Additional Incorporation questions
James H. Moss (JHMoss@LAWYERNET.COM)
Mon, 24 Aug 1998 15:01:15 -0600
Several of you had great questions on my discourse on incorporating units.
Here is more information on the subject that hopefully will filter rather
than muddy the waters.
My thanks to John M. Ballenger of Alexandria, VA for pointing out some flaws
in my analysis and for permission to use his comments.
When You Incorporate A BSA Unit You Lose Liability Protection!
You lose this protection in several ways.
1. "You are no longer a non-profit as such you do not avail yourself of the
immunity statutes in each state for volunteers."
A corporation can be a non-profit (or a non-stock) corporation. The Little
League recommends forming non-profits corporation, so why is it such a bad
idea for Scouting? I am not necessarily an advocate for incorporating
Troops, I am just trying to understand the pros and cons.
Little league is not supported by a chartered organization. Also, I suspect
that Little League's insurance is set up to cover individuals within
separate corporations. The BSA is not because of the registration process
as I understand it. Are you certain that forming a non-profit corporation
prevents the member volunteers from availing themselves of the immunity
statutes in each states for volunteers?
No. If you set a for profit corporation you would lose this protection.
However, to avail yourself of the protection you would have to set 1) a
non-profit corporation and 2) you would have to get it approved as such by
the IRS or in some cases by a state authority. Then you would be able to
fall under the state volunteer immunity statute if it existed in your state.
"2. You are no longer a member of the BSA as such there is an issue as
to whether you have the protection of their insurance policy."
Why are you no longer a member of the BSA if you incorporate? Are you
certain that incorporation as a non-profit corporation prevents the members
from being covered by the BSA insurance policy?
Yes. You may be a member of the BSA if you hold a district position.
However, you are no longer a member of a unit because the unit is no longer
sponsored by a chartered organization approved by the BSA, unless the
corporation you set up becomes the chartered partner. (However, I suspect
the BSA is not going to leave you out in the cold.)
"3. You are no longer protected under any policy of the CO. You are no
longer non-profit here also."
If the corporation is a not-for-profit corporation, would the members be
protected under the policy of the CO?
Should be. Remember the BSA does not own any units. The BSA provides
programs to business and non-profits in the community to use with youth.
One corporation cannot under a standard commercial insurance policy
insurance another corporation, unless that corporation is a wholly owned
subsidiary and there is a rider in the policy acknowledging that. Think
about it this way. You are the underwriter for a church insurance policy.
The Church calls you up and says they have a corporation they want to insure
under their policy. The underwriter asks if they own the corporation? No.
Do they control the corporation? No (Only the shareholders can control a for
profit and the members or the Board of Directors can control a non-profit.)
Who controls and how is the church going to control the new corporation.
Just like you cannot insure a tenant's property even though you own the
Your remarks seem to be addressed toward for-profit corporations. Is there
a distinction here between for-profit and not-for-profit corporations?
Minimal. What the tax status is the only difference between for profit and
non-profit. In addition, that difference only exists one the IRS has
blessed the non-profit.
Even if you form a non-profit corporation for the unit or the committee, you
then lose all protection from the BSA and the CO.
Why would a non-profit corporation lose all protection from the BSA and the
Same way a for profit would. Unless the corporation (for or non) becomes
the chartered partner.
You also then come under the scrutiny of the IRS and any state taxing unit.
As a corporation you must get a tax id number. If you are non-profit, you
have to qualify as such under the IRS regulations. If they do not approve
you, any money or gifts in kind given to the unit are not tax deductible by
You are certainly correct here, but wouldn't a Boy Scout Troop qualify for
Section 501(c) status?
Yes, however, that means you have to apply and file a tax return every year
with the Feds and your state.
If you are for profit, you cannot accept gifts or money donations. You will
also become a liability to the CO.
I agree here. It would be insanity to be a for-profit corporation.
"Speaking of this, how can a CO, adopt another corporation and sponsor a BSA
unit. Legally the board of directors of the CO would have to have 100% (or
at least majority in some states) ownership and control of the unit for one
non-profit to own another corporation. If not, you my mess up the
non-profit tax status of the CO."
Doesn't the CO already have 100% ownership and control of the unit?
Yes, but that is because they own the unit in all senses of the word, legal
and otherwise. What control they exercise runs the across the board.
Aren't all the Committee Members and Scoutmasters approved by the CO and
theoretically under the control and supervision of the CO? Yes OTOH, the
prospect of unnecessary duplication may be a factor to consider. For
example, if the CO is already a section 501 non-profit corporation, then
there would seem to be little reason for the Troop to form another
However, in the business community it is not unusual to have two or more
corporate layer under the theory that there will be greater insulation from
Yes and no. Ten years ago it also provided greater tax protection. That
has now changed based on the percentage of ownership the controlling
corporation has in the subsidiary. Also, the amount of control in actuality
the corporation has on a subsidiary is important. That is why Dow Chemical
company is liable for the breast implant cases even though a subsidiary
corporation was the maker of the implants. Dow controlled the subsidiary so
the corporate shield was pierced.
Our CO is a church. The Virginia Constitution prohibits the General
Assembly of Virginia from granting a charter of incorporation to any church
or religious denomination. However, that prohibition has been held not to
apply to church agencies essential to the accomplishment of church work,
e.g., American Baptist Home Missionary Society.
Under Virginia law, a church is entitled to limited immunity from liability
for torts inflicted on beneficiaries of the institution, but it does not
have total immunity. Also, under the Virginia Code, no member of a church
will be liable in tort for the actions of any officer, employee, leader or
other member of a church solely because of his membership in it. I am not
certain what type of immunity a the members of a Boy Scout Troop sponsored
by a church would have.
Yes, that "charitable immunity" is great. However, in most states
"charitable immunity" has disappearedd. Using that above as an example. A
BSA unit incorporates. The form a Virginia non-profit corporation and
receive IRS approval as a non-profit corporation. However, they under law,
cannot be a church. As such, they lose the statutory immunity you mention.
There is also an immunity statute in Virginia for the directors, trustees
and officers or organizations exempt from income taxation under Section 501
of the Internal Revenue Code who serve without compensation for civil
liability. There are, as always, exceptions. There is liability for
willful misconduct, a knowing violation of criminal law or negligent
operation of a motor vehicle. This civil immunity applies whether the
organization is incorporated or not, and depends on the tax exempt status of
Most states do not allow immunity for automobile accidents and I should have
pointed that out. However, based on your statements about the immunity
available to volunteers in Virginia, I would want to fall under the Church
act rather than the non-profit act because it is broader in scope.
Virginia must be one of those states that offers state tax exemption. In
Colorado and many states, the states rely on the IRS and only the IRS. The
process for applying to be tax exempt and not be an entity like a
corporation is fairly difficult. It is always much easier to incorporate
and apply for the exemption.
"Actual expose of a member of the committee is limited. Remember what is
reported on the TV on in the newspaper has nothing to do with real trials
and real law."
If the Troop is an unincorporated association, then aren't all members of
the association legally responsible for the actions of all other members of
the association (if acting on behalf of the association)?
yes and no. 1). It would be dependent on state law. 2). State law would
say that the association is legally like a partnership. 3) Most states
don't line up associations like partnerships. 4) Even partnerships have
some limitations to liability, that is only liable for acts of a partner
while acting for the partnership.
Most associations can dodge the bullet on a lawsuit like this by saying it
was not the act of the association. Unless it was for the association and
the association was going to benefit then the association could be liable.
however, most statutes do not allow the plaintiff to go after individual
Isn't there total cross-liability, just like in a partnership? No.
I see in a separate reply to another post you have said that an
unincorporated association is not like a partnership, but I remain concerned
about the issue of joint and several liability.
The committee member would have to vote with the rest of the committee to
force the unit leader or some other adult to do something that would place a
kid or kids in danger. If requires affirmative acts knowing such acts
created the danger. Sending a kid to Philmont in a car, knowing there could
be a car accident is not enough. Sending a kid to Philmont in a car with a
person who is a know alcoholic and who is drunk at the time gets you there.
Is this a matter of general law of unincorporated associations? Yes, and
there is differences between the states. This sounds like the kind of
protection that is only available with a corporation, and not with an
unincorporated association? The un-incorporated associations when statutes
removed their charitable immunity were able to hold on to the idea of
Also, most states of eliminated joint and several liability. Now most
states have done away with joint and several liability. Now each person is
responsible for only his percentage of the fault.
Since all adult unit leaders act as volunteers to the CO's Scouting program,
they would be covered by the CO's corporate umbrella.
I agree, and that is good, but couldn't a Scout Troop organized as a
non-profit corporation be added as a named insured on the CO's policy?
Maybe, but the insurance company would probably not want to do it. I have
never heard of it happening.
WRONG!. The new corporation would have to purchase a new insurance policy.
One corporation's insurance policy cannot cover another corporation's
liability. One not incorporated business insurance policy not cover an
incorporated business's policy. This would be like saying your homeowner's
insurance policy cover's your neighbor's house. I am not sure I agree with
this. For example, most commercial leases require that tenants obtain
insurance policies naming the landlord as an additional insured on the
tenant's policy. In that case, there are separate corporations involved.
You need to understand additional insured. Additional insured only covers
liability, not property damage. The option to add someone as an additional
insured is based on insurance law. The person obtaining the policy must
have a contractual reason for requiring the additional insured rider. The
"reason" must be supported by an tradition in the law or a situation where
the one party can do an act would create liability for the other party. The
tenant could burn down the building creating liability for the landlord. If
one corporation is separate from the other, than they could not be
additional insiders on each other's policies, absent some
contractual/insurance basis for it.
The only liability insurance policy that would cover the unit would be one
they purchase. Minimum premium for a $1,000,000 policy would be at least
$750.00 per year. That policy would no doubt have a deductible. Of 5-10
Our Troop already has a policy, and we are required to show it to each camp
we visit. At the top of the policy it says "Boy Scouts of America Scouting
What you have is a health insurance policy for the kids I believe. The
policy provides health insurance benefits for the kids if they are hurt
while on camp property. (I may be wrong on this, but I do not believe so.
The reason is you mention Mutual of Omaha below who is the biggest
underwriter for these policies and MO does not write property or liability
insurance.) The policy probably costs you $25.00 per year per kid?
How would that change if the Troop were a non-profit corporation instead of
an unincorporated association? Is Mutual of Omaha going to refuse to write
the policy? For health insurance no. MO does not write liability
Yours in Scouting
12340 W. Alameda Pkwy., Lakewood, CO 80228-2841
Eagle Class of 69, Vigil, Denver Area Council
Terry Howerton Sakima Group, Inc. SCOUTER Magazine Kansas City