OHIO LEGISLATIVE SERVICE COMMISSION
Office of Research Legislative Budget
www.lsc.ohio.gov and Drafting Office
H.B. 556 Bill Analysis
134th General Assembly
Click here for H.B. 556’s Fiscal Note
Version: As Reported by Senate Judiciary
Primary Sponsor: Rep. Swearingen
Effective Date:
Nick Thomas, Research Analyst
SUMMARY
Requires nonprofit corporation directors to be natural persons (i.e., individuals rather
than business entities).
Authorizes a committee consisting of one or more directors of a nonprofit corporation
to create a subcommittee, unless otherwise provided in the articles, the regulations, or
the resolution of the original committee.
Specifies the fiduciary duty required of an officer of a nonprofit corporation.
Expands the circumstances in which provisional directors may be appointed.
Revises the standards for determining liability of directors when nonprofit corporations
make loans and the interest rate relating to that liability.
Establishes that a loan made in violation of the law governing nonprofit corporation
does not affect the borrower’s liability on the loan.
Authorizes a majority of the incorporators of a nonprofit corporation to amend the
articles of incorporation if (1) the articles do not name initial directors, (2) a meeting of
voting members has not yet occurred, and (3) the incorporators have not yet elected
directors.
Establishes to what extent a certificate issued by the Secretary of State confirming that a
nonprofit corporation is in good standing is conclusive evidence.
This analysis was prepared before the report of the Senate Judiciary Committee appeared in the
Senate Journal. Note that the legislative history may be incomplete.
December 14, 2022
Office of Research and Drafting LSC Legislative Budget Office
Limits the liability of those who provides goods to, or performs services for, nonprofit
corporations or their members to only the person or entity to whom the goods or
services were provided.
Provides an exception to religious organizations excluded from the definition of an
unincorporated nonprofit association in the Unincorporated Nonprofit Association Law.
Extends a person’s immunity from civil liability for donating perishable food to a
nonprofit organization to include donations to a nonprofit that charges an amount that
is sufficient to cover the cost of handling the food.
DETAILED ANALYSIS
The bill makes numerous changes to the Nonprofit Corporation Law, including changes
related to director qualifications and appointment, director and officer liability, and certificates
of good standing from the Secretary of State. It also makes one minor change to the
Unincorporated Nonprofit Association Law.
Director qualifications
The bill requires nonprofit corporation directors to be natural persons (i.e., not business
entities). Current law simply requires directors to have the qualifications, if any, stated in the
nonprofit corporation’s articles of incorporation or regulations.1
Director duties
Evaluating duties
The bill modifies the application of a list of items directors may consider when
performing their duties as directors. Specifically, it limits application of the list to directors’
consideration of what is in the corporation’s best interest. Under current law, the list applies to
consideration of what is in the corporation’s best interest or not opposed to it. The bill limits
application only to consideration of what is in the corporation’s best interest.
Continuing law, unchanged by the bill, requires nonprofit corporation directors to
perform their duties as directors in good faith, in a manner they reasonably believe to be in or
not opposed to the corporation’s interests.2
Committees and subcommittees
The bill authorizes any committee consisting of one or more nonprofit corporation
directors to create subcommittees and delegate any or all of the committee’s power to the
subcommittee. This authority, however, may be withheld by the corporation’s regulations or
the resolution that created the original committee.
1 R.C. 1702.27(A)(3).
2 R.C. 1702.30(B) and (F).
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The bill does not affect existing law’s provisions for the creation of committees by
nonprofit corporation boards of directors. It only creates the new authority for those
committees to create subcommittees.3
Provisional directors
The bill expands provisions of existing law that allow appointment of provisional
directors for nonprofit corporations. Currently, a provisional director can be appointed by a
court upon the complaint of at least one fourth of the directors. In order to make an
appointment, the plaintiffs must establish that the continued operation of the corporation is
substantially impeded or impossible because of irreconcilable differences among the existing
directors.
The bill expands eligible complainants to include at least one fourth of a nonprofit
corporation’s voting members. It also expands the circumstances allowing appointment to
include situations where there are no directors and the voting members are unable to elect
directors, making the continued operation of the corporation substantially impeded or
impossible.4
Corporate officers
Fiduciary duties
The bill establishes a default fiduciary duty that applies to a nonprofit corporation’s
officers (e.g., president, treasurer, etc.) unless the corporation’s articles or regulations, or a
written agreement with an officer, establishes additional fiduciary duties.5
These new provisions largely mirror existing provisions regarding fiduciary duties for
directors. Under them, officers must perform their duties in good faith, in a manner reasonably
believed to be in or not opposed to the corporation’s best interests, and with the care an
ordinarily prudent person in a like situation would use. When performing their duties, officers
may rely on information, including financial statements and other data, prepared or presented
by either:
The corporation’s directors, officers, or employees who the officer in question
reasonably believes to be reliable and competent;
Counsel, accountants, and other professionals working in their scope of practice.6
3 R.C. 1702.33(G).
4 R.C. 1702.521.
5 R.C. 1702.341(A).
6 R.C. 1702.341(B).
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Liability for failure to fulfill fiduciary duties
In order for a court to find that a corporate officer failed to act in good faith, in a
manner reasonably believed to be in or not opposed to the corporation’s best interests (i.e., to
have violated the relevant fiduciary duty), the failure must be proved by clear and convincing
evidence. Clear and convincing evidence is evidence indicating something is highly likely or
reasonably certain. That is a higher standard than the normal evidentiary standard in civil cases,
which is a preponderance of the evidence (the evidence for a proposition outweighs the
evidence against, even if only slightly). The bill further provides, however, that an officer will
not be considered to be acting in good faith if the officer knows something about the matter in
question that would make reliance on information provided by other corporate personnel or
professional advisors unwarranted (see “Corporate officers – Fiduciary duties,”
above).7
The bill has additional provisions for actions seeking to make a nonprofit corporation’s
officer liable for money damages. In those cases, it must be shown by clear and convincing
evidence that the officer’s action or inaction was undertaken with deliberate intent to cause
the corporation injury or with reckless disregard for its best interests. The bill does provide that
this requirement can be nullified by the corporation’s articles or regulations or a written
agreement with the officer in question.8
Limitation of fiduciary duty provisions
The bill limits its new fiduciary duty provisions for corporate officers to those instances
where they are acting as corporate officers. They do not apply when corporate officers are
acting in any other capacity aside from that of corporate officer.9
Director and officer liability
Under continuing law, directors and officers of nonprofit corporations are not personally
liable for the corporation’s obligations. They may, however, be liable to the corporation itself
under certain circumstances. Those are where there is a distribution of corporate assets to
members contrary to law or the corporation’s articles, where there is a distribution of assets
without making sure creditors are paid when winding up the corporation’s affairs, and when
the corporation makes certain loans. The bill modifies the provisions regarding loans.
Under current law, directors and officers may be liable to the corporation when, other
than in the usual conduct of the corporation’s affairs or in accordance with the corporation’s
articles, the corporation makes a loan to a corporate officer, director, or member. The bill
removes the liability application for loans to members. It also removes the liability provision
7R.C. 1702.341(C), Black’s Law Dictionary (11th ed. 2019), and Ohio Trial Practice (Baldwin’s Ohio
Handbook Series) § 9:3 (2021 ed.).
8 R.C. 1702.341(D).
9 R.C. 1702.341(E).
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altogether if, at the time of the loan, the majority of disinterested directors voted for the loan
after taking into account its terms and provisions and determining that it could reasonably be
expected to benefit the corporation.
The bill also adjusts the interest rate applicable to a director’s liability on improper loans
from 6% annually to the federal short-term rate as determined by the Tax Commissioner under
continuing law. Finally, it adds a new provision establishing that even if a loan is made in
violation of the nonprofit corporation law, that violation does not affect the borrower’s liability
on the loan.10
Amendment of articles
Nonprofit corporations are formed when articles of incorporation are filed with the
Secretary of State. The articles may be filed by one or more persons, called incorporators, and
may name the corporation’s initial directors. Once incorporated, articles may be amended by a
majority vote of the corporation’s voting members. The bill adds a new provision allowing
articles of incorporation that do not name the initial directors to be amended, if certain
circumstances are met. Specifically, under the bill, the incorporators may adopt an amendment
to the articles at any time prior to both:
A meeting of the corporation’s voting members;
Election of directors by the incorporators.11
Certificate of good standing
The bill adds a new provision of law establishing that a certificate of good standing
issued for a nonprofit corporation by the Secretary of State is conclusive evidence of certain
facts for seven days after it is issued. The facts the certificate demonstrates are:
The Ohio nonprofit corporation’s authority has not been limited by provisions of
continuing law dealing with its termination or dissolution and the winding up of its
affairs, provided that the person relying on the certificate has no knowledge that the
corporation’s articles have been canceled and the certificate is not presented as
evidence against the state;
That an out-of-state nonprofit corporation’s license to do business in Ohio has not
expired, been canceled, or been surrendered.12
Providers of goods and services
The bill adds a new provision to the nonprofit corporation law providing that, absent
express agreement, those who provide goods or services to a nonprofit corporation do not
10 R.C. 1702.55(A), (B), and (H), and R.C. 1343.03 and 5703.47, not in the bill.
11 R.C. 1702.38(C)(1), and R.C. 1702.01, 1702.04, and 1702.20, not in the bill.
12 R.C. 1702.53(D).
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incur legal liability or owe any duties to the corporation’s members or creditors, or the
members’ creditors, by reason of providing the goods or services. Similarly, the bill provides
those who provide goods or service to a nonprofit’s corporations members do not incur legal
liability or owe any duties to the corporation or its creditors by virtue of providing goods or
services to the members.13
Immunity from liability associated with perishable food
donations
The bill extends a person’s immunity from civil liability for donating perishable food to a
nonprofit organization to include donations to a nonprofit that charges an amount that is
sufficient to cover the cost of handling the food. Under current law, a person is immune from
civil liability only when donating perishable food to a nonprofit that distributes that food to
persons in need for free.14
Unincorporated nonprofit associations
In addition to the law governing nonprofit corporations, Ohio law governs
unincorporated nonprofit associations. Those are unincorporated organizations, consisting of
two or more members pursuant to an agreement for one or more common nonprofit purposes.
Continuing law exempts several entities from the definition, including religious organizations.
The bill permits religious organizations to opt in to the unincorporated association law by
having the religious organization’s governing principles specially state that the exemption does
not apply.15
Edits made for clarity
The bill makes numerous edits to statutory language that makes that language clearer
but does not substantively change the law.16
HISTORY
Action Date
Introduced 02-01-22
Reported, H. Civil Justice 05-25-22
Passed House (90-0) 06-01-22
Reported, S. Judiciary ---
ANHB0556RS-134/tl
13 R.C. 1702.531.
14 R.C. 2305.37.
15 R.C. 1745.05(M)(5).
16 R.C. 1702.30(C) through (E).
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Statutes affected: As Introduced: 1702.27, 1702.30, 1702.33, 1702.38, 1702.521, 1702.53, 1702.55, 1745.05
As Reported By House Committee: 1702.27, 1702.30, 1702.33, 1702.38, 1702.521, 1702.53, 1702.55, 1745.05
As Passed By House: 1702.27, 1702.30, 1702.33, 1702.38, 1702.521, 1702.53, 1702.55, 1745.05