If you are thinking about starting an organization with socially-conscious goals, you may want to consider forming a non-profit corporation or benefit corporation. Forming a corporation designed to help you achieve your goals will limit the personal liability of the organization’s officers and directors and give legitimacy to the organization that most donors and investors require.
To help you decide which entity type is best for your new organization, this article discusses non-profit corporations, which cannot keep their proceeds or distribute them to stockholders, but may be able to obtain tax-exempt status. To learn more about benefit corporations, which can make a profit while focusing on their goals, read our previous blog post here.
Types of Non-Profit Corporations in California
California allows for the formation of three types of non-profit corporations: religious corporations, mutual benefit corporations, and public benefit corporations. Religious corporations are organized primarily or exclusively for religious purposes, such as running a community church. Mutual benefit corporations are organized to provide social or economic benefits to their members, such as medical cannabis collectives. Public benefit corporations are organized instead for the benefit of the public generally to promote a social, educational, recreational, or charitable purpose.
Due to the distinct characteristics of each type of corporation, the type of non-profit corporation you organize depends entirely on the purpose of the organization and who the organization seeks to benefit. By forming any of these non-profit corporations, the directors are duty-bound to devote their primary attention to the promotion of the social mission of the corporation rather than to the production of profits, and the non-profit corporation cannot issue capital stock.
“Non-Profit” Does Not Automatically Mean Tax-Exempt
It is important to distinguish the formation of a non-profit corporation from 501(c)(3) or other tax-exempt status, because forming such a corporation does not automatically give the corporation a unique tax status. In fact, unless the corporation applies for or elects to be taxed differently with the IRS, a California non-profit corporation by default will be taxed as a normal c-corporation.
Most commonly, non-profit corporations apply for tax exempt status under IRC Section 501(c)(3) (other sections under which tax exempt status can be applied for are (c)(4) – (c)(7), but these are less common and will not be discussed in this short article). This is the most common section because it allows for tax exempt status for the type of groups one typically thinks of when they think of a non-profit organization: public charities (organizations that receive a substantial part of their income from the general public) and private foundations (organizations that receive most of their income from investments and endowments and distribute this funding as grants to other organizations) organized for “exempt purposes,” which include charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. Thus, even if a non-profit corporation is formed, it may not be eligible for tax-exempt status if it is not expressly organized for one of these purposes.
Once federal tax exempt status is applied for and granted by the IRS, the non-profit corporation can then avoid federal income taxes on its profits generated from any activities that fall under its exempt purpose. Tax exempt status also allows the corporation’s donors to deduct the amounts of their donations given to the organization, providing additional incentive to contribute.
Other Filing Requirements for a California Non-Profit Corporation
Forming a non-profit corporation in California requires many of the same formation documents as a standard general stock corporation, with some alternative language to reflect the corporation’s non-profit purpose. However, two other filings are required that are unique to California non-profit corporations:
- State tax exempt status: even if a non-profit corporation applies for and is granted tax exempt status from the federal government, it must also separately apply for tax-exempt status from the California Franchise Tax Board. Until a tax determination has been made at the state level, the corporation will owe California franchise taxes each year.
- Registry of Charitable Trusts: within 30 days of receiving a donation, all non-profit corporations in California, regardless of whether they have tax-exempt status, must register with the California Attorney General’s Office to be on the Registry of Charitable Trusts.
Forming a non-profit corporation in California has many detailed requirements that are especially crucial if the organization plans to apply for tax-exempt status, which is its own complicated application process. We highly recommend that you speak with an attorney before starting the formation process, and Bend Law Group would be happy to assist you with this and the tax-exempt application process. If you would like to talk more about your non-profit organization or have any questions, please give us a call at (415) 633-6841 or send us an e-mail at info@bendlawoffice.com.
Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.