                         E                                Y    GENE
                                         F 1L‘EZKAS’
                                    AUSTlN         11.    TEXAS


                                             hue    14, 1960



Hon. 2olU.e steahley                                     Opinion   No. WW-849
Secretary of State
Capitol Station                                          Re:   Authority of the Secretary of
Austin 11, Texas                                               State to accept and file articler
                                                               of incorporation     for the purpose
                                                               of acquiring and operating an
                                                               apartment building for the use
                                                               and enjoyment of the members
                                                               on a co-bperative basis as a
                                                               non-profit  corporation     under
                                                               the Texas Non-Profit Corpora-
Dear   Mr.   Steakleyr                                         tion Act.

               You have requested     an opinion of this office as to whether the
Secretary    of State should accept and fileunder     the provisions    of the Texas
Non-Profit    Corporation    Act proposed articlea   of incorporation     stating that
the purpose of the proposed       corporation is “Acquiring,     owning, erecting,
leasing, maintaining,     improving,   and operating an apartment build-.
ancillary   properties,   the site thereof and the appurtenances      thereto, for
the use and enjoyment of the members of this corporation           on a co-operative
basis as a non-profit corporation as defined and within the amaning of
Article   1.02 of the Texas Non-Profit     Corporation   Act. This purpose clause
is subject to the restrictions     of Chapter 4, Title 32 of the Revised Civil
Statutes of the State of Texas, Revision d 1925.”

               We asmane       that your inquiry is limited to whether the presence
of such a purpose clause         in and of itself prohibits filing of the propoaecj
articles of incorporation        pursuant to the Nongrofit      Act. Xn our opinion
the purpose     clause    does not so prohibit the filing.

              Article    2.01 A of the Act rovides     “Except as hereinafter     $n
this Article   expressly    excluded her et porn. non-profit   corporations may be
organized    under this Act for any lawful purpose or purposes,           which pur-
pomea shall ba fully stated in the articles      of incorporation.     . .** There is
PO reason to believe the proposed purpose ie unlawful.            It remains to be
lacertafned whether the Akt can apply to such a corporation.

               While     Section   2.01 B(o) does exclude certain co-operative   cor-
poratioamfrom application of the Nan-Profit            Act, this type of co-op is not
one of thoee    lo excluded.       Furthermore.    each one of the named co-ops which
                                                                    . .
Ho+      Zollie   Steakley,     page   2   (WW-849)



is so excluded are incorporated       pursuant to specific and special Acts
elsewhere   contained in the statutes.      There is no special statute auth-
orizing the incorporation     of a co-operative    apartment house.    No doubt,
the co;operatives   so excluded were excluded because there were speci-
fic statutes dealing with that particular      type of co~op. We do not believe
that the exclusory   language of Article 2.01 B(3) should be construed to
exclude all co-ops from the purview of the Act. So f&r as we have been
able to ascertain,  there are no other exclusions       in the Act which are
applicable  to this character    of co-op#

             While religious,   charitable  and literary   corporations   are not
the only nonrprofit  corporations,    Reed v. Tidewater    Coal Exchange      Inc.,
116 Atlantic 898 (DeLChan.     1922), the mere factthat the purpose clause
states that a corporation   is to be a non-profit   corporation   is not conclu-
sive or definitive as to whether the corporation      is in fact a non-profit
                                             Telephone Co. v, Union Center
                                             St. 487, 133 N .I,’ 54V m      up. t.)and
                                   go Inc., supra.

                  Article     1.02 A(3) of the Act defines   a non-profit   corporation
thtls:

                           ““‘Non-Profit   Corporation’ is the equivalent  of
                  ‘not for profit corporation*   and means a corporation
                  no part of the income of which is distributabb    to its
                  members,     directors, or officers*”

This does not mean that no member, offikw or director   may be paid by
a non-profit corporation from its revenues or income in a proper case.

                  Article     2.24 provides:

                           “NO dividend shall be paid and no part of the in-
                  come of a corporatibn     sh@ibe distributed   t+ta;lnembers,
                  directors,  or offfcers.   A corporation   may pay compen-
                  sation in a reasonable    amount ti its members,      directors,
                  or officers for services    rendered,   may confer benefits
                  upon its members     in conformity with its purpoees,      and
                  upon dissolution   or final liquidation may mahe distribu-
                  tfons to its members,    but only as permitted    by this Act.”

               The prohibitions  involved in these two statutes are fundament-.
tally prohibitions   against dividends or against the distribution  of a
proportionate    share of profits as profits whether under the guise of
.




    Hon. Zollie    Steakley,   page   3   (WW-849)




    dividends,    salary or otherwise. As stated in the leading case of Reed v.
    Tidewater     Coal Exchange Inc., 116 Atlantic 698 (Del.Chan. 1922) p-4:

                           “Whether   dividends are expected to be paid
                  may, generally    speaking,. be taken as the test by
                  which we are to determine whether, or not, a given
                  corporation  is organized for profit,   Perhaps   a
                  better way to put it would be to say that a corpor-
                  ation is for profit when its purpose is, whether
                  dividends are intended to be declared     or not, to
                  make a profit on the business it does which in r B
                  reason belongs to it and which if its affairs are
                  administered   in good faith would be available   for
                  dividends.”

    Thus, the Act excludes from its purview the incorporation         of enterprises,
    whether commercial      or otherwise, which have as their predominant pur-
    pose the making of a pecuniary profit for the corporation.         That is to say,
    the end in mind is to return or distribute    to members,   directors,     or
    officers  of the corporation  (with the exception of liquidation)    any portion
    of the net revenues above and beyond the actual costs of operation with
    exception of payment of reasonable     compensation   for services     actually
    rendered   the corporation.

                 Co-operatives   sometimes,     and often do, distribute    a portion
    of their income to their members,      In such cases, they are corporations
    for profit and would be excluded from the purview,,of the Act.         In other
    instances their income is not distributable     to the members     in the sense
    above discussed,   but is used entirely in paying the reasonable      costs of
    operation and for the improvement      of the properties.   if any, held and
    owned by the corporation.     The proposed    corporation   may well fall into
    the latter category and as such could incorporate       under the Non-Profit
    Act.

                   Certainly    member% of the apartment house co-op, if tenants,
    will receive benefits by being members           of the corporation;   however,
    Article   2.24 expressly     authorizes   non-profit   corporations   to confer
    benefits upon its members        in conformity with the purposes        of the cor-
    poration as expressed       by its articles   of incorporation.     The benefits
    that tenant-members        of the proposed   corporation    would receive do not
    substantially    differ from the benefits that would be conferred          upon
    members      of a college fraternity    who reside in the fraternity      house.
    Fraternities    are expressly     authorized   to be incorporated    as non-profit
    corporations     by Article   2.01 A of the Act. Thus, the mere fact that
Hon. Zollie   Steakley.   page 4   (WW-849)




this character    of benefit is conferred    upon the tenant-members     ofthe
proposed    corporation   should not bar the Secretary     af State from accepting
the Articles   of Incorporation.    Furthermore,     the courts have held in
several   instances that co-operatives      similar  to the proposed corporation
may be organized as not-for-profit        corporations.    Burley Tobacco
Growers Co-op v. Rogers, 150 N.E. 384 (Ind. 1926); L;X Park Be&i&
County Producers      Co-op. 203 Ala. 345, 83 So. 69 (1919).

              It is to be noted that the proposed   articles  of incorporation
authorize   the purchase    of a single apartment house and its related
appurtenances     rather than the general dealing in real estate by the pro-
posed corporation.      In this respect it should be distinguished   from the type
of corporation    which is dealing in real estate properties    and rentals for
strictly profit-making     purposes.

              Accordingly,    you are advised    that the purposes   expressed   in
the propesed articles     of incorporation  do   not in and of themselves    paohibit
the Secretary of State from accepting and        filing the proposed articles    of
incorporation   under the Texas Non-Profit        Corporation   Act.


                                      SUMMARY

                 The Secretary of State is not prohibited from
              accepting and filing Articles    of Incorporation  &’
              under the provisions    of the Texas Non-Profit
              Corporation   Act merely because the corporate
              purpose is to acquire.    own, operate, etc.. an
              apartment house to be used by the members         of
              the corporation   on a co-operative    basis.


                                              Very truly yours,

                                              WILL WILSON
                                              Attornsy General of Texas




                                                  Wallace P. Finfrock   ”
                                                 ~Assishnt  Attorney General
Hon. Zollie   Steakley.   page   5   (WW-649)




APPROVED:

OPINION     COMMITTEE

W. V. Geppert,    Chairman

Jack Goodman
R. V. Loftin. Jr.
Larry Hargrove
Iola Wilcox


REVIEWEDFORTHEATTORNEYGENERAL
BY:
     Leonard Passmore
