GEORGIA FORMS OF ORGANIZATION

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1 Last Updated: January 2010 GEORGIA FORMS OF ORGANIZATION Alston & Bird LLP Paul J. Nozick Contributors: Farrar J. Barker, Jonathan B. Breviu, Bethany L. Cooper, Kyle G. Healy and Ashley D. Liu Kirkman 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 and Limited Partnerships 7. Sole Proprietorships 8. New Forms of Hybrid Organizations The most common legal form of organization utilized by the social sector is the nonprofit corporation although for-profit corporations, limited liability companies (LLCs), 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.

2 Nonprofit 501(c)(3) 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 for tax-exempt status unless below gross receipts threshold. Recruit directors, draft bylaws and hold organizational meeting. Take steps to comply with license, tax and employment law/regs. Management and Control Liability Tax Factors Capital and Loans 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 in bylaws. Some obligations of the nonprofit corporationscorporation, including have members (like shareholders) who elect directors. for unlawful acts of others involved in the affairs of the 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. 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 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. For-Profit Corporation 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. Managed 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. 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. 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. B Corp (a forprofit corporation with a social mission that is licensed to use the trade name B Corporation ) See for-profit corporation See for-profit corporation. The B Corp license requires the corporation to incorporate specific socially beneficial performance standards into its governing documents and operating principles. See for-profit corporation. See for-profit corporation. 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

3 LLC L3C (low-profit LLC) Partnership Formation 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. Similar to LLC but must be formed for a charitable or educational purpose. Only permitted in certain states (e.g., VT, IL, MI,UT,ME, WY) No filing requirements unless limited partnership (LP) or limited liability partnership (LLP), but partners should sign partnership agreement. Take steps to comply with name, license, tax and employment law/regs. Sole Proprietor No filing requirements. Has no legal existence apart from owner. Take steps to comply with d/b/a name, license, tax and employment law/regs. Management and Control Liability Tax Factors Capital and Loans Flexible structure Can raise capital through like a partnership contributions by with management member/owner. responsibilities Otherwise, same as forprofit specified in corporation. operating agreement (usually management committee or single manager). Same as a corporation. 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. Taxexempt member/owners treat their share of income as exempt or subject to unrelated business taxable income, depending on the character of the income. See LLC Same as a corporation See LLC. 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. Partners have equal, full control unless otherwise specified in partnership agreement. Owner has full control. Partners are personally liable for the debts and obligations of the partnership, including for unlawful acts of other partners and employees. Risk can be limited by creating an LP or LLP. Owner is liable for all debts and obligations, including for unlawful acts of employees. Generally not taxed as an entity. Partners report profits and losses on personal tax returns. Not taxed as an entity. Owner reports business profits and losses on personal tax return. Can raise capital through contributions by partners and by borrowing money through loans or other debt instruments. Owner provides funds for capital investment and owner can borrow money through loans or other debt instruments

4 1. Nonprofit Corporations a. Overview The Georgia Nonprofit Corporation Code, O.C.G.A , et sec. (the GNCC ) governs the formation, operation and dissolution of nonprofit corporations in Georgia. A nonprofit corporation in Georgia 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 to not earn profits. No part of the income or surplus of a Georgia nonprofit corporation may be distributed to its members, directors or officers; however, reasonable compensation may be paid for services rendered. A Georgia nonprofit corporation may also make a distribution to (i) an organization organized and operated for the same or similar purposes as the distributing corporation, (ii) other specified nonprofit corporations, and (iii) governmental entities. Additionally, a Georgia nonprofit may make a distribution to repurchase membership interests, subject to several limitations. A nonprofit corporation has an existence of its own, independent of then 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. 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 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. Therefore, unless the directors and managers can tie the social mission of their for-profit corporation directly to its business purpose, they can be sued for breach of their - 4 -

5 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 if 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 Secretary of State of Georgia, Corporations Division, of its articles of incorporation. This document is in essence a contract between the state and the nonprofit corporation in which the State of Georgia grants individual legal status to the corporation in exchange for the corporation s commitment to follow its rules. One or more persons may act as the incorporator(s) of the nonprofit corporation by executing and delivering the articles of incorporation to the Georgia Secretary of State for filing. The corporate existence of the nonprofit corporation begins when the articles of incorporation are filed. The basic filing fee is $100. The GNCC requires that the articles of incorporation for a nonprofit corporation include the name of the entity, the name and address of the entity s registered agent in Georgia, the name and address of each incorporator, whether or not the entity will have members, the address of the principal office of the entity, if different from the registered office, and a statement that the entity is organized pursuant to the Georgia Nonprofit Corporation Code. Additionally, the articles of incorporation may, but are not required to, set forth the purpose or purposes for which the entity is organized, the names and addresses of the directors, and provisions not inconsistent with law regarding the management of the entity, the certain limitations on liability of directors, and distribution of assets on dissolution. The name of the entity must contain the word corporation, incorporated, company, or limited, or the abbreviation Corp., Inc., Co., or Ltd., or words or abbreviations of like import in a language other than English. The name must also be distinguishable from other entity names on record with the Georgia Secretary of State. 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 in section g). A generic form of articles of incorporation for a nonprofit corporation may be found on the Georgia Secretary of State s website at

6 See also Georgia Corporate Forms for generic forms of articles of incorporation for a nonprofit corporation, specifically Form (nonprofit corporation with members) and Form (nonprofit corporation without members). See Fischer, David Jon, et. al., Georgia Corporate Forms, Volume 1 (2005 ed.). d. Management and Control Once the nonprofit corporation has been established, the initial board of directors, if named in the articles of incorporation, should hold an organizational meeting, either in person or by consent, to ratify the acts in connection with the initial formation of the corporation and adopt bylaws. The bylaws may also be adopted by the incorporator(s). If the initial directors are not named in the articles of incorporation, the incorporator or incorporators should hold an organizational meeting, in person or by consent, to elect directors. The bylaws 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 Georgia 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. A generic form of bylaws may be found in Georgia Corporate Forms as Form (nonprofit corporation with members) and Form (nonprofit corporation without members). See Fischer, David Jon, et. al., Georgia Corporate Forms, Volume 1 (2005 ed.). e. Liability of Members, Directors and Officers A member of a Georgia nonprofit corporation is not, as such, personally liable for the acts, debts, liabilities or obligations of the corporation. A member may become liable to the corporation for agreed upon dues, assessments or fees. Directors of Georgia nonprofit corporations are required to discharge their duties in a manner which the director believes in good faith to be in the best interests of the corporation and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. A director is entitled to rely on information from officers, employees and other persons if the director believes such persons to be reliable and competent in the matters presented. A director who complies with the applicable standard of conduct will not be liable to the corporation, any member, or any other persons for actions taken or not taken as a director. Officers of Georgia nonprofit corporations are held to a similar - 6 -

7 standard of conduct as described above and are not liable to the corporation, any member, or other persons for actions taken as an officer in compliance with the GNCC. The GNCC permits a nonprofit corporation to limit the liability of a director to the corporation or its members for monetary damages for actions taken or for failure to take any action as a director, except liability for an appropriation of a business opportunity of the corporation, for intentional misconduct or knowing violation of the law, for actions resulting from a conflict of interest, and for transactions from which the director received an improper personal benefit. A Georgia nonprofit corporation may indemnify a director from liability if the director conducted himself or herself in good faith and he or she reasonably believed, in the case of conduct in the director s official capacity, that such conduct was in the best interests of the corporation, and in all other cases, that such conduct was at least not opposed to the best interests of the corporation. In the case of a criminal proceeding, the director must have believed that he or she had no reasonable cause to believe his or her conduct was unlawful. A Georgia nonprofit corporation may not indemnify a director in connection with a proceeding by or in the right of the corporation (i.e., derivative actions), except for reasonable expenses if the director is able to meet the applicable standard of conduct. Likewise, a Georgia nonprofit corporation may not indemnify a director in connection with any other proceeding if it is determined that the director received a personal benefit was improperly received by the director. If a director is successful in the defense of a proceeding against the director in his or her capacity as a director of the corporation, the corporation is required to indemnify the director for reasonable expenses incurred. f. Mergers, Acquisitions and Dissolution The GNCC provides that one or more nonprofit corporations may merge into a domestic or foreign corporation (for profit or nonprofit) or other entity, subject to certain restrictions designed to prevent the diversion of assets of a charitable corporation to noncharitable purposes. A corporation that is operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes, to foster national or international sports competition, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder, member or individual is restricted from taking certain actions, including dissolution and certain types of mergers, without judicial approval. A corporation meeting the above description, which is the same as a tax-exempt organization under section 501(c)(3) of the Internal Revenue Code of 1986 (a Charitable Corporation ), must either obtain judicial approval prior to a merger or otherwise follow the procedures set forth in Section (a)(2), unless the surviving corporation resulting from the merger is also a Charitable Corporation. Section (a)(2) requires the Charitable Corporation to transfer certain of its assets prior to the effective time of the merger and obtain consent of - 7 -

8 a majority of its board members who will not be affiliated with the surviving corporation. Additionally, a corporation desiring to follow the procedures of Section (a)(2) must notify the Georgia Attorney General and deliver a copy of the proposed plan of merger at least 30 days prior to the proposed merger. Subject to the restrictions set forth above, a merger of one or more Georgia nonprofit corporations into another entity is accomplished pursuant to a plan of merger followed by filing of articles of merger and notice of publication. A plan of merger must include the name of each corporation or other entity planning to merge and the name of the surviving corporation or other entity, the terms and conditions of the planned merger, and the manner and basis, if any, of converting the membership interests of each nonprofit corporation, and the shares, units or other securities of the surviving corporation or any other corporation or entity into cash or other property. If the nonprofit corporation has members, the plan of merger must be approved by the board and submitted for approval by the members. Unless the corporation s articles, bylaws, or its board or members require a higher percentage of voting approval, the plan of merger must be approved by two-thirds of the members votes cast or a majority of voting power, whichever is less. Additionally, the plan of merger must be approved by other persons whose approval is required by the articles of incorporation for an amendment to the articles or bylaws. If the nonprofit corporation does not have members, the plan of merger must be approved by a majority vote of the directors, unless the corporation s articles, bylaws or its board provide for a higher percentage of voting approval. Nonprofit corporations without members are required to give notice to the directors of the meeting at which approval of the merger is to be obtained. After the requisite approval of the plan of merger has been obtained, the surviving entity should deliver to the Georgia Secretary of State the articles of merger, which sets forth the plan of merger, certain statements regarding the requisite approval obtained by the corporation and a statement that a request for publication of a notice of merger will be made as required by the GNCC. The surviving entity should have the notice of merger published as set forth in the GNCC no later than the next business day after filing the articles of merger. The merger takes effect when the articles of merger are filed, unless a delayed merger is specified in the articles of merger. Upon the effectiveness of the merger, every other corporation or entity to the merger merges into the surviving entity and the separate existence of the other entities ceases. A Georgia nonprofit corporation may be dissolved upon adoption of a plan of dissolution by the corporation and making the requisite filings with the Georgia Secretary of State and publications prescribed by the GNCC. A plan of dissolution shall provide for the distribution of assets in the order provided for in the GNCC

9 Additionally, a Charitable Corporation is required to notify the Georgia Attorney General 30 days in advance of the dissolution and is restricted from transferring any assets until 30 days after such notice, and must provide to the Attorney General a list of those to whom the assets of the corporation were transferred. If the corporation has members entitled to vote on dissolution, they are given notice and an opportunity to vote on dissolution. If the corporation has no members entitled to vote, the dissolution may be effected by a vote of the majority of the directors, upon specific notice to the directors. Once a corporation obtains the requisite authorization to dissolve, the corporation must deliver notice of intent to dissolve to the Georgia Secretary of State, indicating the name of the corporation, the date dissolution was authorized, and a statement that the dissolution was duly approved by the members, if required. Additionally, the corporation must deliver to the Georgia Secretary of State a certificate verifying the request for publication of the notice of intent to dissolve and follow the procedure for publishing such notice similar to that provided for for-profit corporations. Once all known obligations of the corporation have been discharged, the corporation may dissolve by delivering the articles of dissolution to the Georgia Secretary of State for filing, which sets forth the name of the corporation, the date when the notice of intent to dissolve was filed and that it has not been revoked, a statement regarding the satisfaction of all debts and obligations, a statement regarding the distribution of any remaining assets and a statement regarding any pending actions against the corporation. g. Recordkeeping, State Reports and State Taxes All corporations incorporated in the State of Georgia, including nonprofit corporations, are required to file an annual registration. The basic filing fee is $30. All corporations should keep minutes of all meetings of members and the board of directors, executed consents, and all committee actions, as part of the corporation s permanent records. All corporations should also maintain appropriate accounting records, a record of the name and address of all members and any voting rights for each member. In general, a corporation which is incorporated under Georgia law but otherwise has no contact with Georgia will generally not be subject to Georgia taxes. However, even to the extent that a nonprofit corporation has assets or activities in Georgia, such nonprofit corporation may be exempt from corporate income taxes, property taxes, and Georgia corporate net worth taxes. For all tax years beginning after January 1, 2008, corporations which are exempt from federal income taxation pursuant to Section 501(c), 501(d), 501(e), 664, or 401 of the Internal Revenue Code are automatically exempt from Georgia corporate income taxes. Also, any organization not organized for pecuniary gain or profit is exempted from Georgia s corporate net worth tax. Institutions of purely public charity are also exempt from property taxes imposed by counties. In addition to that general exemption, those charitable institutions may use a building and up - 9 -

10 to 15 acres of land for the purpose of securing income so long as the income is used exclusively for the operation of that charitable institution. However, there is no general exemption for nonprofit entities from the payment of sales or use taxes on Georgia purchases. Such entities must pay tax on their taxable purchases (or taxable uses) in Georgia, and they must also collect and remit sales/use taxes on their taxable sales in Georgia. Numerous nonprofit taxpayers, though, are specifically exempted by Georgia statutory provisions. 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. A Georgia nonprofit corporation is specifically permitted to purchase liability insurance on behalf of its directors, officers, employees, or agents of the corporation or who, while a director, officer, employee, or agent of the corporation, serves at the corporation s request as a director, officer, partner, trustee, employee, or agent of another domestic or foreign business or nonprofit corporation or other entity, to insure against potential liability of such persons in their capacity or arising from such person s status as a director, officer, employee, or agent, whether or not the corporation would have power to indemnify or advance expenses to the individual against the same liability. Thus, the GNCC theoretically permits the corporation to insure its directors against judgments or amounts paid in settlement of derivative suits and against expenses incurred by a director even in circumstances in which a director has been found to have acted unlawfully or in bad faith. 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 Georgia Secretary of State, Corporations Division, Fischer, David Jon, et. al., Georgia Corporate Forms, Volume 1 (2005 ed.)

11 Oleck and Stewart, Nonprofit Corporations, Organizations & Associations (Prentice-Hall, 1994, Cum. Supp. 2002) Jacobs, Jerald A., Association Law Handbook (ASAE & The Center for Association Leadership 4 th ed., 2007) Nonprofit Governance and Management (American Bar Association and American Society of Corporate Secretaries, 2002) 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) 2. For-profit Corporations a. Using For-profit Corporations to Pursue Social Objectives The for-profit form of organization can and frequently is used as a vehicle for conducting a business that also has a social mission or objective. Although for-profit corporations are usually formed for the purpose of making money and distributing it to shareholders, there is no reason why a for-profit corporation cannot include a social mission in the purposes clause of its articles of incorporation. While such a provision would authorize the corporation to pursue social objectives, it would not require the corporation to do so - only the shareholders 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 behaviors 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, inheritance or otherwise. Moreover, a tightly drafted shareholders agreement which makes it difficult to respond to business changes over time would tend to render the for-profit corporation much less attractive to investors (potential new shareholders)

12 b. Formation The Georgia Business Corporation Code, O.C.G.A , et. seq. (the GBCC ) governs the formation, operation and dissolution of for-profit corporations in the State of Georgia. The GBCC authorizes [o]ne or more persons to incorporate a corporation by filing articles of incorporation with the Georgia Secretary of State. The articles of incorporation must set forth: (i) the name of the corporation, which must include a word designating that such entity is a corporation (e.g., corporation, incorporated, etc., or an abbreviation thereof); (ii) the number of shares the corporation is authorized to issue; (iii) the address of the registered office of the corporation in the State of Georgia and the name of the corporation s registered agent; (iv) the name and address of each incorporator; and (v) the mailing address of the initial principal office of the corporation. In addition, the GBCC sets forth additional provisions that may be included in the articles of incorporation at the option of the incorporation. These include names and addresses of the initial directors; the purpose for which the entity is organized; the power of the corporation, its directors and shareholders; the par value for authorized shares or classes of shares and parameters regarding personal liability of shareholders and directors; and other provisions not inconsistent with law. The articles of incorporation must be executed and filed by the incorporator or incorporators in accordance with the GBCC, which includes an obligation to publish a notice of such filing in a proper county newspaper. The cost of filing article of incorporation with the Georgia Secretary of State includes a $100 filing fee due at the time of filing the articles of incorporation. A generic form of articles of incorporation may be found on the Georgia Secretary of State s website at procedures_corp_2001.pdf. In addition, a form of articles of incorporation may be found in Georgia Corporate Forms as Form See Fischer, David Jon, et. Al., Georgia Corporate Forms, Volume 1 (2005 ed.). c. Management and Control A for-profit corporation has a hierarchical control structure. It is managed by or under the direction of a board of directors and its officers, although its shareholders vote on important corporate issues, such as election of directors, mergers, sale of all assets and dissolution. Similar to a nonprofit corporation, once the for-profit corporation has been established, the initial board of directors meets (in person or by consent), ratifies the acts in connection with initial formation of the corporation and adopts bylaws which set forth the

13 rules and procedures governing the operation and management of the corporation consistent with the applicable statutes of Georgia and 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; conflicts of interest; and amendment, merger and dissolution procedures. A generic form of bylaws may be found in Georgia Corporate Forms as Form See Fischer, David Jon, et. al., Georgia Corporate Forms, Volume 1 (2005 ed.). d. Liability of Shareholders, Directors and Officers In fulfilling their managerial responsibilities, directors are charged with an unyielding fiduciary duty (legal or ethical relationship of confidence or trust) to protect the interests of the corporation and to act in the best interests of the corporation's shareholders. In recognition of the managerial prerogatives granted to directors of Georgia corporations under the GBCC, Georgia law generally presumes that, in making business decisions, the directors of a corporation are disinterested and act on an informed basis, in good faith, with due care and in the honest belief that the action taken is in the best interests of the corporation and its shareholders. Under the business judgment rule, a court will not second-guess the business decisions of the board, nor impose liability on directors for decisions that in hindsight appear to have been wrong, if the decision was made in good faith for a rational business purpose. This presumption will be rebutted, however, if the directors are shown to have breached their fiduciary duty of loyalty or their fiduciary duty of care. In such an event, the directors will bear the burden of demonstrating that their decisions were entirely fair to the corporation and its shareholders. The duty of care essentially requires that the corporate fiduciary be attentive and inform himself of all material facts regarding a decision before taking action. The duty of loyalty generally requires that the corporate fiduciary's actions be motivated solely by the best interests of the corporation and its shareholders. For directors to fulfill their fiduciary duties, they must also act in good faith. Georgia law permits a corporation to make available to its directors and officers separate levels of protection against possible exposure to liability for breach of fiduciary duty. Georgia law permits a corporation to: (i) indemnify its directors and officers for attorneys' fees and other expenses incurred in defending such actions; (ii) advance litigation expenses incurred by directors and officers; and (iii) provide insurance to

14 directors and officers against those expenses incurred by them in their capacity as directors and officers of the corporation, including those expenses which may not otherwise be subject to indemnification. In addition, Georgia law permits a corporation to include in its articles of incorporation a provision eliminating or limiting the personal liability of a director to the corporation and its shareholders for monetary damages for breach of a fiduciary duty as a director. Such provision shall not, however, eliminate or limit the liability of a director: (i) for any appropriation of any business opportunity of the corporation; (ii) for acts or omissions which involve intentional misconduct or a knowing violation or law; (iii) for unlawful distributions; or (iv) for any transaction from which the director derived an improper personal benefit. 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, etc.) to numerous types of debt instruments (convertible notes, subordinated notes, bonds, commercial paper, etc.). f. Recordkeeping and State Reports All corporations incorporated in the State of Georgia are required to file an annual registration with the Secretary of State of the State of Georgia. The annual registration filing fee for for-profit corporations is $ The annual registration is to be received no later than April 1st of each year. g. Taxation Corporations that do not conduct business in Georgia are not subject to Georgia corporate income taxation. If the corporation is incorporated in Georgia but does not conduct business in Georgia, then the corporation will pay only the annual corporate net worth tax. The amount of the tax shall not exceed $5,000 per taxable year and is based on the net value of the corporation. For foreign corporations doing business in Georgia, the net worth is measured by multiplying the corporation's net worth by the percentage of business the corporation does in Georgia. Corporate income tax and corporate net worth tax returns are due on the 15 th day of the third month following the end of the taxpayer's fiscal year. For example, for corporate taxpayers using a calendar year, the returns are due on March 15. Georgia corporations doing business in the State of Georgia are subject to Georgia corporate income tax. Unlike sole proprietorships and partnerships, income earned by Georgia for-profit corporations doing business in the state may be subject to double taxation. That is, the corporation pays federal and state taxes on the income it earns and

15 the shareholders are taxed at their personal income tax rate on any profits that are distributed to them by the corporation as dividends. A corporation may, however, elect to be governed by Subchapter S of the Internal Revenue Code to avoid double taxation. Subchapter S corporations are not taxed at the corporation level. Rather, the income and losses of a Subchapter 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. h. Resources Secretary of State Corporations Division, Fischer, David Jon, et. al., Georgia Corporate Forms (2005 Edition) 3. Limited Liability Companies (LLCs) a. Using LLCs to Pursue Social Change 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. The State of Georgia does not have such a requirement, but requires only that an LLC be formed for a lawful purpose. LLCs differ from forprofit corporations because they are formed and owned by members rather than shareholders; however, like S corporations and partnerships, LLCs are eligible for passthrough 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 often 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 ). As with the shareholders of a corporation, the members of an LLC may be divided into classes, each with its own economic or voting rights, and members have limited personal liability (discussed below)

16 The Georgia Limited Liability Company Act, O.C.G.A , et seq. (the GLLCA ) governs the formation, operation and dissolution of LLCs in Georgia. Two states, Tennessee and Kentucky, specifically authorize the formation of nonprofit limited liability companies (nonprofit LLCs). The statutes of numerous states, though not Georgia, 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) of the Internal Revenue Code 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 are discussed in the Nonprofit Taxation section. b. Formation To form and organize an LLC under the GLLCA, articles of organization must be filed by one or more organizers with the Georgia Secretary of State. The articles of organization must set forth the name of the LLC, which must contain the words limited liability company or limited company (it may abbreviate the word limited to ltd. and the word company to co. ) or the abbreviation L.L.C, LLC, L.C. or LC. In addition, the articles of organization may set forth any provisions not inconsistent with law, including the vesting of the management of the LLC in one or more managers. The organizer(s) must also supply the Secretary of State with the following information: (1) the name and address of each organizer, (2) the street address and county of the LLC s initial registered office and its initial registered agent at that office, and (3) the mailing address of the LLC s principal place of business. The Georgia Secretary of State requires this information to be provided as part of its Transmittal Information for Georgia Limited Liability Companies Form, which may be found on the Secretary of State s website. Each Georgia LLC must have a registered office in the State of Georgia, which may but need not be its place of business, and a registered agent at the registered office for service of process on the Georgia LLC, which must be a resident of Georgia, a Georgia corporation, or a foreign corporation with authority to transact business in Georgia. The articles of organization may be signed by any member of the LLC, any manager if management is vested in one or more managers, or by an organizer if the entity has been formed but it has no members or managers. The person signing the articles of organization should indicate next to his or her signature the capacity in which he or she signs. Organizers are not required to be a member of the LLC, either at the time of formation or thereafter. In addition, a filing fee of $100 for filing articles of organization with the Georgia Secretary of State is required

17 A Georgia LLC is deemed to have been formed at the time its articles of organization are filed, unless the articles provide for a future effective date or time. Articles of organization may be filed with the Georgia Secretary of State prior to entering into an operating agreement. A Georgia LLC may be formed for any lawful purpose, and unless a more limited purpose is set forth in its articles of organization or a written operating agreement, a Georgia LLC has the purpose of engaging in any lawful activity. A Georgia LLC shall possess and exercise all of the powers and privileges granted by the GLLCA or by any other law or by its operating agreement, together with any powers incidental thereto, including such powers and privileges as are necessary to carry out its purpose, business and affairs. The purposes and powers of an LLC may be restricted by provisions in the operating agreement if desired. See Fischer, David Jon et al., Georgia Corporate Forms, vol. 2, (LexisNexis 2005) for generic forms of articles of organization for a Georgia LLC. c. Management and Control Typically, an LLC operating agreement executed by the members governs the management of an LLC. The operating agreement, which acts like the articles of incorporation, bylaws and a shareholder agreement for a corporation all in a single document may contain provisions requiring adherence to a social purpose and such purpose and the values it embodies may be interwoven throughout the operating agreement. A Georgia LLC is governed by the terms of both its articles of organization and its operating agreement. In the event of a conflict between a provision of the articles of organization and a provision of an operating agreement, the provision of the articles of the organization governs. The GLLCA permits oral operating agreements, though in many cases any deviation from the default rules in the GLLCA must be made pursuant to a written operating agreement. It is always recommended to have a written operating agreement that defines the rights, duties and liabilities of the members, and managers if applicable, of the LLC. The GLLCA permits the formation of Georgia LLCs that have only one member. The GLLCA was drafted in a way that provides flexibility in establishing the management and structure of a Georgia LLC. In most cases, the rules set forth in the GLLCA are default rules that may be modified in an operating agreement and are otherwise only applicable when the operating agreement is silent on the issue. The GLLCA provides that it is the policy of the State of Georgia to give maximum effect to the principle of freedom to contract and to the enforceability of operating agreements

18 Virtually any natural person, legal entity, association, government or representative may be a member of a Georgia LLC. In connection with the formation of a Georgia LLC, a person is admitted as a member of the LLC upon the later to occur of (i) the formation of the LLC, or (ii) the time provided in and upon compliance with the articles of organization or a written operating agreement or, if the articles of organization and any written operating agreement do not so provide, when the person s admission is reflected in the records of the LLC. Once the LLC has been formed, a person may be admitted as a member pursuant to the terms of the articles of organization and any written operating agreement. A person may be admitted as a member of a Georgia LLC without (i) acquiring a limited liability company interest in the LLC or (ii) making a contribution or being obligated to make a contribution to the LLC. A Georgia LLC may provide for classes or groups of members having such relative rights, powers and duties as are set forth in its articles of organization or a written operating agreement. The articles of organization or written operating agreement may grant to all or certain identified members or classes or groups of members the right to vote, separately or with any other class or group of members or managers, on any matter. The articles of organization or written operating agreement may also provide for the taking of specified actions without the vote or approval of the members. The GLLCA identifies certain major matters, including the dissolution of the LLC, a merger of the LLC, the admission of new members and an amendment to the articles of organization or written operating agreement, that require unanimous consent of the members (regardless of whether or not members manage the LLC) unless the articles of organization or a written operating agreement provides otherwise. The GLLCA is drafted in a way to permit members to have broad discretion in determining the internal governance of the Georgia LLC. Unless otherwise provided in the articles of organization or a written operating agreement, the management of a Georgia LLC is vested in its members and each member shall have one vote with respect to matters concerning the business of the LLC and the decision of a majority of the members shall control. In contrast, the articles of organization or a written operating agreement may vest all or part of the management of the LLC in one or more managers or any board or other management structure that the members desire. Unless otherwise provided in the articles of organization or a written operating agreement, each manager shall have one vote with respect to matters concerning the business of the LLC and the decision of a majority of the managers shall control. Under the GLLCA, an interest in a Georgia LLC is freely assignable, in whole or in part, except as otherwise provided in the articles of organization or a written operating agreement. Unless otherwise provided in the articles of organization or a written operating agreement, an assignee of an interest in a Georgia LLC shall not be admitted as

19 a member or have any right to participate in the management of the business and affairs of the LLC unless the other members unanimously consent to the assignee becoming a member and the assignee also consents to such admission and such assignee complies with any additional requirements or procedures set forth in the articles of organization or any written operating agreement. A person ceases to be a member of a Georgia LLC when (i) the member assigns all of his or her interest and all of the assignees become members of the LLC, (ii) the member is removed as a member, either in accordance with the articles of organization or a written operating agreement or if such member has assigned all of his or her interest, by majority vote of members who have not assigned all of their interests (unless the articles of organization or a written operating agreement provides otherwise), (iii) the member s entire interest is purchased or redeemed by the LLC, (iv) the member is involved in certain bankruptcy proceedings (unless the articles of organization or a written operating agreement provides otherwise or unless all other members by written consent at the time decide otherwise), (v) bankruptcy proceedings have commenced and are not dismissed after 120 days, or a trustee is appointed and the appointment is not vacated or stayed after 90 days (unless the articles of organization or a written operating agreement provides otherwise or unless all other members by written consent at the time decide otherwise), or (vi) in the case of an individual member, such member dies or is declared incompetent by the court (unless the articles of organization or a written operating agreement provides otherwise or unless all other members by written consent at the time decide otherwise). Note that members of LLCs formed on or after July 1, 1999 may not voluntarily withdraw unless the articles of organization or a written operating agreement provides otherwise. The GLLCA provides certain default rules regarding allocations of profits and losses and distributions of assets, but members are free to contract with respect to such economic rights in the articles of organization or a written operating agreement. Absent a provision in the articles of organization or any written operating agreement, the profits and losses of a Georgia LLC shall be allocated equally among the members and distributions of cash or assets shall be shared equally among the members. See Fischer, David Jon et al., Georgia Corporate Forms, vol. 2, and (LexisNexis 2005) for generic forms of an operating agreement for a Georgia LLC. d. Limited Liability of Members and Managers Under the GLLCA, the general rule is that a member or manager is not liable, solely by reason of being a member or manager of a Georgia LLC, for any debt, obligation or liability of the Georgia LLC, or for the acts or omissions of any other member or manager, except as otherwise provided in the GLLCA. The duties and liabilities of

20 members and managers can be expanded, restricted or eliminated by provisions in the articles of organization or a written operating agreement. Notwithstanding this general ability to contractually limit liability, a Georgia LLC cannot eliminate or limit the liability of a member or manager (i) for intentional misconduct or a knowing violation of law, or (ii) for any transaction for which the member or manager received a personal benefit in violation of a written operating agreement. In addition, a member or manager may agree by contract to be obligated personally for any or all of the debts, obligations and liabilities of the Georgia LLC. A member is liable for member contributions required to be made by it and other payment obligations as provided in the articles of organization or a written operating agreement and, under certain limited circumstances, a member may be required to return distributions wrongfully distributed to it. A Georgia LLC may choose to indemnify and hold harmless any member or manager or other person from and against any and all claims or demands arising in connection with the LLC, subject to such standards and restrictions as are set forth in the articles of organization or a written operating agreement. e. Merger, Dissolution and Term of Existence The GLLCA permits a Georgia LLC to merge with or into one or more business entities. A business entity includes another Georgia LLC, a foreign LLC, a Georgia or foreign limited partnership, a general partnership, or a Georgia or foreign corporation. Before merging, each party to the merger must adopt a written plan of merger and the surviving entity must file articles of merger with the Georgia Secretary of State. Unless the articles of organization or a written operating agreement requires a different vote, the members of a Georgia LLC must unanimously consent to any such merger. It should be noted that the GLLCA also provides for conversion of other business entities into Georgia LLCs. A Georgia LLC may not have perpetual existence; the GLLCA requires that each Georgia LLC specify in its articles of organization or a written operating agreement a date upon which the LLC shall dissolve if the LLC has not earlier dissolved. Section of the GLLCA further provides that a Georgia LLC is dissolved upon the first to occur of the following (i) at the time specified in the articles of organization or a written operating agreement, (ii) upon the happening of events specified in the articles of organization or a written operating agreement, (iii) subject to contrary provision in the articles of organization or a written operating agreement, at a time approved by all members, (iv) for Georgia LLCs formed prior to July 1, 1999, subject to contrary provision in the articles of organization or a written operating agreement, 90 days after the dissociation of a member unless all other members consent in a writing to the