House Corporation Essentials Q&A

Q Why is a house corporation necessary?
A Sigma Chi chapters need a place to call home. That facility usually needs an entity referred to generically as “house corporation” to represent the chapter as either owner of the property or lessee if the chapter rents from a private party or the university. This house corporation acts independently of Sigma Chi Fraternity which has no control over house corporation operations.
 
House Corporation As Owner. If the chapter house is owned by the house corporation, the house corporation manages the property like a landlord. Individual tenant brothers sign a Rental Agreement with the house corporation and agree to pay rent, utilities and other charges and to take reasonable care of the property. If a particular tenant fails to comply with conditions of the Rental Agreement, the house corporation has the right and duty to evict that tenant. The house corporation is responsible for regular maintenance and repairs just like any landlord. The house corporation can borrow money or do fund raising to renovate the property and is obligated to repay debts, insurance premiums, property taxes and other related charges.
 
House Corporation As Lessee. If the chapter wants to rent property from a private individual or the university, a house corporation acts on behalf of the chapter as the lessee to sign a Master Rental Agreement. The house corporation then subleases to individual tenants, collects rent from them and pays the lessor the monthly rent. (If the lessor is a university, the university may collect directly from the tenants.) Having a house corporation be responsible for the Master Rental Agreement provides a legal entity and the continuity that most landlords require for long term agreements. Undergraduate brothers that come and go simply cannot provide these essentials. If the tenants create disciplinary issues, fail to maintain the property or pay rent, the house corporation is responsible for enforcement, not the property owner.
 
Q A group of alumni wants to start a house corporation. What are the steps?
A In order to achieve corporate status, your group must first determine its mission (reason for being) and then seek local legal counsel familiar with incorporation procedures which include:
 
1. File Articles of Incorporation with the state in which the chapter is located. The filing will probably be for a non-stock corporation controlled by a board of directors. The State filing fee is usually minimal. If the Articles are in good order, the State should issue a corporate charter.
 
2. After receiving the corporate charter, an organizational meeting should be held shortly thereafter to elect a board of directors from fraternity alumni (actives and chapter advisors should not serve on this board for liability reasons). The elected board will then select its officers. Bylaws must be adopted at the organizational meeting. Opening a bank account for the house corporation requires a corporate resolution which can be passed at this meeting as well. A Tax or Employer ID is necessary to open a corporate account and can be obtained from the IRS by mail, phone or online.
 
3. Minutes should be taken at each board meeting and kept in a Book of Minutes. Minutes are the record of corporate decisions and actions and keeping these records is required by statute. When it comes to taking minutes remember, minutes are minutes not seconds or hours. It’s a Goldilocks thing: not too much and not too little. Minutes are a record of board actions, not board discussions. Board actions require a motion from one director and a second from another board member. (If no motion and second are proposed, move on because no business has been accomplished.) Following a motion and second, discussion follows, then a vote is called for. Typically, a majority of the directors present at the meeting, can carry a motion subject to quorum requirements. An example of quorum is, if there are a total of seven directors, usually at least a majority of them (four) must be present at a meeting to transact business. Of that four, at least three would have to vote in favor of a motion to achieve a majority vote.
 
While house corporation board meetings do usually not require full blown parliamentary procedure like Roberts Rules of Order, a simplified version of Roberts Rules that follows an advance written agenda can speed decision making and shorten meetings. Much has been written on Roberts Rules for small groups which is available on the internet. Do not underestimate the power of short meetings to attract and hold volunteers. Meetings should be few, necessary and to the point. And leave the cocktails, if any, until after the meeting.
 
4. Corporations are required to file annual tax returns so good financial records should be maintained. House corporations are eligible for recognition as not-for-profit organizations under Sections 501(c)(2) or 501(c)(7) of the Internal Revenue Code. This status can be applied for at the time the corporation requests its Tax ID number.
 
Q Once the corporation has been formed, does it have to have regular meetings?
A Laws vary from state to state. At a minimum, the board should meet annually to hold elections and adopt the coming year’s budget. Taking minutes of the meetings is imperative for historical record keeping and compliance with state law. While only annual meetings are required, many house corporation boards meet regularly during the school year to review ongoing operations and or for special meetings if urgent issues arise. Finally, whenever the house corporation wants to borrow money, buy or sell property or appoint vacancies to the board, a meeting should be held with an appropriate resolution passed and placed in the Book of Minutes.
 
Q Can undergraduates serve on the house corporation board?
A Undergraduates should not serve on the board since the house corporation should not be advising or mandating the chapter’s operations. It’s fine to have them attend board meetings, just not serve on the board or vote. This is also true of chapter advisors and other alumni whose roles could be construed as “supervisory.” In a lawsuit against the chapter, an advisor serving on the board might provide a legal connection between the chapter and the assets of the house corporation.
 
Q Can house corporation members be compensated for their time?
A Although it’s not illegal, house corporation member typically serve as unpaid volunteers to avoid conflict of interest that inevitably arises when compensation is involved. If a board member wants to serve as a paid property manager and the board agrees that would be a good thing, that board member should resign from the board and serve as a property manager.
 
Q What should we do about a director who enters into a contract for repair to the chapter house which the board did not authorize?
A If the work was ordered by a board member who had authority to bind the house corporation to a contract (like the president), the corporation may have to pay. But your bylaws should include a provision that requires all contracts to be approved by the board with an additional provision providing for reimbursement to the house corporation by the member should they authorize work without seeking approval first.
 
Q We have a house corporation president who won’t call a meeting or turn over the control of the corporation. What do we do?
A Officers serve at the pleasure of the board so the board majority can remove any officer from his position, although not from the board itself. However, if his term has expired, he is no longer authorized to serve on the board in any capacity. But to formalize this issue, an annual meeting must be held. Your bylaws should state when the annual meeting is to take place. The remaining board members can follow those guidelines, give notice of the meeting to all members, hold the election and move on.
 
Q Do we have any individual legal liability as house corporation members?
A If the house corporation is in good standing with the state or province, its records are in good order and the members do not act outside the scope of their authority, the liability risk is minimal. Insurance for house corporation members is the second level of protection. House corporation volunteers at chapters insured by the Risk Management Foundation receive liability insurance coverage. A personal liability umbrella policy is also a good idea and reasonably priced. This kind of policy covers a volunteer for other organization activity as well.
 
Q What could be done to prevent misuse or embezzlement of house corporation funds?
A While our brothers are believed to be men of honesty and integrity, temptation can be great for some who are in financial straits or who have drinking, drug or gambling addictions, etc. Embezzlement usually takes place when only one person is handling the money. To discourage the possibility, have someone besides the designated person receive and review a copy of the monthly bank statements. It is also not a bad idea to buy fidelity insurance for those that have access to the money. It is not expensive and can save the corporation from a disaster.
 
By Grand Trustees Harvey Silverman and Rich Thompson. Have other house corporation questions? Email rich@regenesis.net