cannot be undertaken without the vote and approval of
the shareholders.
After the articles of incorporation are filed, if the initial directors are named in the articles
of incorporation, they hold an organizational meeting to complete the organization of the
corporation by appointing officers, adopting bylaws and transacting any other business
that is appropriate. If the initial directors are not named in the articles of incorporation,
the incorporator(s) hold an organizational meeting to either: (i) elect directors and
complete the organization of the corporation, or (ii) elect a board of directors who in turn
complete the organization of the corporation.
The bylaws of the corporation may contain any provisions for the regulation and
management of the affairs of the corporation not inconsistent with the RIBCA or the
articles of incorporation. In general, the bylaws of a for-profit corporation contain
provisions governing director and officer qualifications, powers and duties; voting;
meetings of shareholders, directors and officers; filling of vacancies; committees;
property holding and transfer; indemnification of directors and officers; bank accounts;
fiscal year audits and financial reports; and conflicts of interest. As mentioned above, the
initial bylaws of a corporation must be adopted by its incorporators or by its board of
directors at its organizational meeting. Subsequently, the bylaws may be amended by the
shareholders, or, unless otherwise provided in the articles of incorporation or the bylaws,
by the board of directors, but any amendment to the bylaws by the board of directors may
be changed by the shareholders.
Initial directors hold office until the first annual meeting of shareholders and until their
successors have been elected and qualified. At the first annual meeting of shareholders
and at each subsequent annual meeting, the shareholders elect directors to hold office
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until the next succeeding annual meeting. Each director holds office for the term for
which he or she is elected and until his or her successor has been elected and qualified.
The officers of a corporation consist of a president, a secretary and a treasurer, and such
other officers as are authorized by the bylaws or the board of directors. The initial slate
of officers is chosen by the incorporators or by the initial board of directors. Thereafter,
the officers of the corporation are usually elected by the board of directors on an annual
basis and serve at the pleasure of the board of directors. The officers have such authority
and perform such duties as may be set forth in the bylaws or determined by resolution of
the board of directors.
Model forms for the organization of a Rhode Island for-profit corporation, including
articles of organization and by-laws may be found in a seminar publication of the Rhode
Island Bar Association Continuing Legal Education entitled "Practical Skills –
Organizing a Rhode Island Business, Publication 2011-18."
d. Liability of Shareholders, Directors and Officers
Section 801 of the RIBCA requires that a director shall discharge his duties as a director
(i) in good faith; (ii) with the care that a person in a like position would reasonably
believe appropriate under similar circumstances; and (iii) in a manner he or she
reasonably believes to be in the best interests of the corporation. In discharging his or her
duty of care, a director is entitled to rely on information prepared by officers and
employees of the corporation or by outside professionals whom the director reasonably
believes to be reliable and competent. In addition, directors also owe their corporation a
duty of loyalty which requires that a director act in the best interests of the corporation
and its shareholders, as distinguished from his or her own personal interest if in conflict
with the interests of the corporation and its shareholders. Directors can have liability to
the corporation or its shareholders in circumstances where the directors have breached
their duties of care and/or loyalty. However, under the business judgment rule, a court
will usually not impose liability on directors for decisions that in hindsight appear to have
been wrong, as long as the decisions were made in good faith for a rational business
purpose and as long as the directors discharged the duties of care and loyalty which they
owe to the corporation and its shareholders. In this connection, it should be noted that the
articles of incorporation of a corporation may contain a provision eliminating or limiting
the personal liability of a director to the corporation or its shareholders for monetary
damages for breach of the director's duty of care (but not his duty of loyalty) save in
certain situations spelled out in §202(b)(3) of the RIBCA.
Officers of the corporation are held to owe to the corporation and its shareholders the
same duties of care and loyalty which are owed by the directors.
14
Subject to the guidelines in §814 of the RIBCA, the articles of incorporation and/or
bylaws of the corporation will usually contain provisions obligating the corporation to
indemnify and hold harmless its officers and directors from and against any liabilities and
expenses they may incur or suffer arising out of a breach of their duties owed to the
corporation and its shareholders. In addition, corporations often make D&O liability
insurance available to their directors and officers as an extra layer of protection against
possible exposure to liability for breach of their fiduciary duties. Directors and officers
will often condition their service to the corporation on the availability of strong
indemnification provisions in the articles of incorporation and bylaws and, where the
corporation can afford it, D&O insurance.
Normally, a shareholder, by reason of his shareholder status alone, is not personally liable
for the debts and obligations of a corporation. This rule of limited liability is often a
primary motivation for the formation of the corporation. By virtue of the "corporate
shield", a shareholder's exposure for the debts and obligations of the corporation is
limited to his or her investment in the corporation. However, in rare instances, a court
may hold a shareholder liable for the debts, actions or omissions of a corporation under a
so-called "piercing the veil" theory.
e. Raising Capital
For-profit corporations (and LLCs) offer the most flexibility in raising capital, ranging
from various kinds of equity (common stock, preferred stock, options, warrants) to
numerous types of debt instruments (convertible notes, subordinated notes, bonds,
commercial paper)
f. Recordkeeping and State Reports
Section 1502 of the RIBCA requires each corporation to keep correct and complete books
and records of account and minutes of the proceedings of its shareholders and board of
directors. It also requires each corporation to keep at its registered office or principal
place of business, legal counsel's office, or at the office of its transfer agent or registrar, a
record of its shareholders giving the names and addresses of all shareholders and the
number and class of shares held by each. Any director or shareholder of the corporation,
upon written demand stating the purpose for the demand, has the right to examine, in
person, or by agent or attorney, at any reasonable time or times, for any proper purpose,
the corporation's relevant books and records of account, minutes, and record of
shareholders and to make extracts therefrom.
Section 1501 of the RIBCA requires each corporation to file an annual report with the
Rhode Island Secretary of State between January 1 and March 1 of each year following
the year of incorporation. The form of annual report (Form No. 630) is available online
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at the website of the Rhode Island Secretary of State (www.sec.state.ri.us/corps) and may
be filed in paper format or online by electronic transmission.
g. Taxation
A for-profit corporation pays federal and state taxes on the income it earns, and its
shareholders pay taxes on dividends distributed by the corporation. S corporations,
however, are not subject to double taxation; their income is generally not taxed at the
federal or state level, but the income and losses of the S corporation are “passed through”
to the shareholders in relation to their ownership interests. To be eligible for this tax
treatment, S corporations must meet certain requirements, including but not limited to,
having only one class of stock and no more than 100 shareholders.
A corporation (other than an S corporation) that is subject to tax in this state is subject to
the Rhode Island business corporation tax on the portion of its net income allocated to
this State at the rate of 9%. If that liability is less than the greater of the minimum annual
business corporation tax ($500) and the annual franchise tax, which is assessed at the rate
of $2.50 for each multiple (or part thereof) of $10,000 in authorized capital stock, the
corporation's tax liability for that year is appropriately increased. For purposes of the
annual franchise tax, capital stock having no par value is deemed to have a par value of
$100 per share. Also, a corporation that was not engaged in any business activity in this
state during the preceding year is subject to a reduced level of franchise tax. To the extent
an S corporation is not subject to federal income tax its income will not be subject to the
annual business corporation tax. An S corporation, however, is subject to the minimum
annual business tax ($500) or, if applicable, the state franchise tax. In addition, if an S
corporation has a non-resident shareholder the corporation is required to withhold and
remit tax to the State on the non resident shareholder's share of the corporation's income
subject to Rhode Island tax. The withheld tax is allowed as a credit against the nonresident shareholder's Rhode Island personal income tax liability.
h. Resources
Rhode Island Secretary of State Corporations Division website
(www.sec.state.ri.us/corps)
A Practical Guide to Organizing a Business in Rhode Island, MCLE New England,
Edited by Christopher D. Graham, 1st Edition 2011.
The Bureau of National Affairs, Inc., State Portfolios: Corporate Income Taxes, Portfolio
1100-2nd: Income Taxes: Computation of State Taxable Income (Minnesota through
Wyoming), Section 1100.18 Rhode Island.
Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders (2002).
16
3. Limited Liability Companies (“LLC(s)”)
a. Using LLCs to Pursue Social Change
The Rhode Island Limited Liability Company Act, R.I.G.L. §7-16-1, et seq (the “RI LLC
Act”), governs the formation, operation and dissolution of LLCs in the State of Rhode
Island.
Combining certain characteristics of both partnerships and corporations, LLCs are
privately owned legal entities that can be formed for the purpose of earning profits,
pursuing a social mission, or both, although some states require an LLC to be formed
only for a “business purpose.” LLCs differ from for-profit corporations because they are
formed and owned by members rather than shareholders; however, like S corporations
and partnerships, LLCs are eligible for pass-through income tax treatment. This means
that income and expenses are reported as though the members incurred them directly, and
profits or losses are taxed at the ownership (member) level, rather than the entity
(company) level.
Members of LLCs can be individual investors as well as for-profit corporations and taxexempt nonprofit corporations. For this reason and also because of pass-through taxation
which eliminates “double taxation” (the effect of taxing income at the corporate level and
again when it is included in the owner’s income), LLCs are preferred over for-profit
corporations as vehicles for social enterprise, especially for joint ventures between a taxexempt nonprofit with a social change mission and a for-profit business.
LLCs are akin to partnerships because the members have broad discretion to allocate
profit and loss and management powers among themselves (via an “operating
agreement”). On the other hand, as with the shareholders of corporations, the members of
an LLC can be divided into classes, each with its own economic rights, and members
have limited personal liability (discussed below).
Two states, Tennessee and Kentucky, specifically authorize the formation of nonprofit
LLCs. The statutes of numerous states, including California, have language that permits
nonprofit LLCs to exist. Assuming state laws permit formation of nonprofit LLCs, the
IRS will recognize such an LLC as exempt under Section 501(c)(3) if it elects to be
treated as a separate legal entity for tax purposes and its operating agreement includes the
language mandated by the organizational test (purposes, distribution of assets upon
dissolution, etc.) and it meets numerous requirements largely designed to guard against
inurement and private benefit. These conditions will be discussed in the Nonprofit
Taxation section.
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b. Formation
To form and organize an LLC under the RI LLC Act, one or more persons must deliver
executed articles of organization to the Rhode Island Secretary of State. When the
Secretary of State accepts the articles of organization for filing and issues the certificate
of organization, the LLC is formed under the name and subject to the conditions and
provisions stated in its articles of organization. The articles of organization must set forth
the following: (1) the name of the LLC, which name shall end with either the words
“limited liability company” or the upper or lower case letters “l.l.c.” with or without
punctuation; (2) the name and address of its resident agent in the State of Rhode Island;
(3) a statement whether, under the articles of organization and any written operating
agreement made or intended to be made, the LLC is intended to be: (i) treated as a
partnership; (ii) as a corporation; or (iii) disregarded as an entity separate from its
member for purposes of federal income taxation; (4) the address of the principal office of
the LLC if its determined at the time of organization; (5) any other provision, not
inconsistent with law, which the members elect to set out in the articles, including, but
not limited to, any limitation of the purposes or duration for which the LLC is formed,
and any other provision which may be included in an operating agreement; (6) a
statement of whether the LLC is to be managed by its members or by one or more
managers, and if the LLC has managers at the time of its formation, the name and address
of each manager; and (7) the name and address of the person authorized to sign and who
does sign the articles of organization.
The person authorized to sign the articles of organization need not be a member of the
LLC but only authorized to do so by the persons forming the LLC. The RI LLC Act
requires that each domestic or foreign registered LLC shall have a resident agent for
service of process in the LLC who shall be either: (i) an individual resident of the State of
Rhode Island; or (ii) a corporation, limited partnership, or LLC, and in each case either
domestic or one authorized to transact business in the State of Rhode Island. As of July
1, 2009, the fee for filing original articles of organization was $150.00.
The articles of organization become effective upon the issuance of a certificate from the
Rhode Island Secretary of State indicating the document was accepted for filing or at any
later date set forth within the articles of organization, but in no event later than thirty (30)
days after the filing of said articles of organization.
An LLC may engage in any business which a limited partnership may carry on, except
for the provision of professional services (as defined in R.I.G.L. §7-5.1-2 and includes for
examples physicians, dentists, attorneys at law, professional engineers, architects,
opticians, etc.), and has perpetual existence until dissolved or terminated in accordance
with the RI LLC Act, unless a more limited purpose or duration is set forth in the articles
of organization.
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The required form of articles of organization may be located on the website for the Rhode
Island Secretary of State website on the corporations form home page
(http://www.sec.state.ri.us/corps/corpforms1205/corpforms07.html).
c. Management and Control
Although not required by the RI LLC Act, it is recommended that an LLC have an
operating agreement to govern the management of the LLC. A typical operating
agreement would contain the following provisions for example: duration of the LLC;
purpose of the LLC; list of members; membership interests and capital contributions of
the members; division of profits, losses and distributions; compensation of the members;
management of the LLC either by the members or managers; insurance; death,
resignation, expulsion, bankruptcy or dissolution of a member; sale, transfer or
assignment of membership interest; mechanism to amend, restate or repeal the operating
agreement; federal income tax classification and any other applicable provision not
inconsistent with Rhode Island law. An LLC may have an operating agreement that
provides for classes or groups of members having such rights as said operating agreement
may provide. The operating agreement may grant to all or certain identified members or
classes or groups of members the right to vote, separately or with all or any other class or
group of the members or managers, on any matter. The operating agreement may also
provide for the taking of any action without the vote or approval of any member or class
or group of members.
The business of the LLC shall be managed by the members unless the articles of
organization or an operating agreement provide for management by one or more
managers. If management is vested in the members of the LLC: (1) the members are
deemed to be managers for purposes of applying the provisions of the RI LLC Act; and
(2) each of the members has the power and authority and is subject to all duties and
liabilities of managers. The members of an LLC are entitled to vote in proportion to the
capital value of the membership interests unless the articles of organization or operating
agreement provide otherwise.
The articles of organization or a written operating agreement may deny, restrict or
enlarge the management rights and duties of any member or group or class of member
and may provide that business and affairs of the LLC shall be managed by or under the
authority of one or more managers who may, but need not be, members.
A member or a manager of a LLC shall discharge his or her duties in good faith, with the
care that an ordinarily prudent person in a similar position would use under the
circumstances, and in the manner the member or the manager reasonably believes to be in
the best interests of the LLC. If the business and affairs of the LLC is managed by more
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than one manager, the managers shall act by majority vote, with each manager being
entitled to one vote unless stated otherwise in the operating agreement.
The contribution of a member to a LLC must be in the form of a capital contribution.
The profits and losses of a LLC shall be allocated to each member on the basis of the
member’s capital value, unless stated otherwise in the articles of organization or
operating agreement.
Membership interests are freely assignable under the RI LLC if the other members
unanimously consent to said assignment and except as otherwise provided for in an
operating agreement. The consent of a member may be evidenced in any manner
specified in an operating agreement, but in the absence of specification, consent is
evidenced by a written instrument, dated and signed by the member, or evidenced by a
vote taken at a meeting of the members called in accordance with the operating
agreement and maintained with the records of the LLC.
A sample form of operating agreement for a Rhode Island LLC may be found in a
seminar publication of the Rhode Island Bar Association entitled “Practical Skills –
Organizing a Rhode Island Business, Ref # 2008-12, Nov/Dec 2008.”
d. Limited Liability of Members and Managers
Under the RI LLC Act, a member or manager of a LLC is not liable for the obligations of
the LLC solely by reason of being a member or a manager except as otherwise provided
by the RI LLC Act. The RI LLC Act states that a member or a manager must discharge
his or her duties in good faith and demonstrate the care that an ordinarily prudent person
in a similar position would use under the circumstances. Although an operating
agreement may limit the amount of a member’s or manager’s liability, a member or
manager shall be liable for the following activities: (1) breach of the duty of loyalty to the
LLC or its members; (2) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (3) wrongful distribution; or (4) any
transaction from which derived an improper personal benefit, unless the transaction was
with the informed consent of the members or a majority of the disinterested managers. In
addition, a member or a manager who votes for or assents to a distribution in violation of
the operating agreement or of the restrictions on making distributions is personally liable
to the LLC for the amount of the distribution that exceeds what could have been
distributed without violating the operating agreement or of the restrictions on making
distributions section of the RI LLC Act.
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e. Merger, Dissolution and Term of Existence
The RI LLC Act permits a domestic or foreign LLC to merge or consolidate with or into
any one or more domestic or foreign LLCs, limited partnerships or corporations. In order
to merge or consolidate, an LLC must enter into a written plan of merger or consolidation
and file said articles of merger or consolidation to the Rhode Island Secretary of State.
Unless the operating agreement of the LLC provides otherwise, the LLC shall have the
plan of merger or consolidation approved by the unanimous consent of the members. In
addition, the RI LLC Act allows for the conversion of LLCs to another entity or the
conversion of other business entities to a LLC.
The RI LLC Act provides that a RILLC will have perpetual existence unless a specified
time is otherwise specified in the LLC operating agreement. The RI LLC Act, in §7-1639, provides that a LLC is dissolved and its affairs shall be wound up upon the happening
of the first to occur of the following: (1) at any time specified in the articles of
organization; (2) an event specified in the articles of organization or a written operating
agreement to cause dissolution; (3) by action of members taken pursuant to R.I.G.L. §716-21(b)(1); (4) on the written consent of a majority of the capital values of the
remaining members after the death, withdrawal, expulsion, bankruptcy, or dissolution of
a member, or the occurrence of any other event that terminates the continued membership
of a member in the LLC, unless otherwise provided in the articles of organization or a
written operating agreement; or (5) unless otherwise provided in the articles of
incorporation or a written operating agreement, on the death, withdrawal, expulsion,
bankruptcy or dissolution of the last remaining member or any other event that terminates
the continued membership of the last remaining member, unless within ninety (90) days
the successor(s) in interest of the last remaining member and any assignees of the
member's interest and of any other member's interest agree in writing to admit at least one
(1) member to continue the business of the LLC; or (6) entry of a decree of judicial
dissolution under R.I.G.L. §7-16-40.
f. Raising Capital
An LLC offers the same flexibility in raising capital as a for-profit corporation.
g. Recordkeeping and State Reports
A RILLC shall keep the following information at its principal office: (1) a current list of
the name and last known address of each member and manager; (2) copies of records that
would enable a member to determine the capital values and the relative voting rights of
the members; (3) a copy of the articles of organization and any restatements of said
articles and restatements; (4) executed copies of any powers of attorney; (5) copies of the
RI LLC’s federal, state and local income tax returns and reports, if any, for the five most
21
recent years; (6) a copy of any written operating agreement; (7) any written records of
proceedings of the members or managers; and (8) copies of any financial statements of
the LLC for the five most recent years.
Each domestic LLC and each foreign LLC authorized to transact business in the State of
Rhode Island, shall file, between the first day of September and first day of November in
each year following the calendar year in which its original articles of organization or
application for registration were filed with the Secretary of State, an annual report setting
forth the following: (1) name and address of the principal office of the LLC; (2) state or
other jurisdiction under the laws of which it is formed; (3) the name and address of its
resident agent; (4) current mailing address of the LLC and the name or title of a person to
whom communications may be directed; (5) a brief statement of the character of the
business in which the LLC is actually engaged in Rhode Island; (6) any additional
information required by the Rhode Island Secretary of State; and (7) if the LLC has
managers, the name and address of each of its managers. The information in the annual
report shall be given as of the date of the execution of the report. It shall be executed by
an authorized person of the domestic LLC and by a person with authority to do so under
the laws of the state or other jurisdiction of organization of a foreign LLC.
h. Taxation
Unless an LLC has elected to be taxed for federal income tax purposes as an association
taxable as a corporation, the LLC is not subject to Rhode Island tax on its income and its
income is taxed directly to its members. The LLC, however, is subject to the annual
Rhode Island minimum business corporation tax ($500) and it is required to withhold and
remit to the State tax on its non-resident members share any income that would be
taxable in Rhode Island. LLC's and S corporations are both subject to the Rhode Island
minimum business corporation and are obligated to withhold tax on their nonresident owners share of any income that entity earns that would be subject to Rhode
Island tax. Limited and general partnerships are subject to the non-resident withholding
rule, and starting in 2012, limited partnerships (and limited liability partnerships) are
subject to the annual minimum $500 Rhode Island Business Corporation Tax.
i. Resources
A Practical Guide to Organizing a Business in Rhode Island, MCLE New England,
Edited by Christopher D. Graham, 1st Edition 2011.
Humphreys, Thomas, Limited Liability Companies and Limited Liability Partnerships
(Incisive Media, 2009)
22
The Bureau of National Affairs, Inc., U.S. Income Portfolios: Partnerships, Portfolio
722-3rd: Family Limited Partnerships and Limited Liability Companies.
The Bureau of National Affairs, Inc., State Portfolios: Business Entities and
Transactions, Portfolio 1560-1st: State Taxation of Limited Liability Companies and
Partnerships, Section 1560.07.
Rhode Island Secretary of State Corporations Division website
(www.sec.state.ri.us/corps)
4. Low-Profit Limited Liability Companies (L3Cs)
a. Overview
The L3C, or Low-Profit Limited Liability Company, is a new type of corporate entity that
is a cross between a nonprofit and a for-profit corporation. L3Cs are not eligible for taxexempt treatment by the IRS. Rather, they are intended to be profit-generating entities
with charitable and educational (including positive social change) missions as their
primary objectives. Building upon the LLC structure, the L3C has been enacted in
Vermont , Michigan , Utah , Wyoming , Illinois , Rhode Island , Louisiana, Maine, and
North Carolina and the federal jurisdictions of the Ogalala Sioux Tribe and the Crow
Indian Nation of Montana, L3C legislation has been or is being considered in other
states. For more information about the status of L3C legislation please visit:
http://www.americansforcommunitydevelopment.org/legislativewatch.html.
In 2011, the Rhode Island legislature passed legislation which amends the RI LLC Act to
permit the formation of an LLC that qualifies as an “L3C” or “low-profit limited liability
company”. The legislation will take effect on July 1, 2012. If an LLC is formed in
Rhode Island and wishes to qualify as an L3C, its name must end with either the words
“low-profit limited liability company” or the abbreviation “L3C” or “l3c”, and it must
also meet the requirements of new Section 76 of the RI LLC Act, summarized below.
L3Cs are similar to LLCs in that they have the liability protection of a corporation, the
flexibility of a partnership and membership shares can be sold to raise capital just like
common stock. However, unlike the LLC, the L3C must be formed for a charitable or
educational purpose, it cannot have a significant goal of producing income or capital
appreciation and it may not accomplish political or legislative objectives.
L3Cs are intended to be vehicles which can both attract capital investment from for-profit
enterprises and investment by foundations. Nontraditional for-profit investors who are
willing to sacrifice market-level returns in exchange for social impact are prime
candidates to provide capital investments or loans to L3Cs. Similarly, private foundations
that wish to provide support in the form of a loan or equity rather than a grant may find
23
an L3C to be attractive because the enabling legislation is written in such a way as to
comply with the IRS “program related investment” or “PRI” regulations, thus eliminating
the need for private letter rulings or legal opinions for such investments. PRIs can be
attractive to foundations because they count toward its 5% minimum payout requirement,
just as if they were grants. But if the investment is successful, the foundation could
recapture the full amount of the investment, plus a reasonable rate of return, which it then
must pay out again in the form of grants or more PRIs.
Existing nonprofit corporations can utilize the L3C structure in at least two ways. First, if
the nonprofit generates enough earned income to qualify as “low profit,” it could
reincorporate as a stand-alone L3C. Second, it could establish a subsidiary as an L3C to
conduct low-profit earned income activities.
It is too early to tell whether L3Cs will proliferate and whether they will attract
significant investments from non-traditional investors and foundations. Some experts
have predicted that since PRIs comprise a relatively small amount of foundation grants
and capital, the L3C will not succeed in attracting significant funds from foundations and
thus this form of organization will not become the preferred vehicle.
b. Resources
Lang, Robert. “Overview.” Americans for Community Development.
http://www.americansforcommunitydevelopment.org
Peeler, Heather, “The L3C: A New Tool for Social Enterprise, “Community Wealth
Vanguard, Aug. 2007,
http://www.communitywealth.com/Newsletter/August%202007/L3C.html
Tozzi, John, “Turning Nonprofits into For-Profits,” Business Week: Small Business
Financing (June 15, 2009),
http://www.businessweek.com/smallbiz/content/jun2009/sb20090615_940089.htm
“How-to: An Insider’s Look at the L3C and What it Could Mean for you and your Social
Enterprise.” Social Earth. http://www.socialearth.org/how-to-an-insider’s-look-at-the-l3cand-what-it-could-mean-for-you-and-your-social-enterprise
Chang, Emily, L3C-Developments & Resource, Nonprofit Law Blog,, available at
http://www.nonprofitlawblog.com/home/2009/03/l3c-developments-resources.html#more
5. Joint Ventures
A joint venture is not a statutory entity or form of doing business in Rhode Island. Rather, it
is a contractual arrangement whereby more than one person or entity join forces to operate a
24
venture. Many joint ventures operate by agreement only; the participants do not have to
create a separate entity as the vehicle for a joint venture. However, nonprofit corporations,
for-profit corporations, partnerships and LLCs can each function as the entity vehicle for
joint ventures. When liability protection and maximum flexibility are required and the
number of participants/investors is small, the LLC is considered by many to be the preferred
entity/vehicle for the joint venture.
Thus, for example, a tax-exempt nonprofit corporation pursuing a social mission and a forprofit corporation operating a business can join together and form a joint venture using an
LLC as the vehicle for the enterprise. The operating agreement would spell out the rights
and obligations of each member. However, each member would continue to be bound by the
laws and rules governing its own existence, so that the nonprofit may not confer an undue
economic benefit on the for-profit coventurer, nor may the business corporation use the joint
venture to do something that it could not do directly.
The IRS has addressed the circumstances in which tax-exempt social and charitable
enterprises may engage in joint ventures with for-profit entities, and has adopted rules that
govern the kinds of benefits that tax-exempt enterprises can confer on for-profit entities in
the context of joint ventures. The IRS rules are extremely complicated. A tax-exempt social
enterprise should not enter into a joint venture with a for-profit entity without first seeking
advice from expert counsel.
Harroch, Richard D., Partnership and Joint Venture Agreements (Law Journal SeminarsPress, 1995)
Sanders, Michael I., Joint Ventures Involving Tax-Exempt Organizations (John Wiley &
Sons, 3d revised ed 2007)
6. Partnerships, Limited Partnerships and Registered Limited Liability Partnerships
a. Overview
Partnerships, limited partnerships and registered limited liability partnerships are forms
of organization that can be used to pursue social objectives and are recognized as
statutory entities under Rhode Island law. Until the advent of LLCs, partnerships were
the most oft-used alternative to a nonprofit corporation.
Partnerships, similar to LLCs, provide almost unlimited flexibility in governance and
management. Profits and losses are allocated according to the capital contributions of
each partner but unlike LLCs and nonprofit corporations, the total assets of each partner
in a general partnership are at risk to satisfy the liabilities of the partnership, not just the
capital that has been put into the partnership. Limited partnerships changed this by
permitting the creation of a special class of partners, known as "limited" partners, who
25
provide capital but do not participate in management. In limited partnerships, the limited
partners who do not participate in the control of the business of the limited partnership
are shielded from liability for the partnership's debts beyond their capital contributions,
but the general partner—who manages the affairs of the limited partnership—does not
have this liability protection. Limited partnerships are often used as financing vehicles
and are most useful when investors are to have no role in management and a simple or
flexible governance structure is needed.
Limited partnerships and registered limited liability partnerships (LLPs) function like
general partnerships but provide extra protections for the partners. Such protections may
include personal immunity for liability arising from the negligence and wrongful acts of
the LLP. Thus, a partner's loss with respect to the LLP may be limited to his/her
investment in the partnership.
General partnerships, limited partnerships and registered limited liability partnerships are
pass-through entities, that is, each entity’s income, losses and credits pass through to its
partners. These entities are not subject to income tax themselves; however, pursuant to
Section 44-11-2.2 of the Rhode Island General Laws, each entity has specific tax
withholding obligations with respect to its nonresident partners in connection with their
share of the entity's Rhode Island source income.
b. General Partnerships
The Rhode Island Uniform Partnership Act (“RIUPA”), Rhode Island General Laws §§
7-12-12 – 7-12-55, governs the formation, operations and dissolution of Rhode Island
general partnerships. A general partnership is formed when there is an association of two
or more persons (which term is broadly defined under the RIUPA) to carry on as coowners a business for profit and includes registered limited liability partnerships.
No filings with the Rhode Island Secretary of State are required in order to form a general
partnership. Once formed, as a general matter, a partnership agreement governs the
relations among the partners and between the partners and the partnership. The
partnership agreement may be written or oral. The partnership agreement may modify
many of the default provisions of the RIUPA that concern the relations among the
partners and between the partners and the partnership. For instance, a partnership
agreement may provide for certain partners to have such rights, powers and duties as the
partnership agreement may provide, including that any partner or class or group of
partners shall have no voting rights. Subject to the effect of the partnership agreement,
each partner has equal rights in the management of the partnership.
The partners should decide how to keep and maintain the books and records of the
general partnership. The RIUPA contains no specific record keeping requirements,
26
however, as a general matter, the RIUPA establishes that partners shall have access to
true and full information of all things affecting the partnership and therefore the general
partnership should, at a minimum, keep records of such information. Although the
RIUPA does not specify the information that must be provided, such information would
generally include the status of the business and financial condition of the partnership, a
copy of the general partnership's federal, state and local income tax returns for each year,
a current list of the name and last known business address of each partner, a copy of any
written partnership agreement and all amendments thereto, together with executed copies
of any written powers of attorney pursuant to which the partnership agreement and any
amendments thereto have been executed, and information regarding the amount of cash
and a description and statement of the agreed value of any other property or services
contributed by each partner and which each partner has agreed to contribute in the future,
and the date on which each partner became a partner.
As specified on Section 44-11-2.2, a general partnership has specific tax withholding
obligations with respect to nonresident partners in connection with their share of the
entity's Rhode Island source income.
c. Limited Partnerships
The Rhode Island Uniform Limited Partnership Act ("RIULPA"), Rhode Island General
Laws §7-13-1 et seq., governs Rhode Island limited partnerships. In contrast to a general
partnership, a limited partnership may only be created by compliance with statutory
requirements, including the filing of a certificate of limited partnership with the office of
the secretary of state. The form of the certificate of limited partnership (Form No. 300) is
available online at: http://www.sec.state.ri.us/corps. In Rhode Island a limited
partnership is formed when (1) at least two parties have an agreement to form and operate
a limited partnership with at least one being a general partner and at least one being a
limited partner, and (2) a certificate of limited partnership is filed with the Rhode Island
Secretary of State. The certificate of limited partnership needs to only contain the name,
office address and mailing address of the limited partnership, the name and address of the
limited partnership's agent for service of process in Rhode Island, and the names and
addresses of the general partners. In addition to other requirements listed in Section 713-2, the name of the limited partnership must contain the words "limited partnership" or
the abbreviation "L.P."
A limited partnership must pay fees and account for taxes as set forth in Section 7-1354.1 and Section 44-11-2.2 respectively. As specified on Section 44-11-2.2, the limited
partnership has specific tax withholding obligations with respect to non-resident partners
in connection with their share of the entity's Rhode Island source income. Upon filing a
certificate of limited partnership, the Rhode Island Secretary of State collects a filing fee
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of $100, applicable fees may change over time and the current statute should be consulted
before filing.
Once formed, the limited partnership's partnership agreement and RIULPA govern the
operation and management of the limited partnership. The partnership agreement may be
written or oral. The partnership agreement can modify many of the default provisions of
RIULPA. Typically, the general partner manages the business and activities of the
limited partnership. Unless otherwise provided in the partnership agreement, the general
partner has the authority to delegate its rights and powers to manage the limited
partnership.
Each limited partner has the right to inspect and copy any of the partnership records
required to be maintained as specified in Section 7-13-5 and to obtain from the general
partners upon reasonable demand information regarding the status of the business and
financial condition of the limited partnership and other information regarding the affairs
of the limited partnership as is just and reasonable.
Section 7-13-5 of the RIULPA requires each limited partnership to maintain at its
designated office in the state of Rhode Island certain records, including a current list of
the name and last known business address of each partner, separately identifying the
general partners and the limited partners; a copy of the certificate of limited partnership
and all amendments thereto, together with executed copies of any written powers of
attorney pursuant to which any certificate has been executed; a copy of the limited
partnership's federal, state and local income tax returns and reports if any, for the three
most recent years; copies of any then effective written partnership agreements and of any
financial statements of the limited partnership for the three most recent years; and unless
contained in a written partnership agreement, a writing setting out: the amount of cash
and a description and statement of the agreed value of any other property or services
contributed by each partner and which each partner has agreed to contribute in the future,
the times at which or events on the happening of which any additional contributions
agreed to be made by each partner are to be made; any right of a partner to receive a
distribution, or of a general partner to make distributions to a partner that include a return
of all or any part of the partner’s contribution; and any events which would cause the
limited partnership to be dissolved and its affairs wound up.
The RIULPA also describes the liabilities of the partners. The general partner has
general liability for the debts and obligations of the limited partnership to third parties. A
partnership agreement may modify the liability of a general partner to the limited
partnership and the limited partners. As specified in Section 7-13-19, so long as a limited
partner is not also a general partner and does not otherwise participate in the control of
the business of the limited partnership, a limited partner does not have liability for the
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obligations of a limited partnership. A limited partner does have liability for any
unperformed contributions that such limited partner has agreed to make to the limited
partnership, the amount of any distribution that such limited partner is required to return
to the limited partnership pursuant to the RIULPA, and their own torts or wrongful acts.
d. Registered Limited Liability Partnerships (LLPs)
In Rhode Island, a registered limited liability partnership is a general partnership formed
pursuant to an agreement governed by the laws of Rhode Island that has registered as an
LLP pursuant to Section 7-12-56 and in compliance with Section 7-12-58, if applicable.
Pursuant to Section 7-12-56 a general partnership may be formed as an LLP, or may
become an LLP. To become and to continue as an LLP, a partnership must annually file
an application or a renewal application with the Rhode Island Secretary of State, stating
the name of the partnership, the address of its principal office, if the partnership's
principal office is not located in Rhode Island, the address of a registered office and the
name and address of a registered agent for service of process in Rhode Island. In
addition, LLPs must provide the names and addresses of all resident partners, the place
where the business records of the partnership are maintained, or if more than one location
for business records is maintained, then the principal place of business of the partnership,
a brief statement of the business in which the partnership engaged, and that the
partnership applies for status or renewal of its status, as an LLP. An LLP continues to be
the same partnership that existed before registering as an LLP. The form of the
application/renewal application for registered limited liability partnerships (Form No.
500) is available online at the website of the Rhode Island Secretary of State
(http://www.sec.state.ri.us/corps).
Registration as an LLP is effective for one year after the date an application is filed,
unless voluntarily withdrawn by filing with the Rhode Island Secretary of State a written
withdrawal notice executed by a majority in interest of the partners or by one or more
partners authorized to execute a withdrawal. Registration, whether pursuant to an original
application or a renewal application, as an LLP is renewed if, during the sixty (60) day
period preceding the date the application or renewal application otherwise would have
expired, the partnership files with the Rhode Island Secretary of State a renewal
application. A renewal application expires one year after the date an original application
would have expired if the last renewal of the application had not occurred.
In addition to the other requirements found in Section 7-12-57, the name of the LLP must
contain as the last words or letters of its name the words "registered limited liability
partnership," the abbreviation "L.L.P." or the designation "LLP".
An LLP must pay fees and account for taxes as set forth in Section 7-12-56 and Section
44-11-2.2 of the Rhode Island General Laws respectively. As specified in Section 44-1129
2.2, the LLP has specific tax withholding obligations with respect to non-resident
partners in connection with their share of the entity's Rhode Island source income, and
starting in 2012 they will be subject to the annual minimum $500 Rhode Island Business
Corporation Tax. Upon filing of an application or renewal application, the Rhode Island
Secretary of State collects a filing fee of $100 for each partner, not to exceed $2,500,
applicable fees may change over time and the current statute should be consulted before
filing.
In general, an LLP is managed and operated in the same manner as a general partnership.
The partnership agreement governs relations among the partners and between the partners
and the LLP. The partnership agreement may modify many of the default provisions of
RIUPA that concern the relations among the partners and between the partners and the
LLP.
The liability of partners in a partnership, including registered limited liability
partnerships, formed and existing pursuant to an agreement governed by RIUPA for the
debts and obligations of the partnership, is at all times determined exclusively by the laws
of the State of Rhode Island. Partners of an LLP do have different liabilities than partners
of a general partnership. An obligation of an LLP, whether arising in contract, tort or
otherwise, is solely the obligation of the LLP and a partner is not personally liable,
directly or indirectly, by way of indemnification, contribution, assessment or otherwise,
for such obligation of the LLP solely by reason of being or acting as a partner. A partner
is personally liable for his or her own negligence, wrongful acts or misconduct, or that of
any person under that partner's direct supervision and control other than in an
administrative capacity. In addition, in a partnership agreement or under another
agreement, a partner may agree to be personally liable, directly or indirectly, by way of
indemnification, contribution, assessment or otherwise, for any or all of the obligations of
the LLP. Furthermore, a partner is responsible for the amount of any distribution that
such partner is required to return to the LLP.
e. Resources
Rhode Island Secretary of State Corporations Division website
(www.sec.state.ri.us/corps)
Transactional Lawyer's Deskbook: Advising Business Entities (Arthur Norman Field &
Morton Moskin eds.)
7. Sole Proprietorships
Persons conducting a social enterprise alone in Rhode Island without the protections afforded
by incorporation are called sole proprietors. A sole proprietorship has no legal existence apart
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from its owner and may be formed without any expense or formality. Profits and losses are
borne directly by the proprietor. The proprietor may operate under a trade name. In Rhode
Island, trade names are most commonly registered in the local city or town hall where the
business is located. Such registration provides limited protection for exclusive use of the
name, absent trademark or service mark registrations.
The main disadvantage of forming a sole proprietorship is that the owner is wholly liable for
all debts and obligations of the enterprise. All of the personal assets and assets devoted to the
social enterprise can be seized to make payments. A sole proprietorship itself cannot be sold
since there is complete unity between the enterprise and its owner, but the assets used in the
enterprise can be sold. A sole proprietorship terminates upon the death of its owner.
8. New Forms of "Hybrid" Organizations
Leading thinkers in business, philanthropy and academia are studying the rapid growth of
social enterprise that is taking root in the space between the for-profit corporate world, which
is constrained by the duty to generate profits for shareholders, and the nonprofit world, which
lacks the market efficiencies of commercial enterprise and does not have ready access to
invested capital. A major legal question that has emerged from these studies is whether new
laws and tax regulations are needed in order to nurture and support the growth of this new
generation of "hybrid" organizations.
Starting with a meeting in 2007 titled "Exploring New Legal Forms and Tax Structures for
Social Enterprise Organizations," the Aspen Institute's Nonprofit Sector and Philanthropy
Program has been bringing legal scholars and practitioners together to grapple with this
question and related issues. Under the auspices of the Fourth Sector Network, many of the
same individuals are also working on this question.
As of this writing, these groups have not achieved a consensus as to whether new or revised
organizational and tax laws are needed to encourage and incentivize the growth of social
enterprise. Indeed, some participants have suggested that existing legal and tax regimes
already allow nonprofit social enterprises to operate broadly at the intersection of
philanthropy and business and they express skepticism that any legal reform is needed. On
the other hand, many participants advocate broad change, including revisions in federal tax
and state corporate laws to accommodate new forms of social enterprise such as the
"Charitable LLC," "B Corporations" and the "Socially Responsible Corporation."
LawForChange will follow these groups and report significant developments as they emerge.
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9. Resources
Austin, James E., et. al., "Capitalizing on Convergence," Stanford Social Innovation Review,
Winter 2007. http://www.Ssireview.org/images/articles/2007Wl_feature_autstinetal.pdf
Billiteri, Thomas J., "Mixing Mission and Business: Does Social Enterprise Need a New
Legal Approach?" The Aspen Institute, January 2007.
http://www.nonprofitresearch.org/usr_doc/New_Legal_Forms_Report_FINAL.pdf
Searing, Jane M., "Capital With a Conscience," Journal of Accountancy Online, July 2008.
http://www.aicpa.org/PUBS/jofa/jul2008/capital_conscience.htm
Wolk, Andrew, "Social Entrepreneurship & Government: A New Breed of Entrepreneurs
Developing Solutions to Social Problems," Root Cause, 2007.
http://www.rootcause.org/assets/files/SE_and_Gov_Wolk.pdf
"Structures at the Seam: The Architecture of Charities' Commercial Activities," New York
University School of Law and National Center on Philanthropy and the Law, conference
materials, October 2008.
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