GENERALLY

The most common organizational structure for a nonprofit is the corporation. There are three main types of nonprofit corporations: 1) public benefit; 2) mutual benefit; and 3) religious corporations. Each nonprofit corporation type has distinguishing characteristics, but the three also share many common features. By filing articles of incorporation and paying the required $30 fee to the Secretary of State, one or more persons may form a nonprofit corporation. California Corporations Code §§ 5120(a), 7120(a), 9120(a); California Government Code § 12186(d). After filing articles of incorporation, bylaws must be adopted to structure internal governance and provide notice to directors regarding the law governing the nonprofit corporation. California Corporations Code §§ 5150-5151, 7150-7151, 9150-9151. A nonprofit corporation may be dissolved voluntarily by an affirmative vote of the members, if any, or the directors. California Corporations Code §§ 6610, 8610, 9680.

Advantages

The corporate form is an established and well-understood entity governed by clear statutory norms in areas such as permitted activities, director and member liability, director standards of conduct, indemnification of agents, and internal governance.

Nonprofit corporations have the power to purchase property, enter into contracts, carry on a business, and issue memberships. California Corporate Code §§ 5140, 7140, 9140. The board of directors has control of the direction of management and the exercise of corporate powers. California Corporations Code §§ 5210, 7210, 9210.

Members, directors, and officers are indemnified from personal liability for the nonprofit corporation's debts, liabilities and obligations. California Corporate Code §§ 5350(a), 7350(a), 9350(a). If a director, officer, or trustee is uncompensated, he or she may be protected from liability. California Corporate Code §§ 5047.5, 5239, 7231.5, 9247; and §§9.115-9.120. Directors performing duties in accordance with the statutory standard of care is not liable for any alleged failure to discharge directorship obligations. California Corporations Code §§ 5231(c), 7231(c), 9241(d).

Nonprofit corporations may also choose to indemnify directors and officers from litigation expenses under certain statutory conditions. California Corporations Code §§ 5238, 7237, 9246; and §§9.156-9.162.

Disadvantages

The cost and time required to comply with government filing requirements, the observance of corporate formalities, and regulations limiting nonprofit activities are disadvantages of forming a nonprofit corporation. However, unless the proposed nonprofit organization is extremely small, these disadvantages are outweighed by the advantages of the nonprofit corporate form.

TAX EXEMPT STATUS

Nonprofit and Tax Exempt

The terms "nonprofit" and "tax exempt" are often used interchangeably, although use of these terms as synonyms is incorrect. Most California nonprofit corporations are eligible to apply for tax exempt status, and will benefit from tax exempt status, but there are certain businesses operated by California nonprofit organizations are not eligible for tax exempt status.

Tax Exemption Categories

Under Internal Revenue Code § 501(c) there are 28 different categories for tax exempt status, and most of these are provided tax exemption by the State of California under California Revenue and taxation Code § 23701.

The most frequently used categories are for charities, social welfare and lobbying, labor unions, trade and business associations, social clubs and veteran's groups. Internal Revenue Code §§ 501(c)(3), 501(c)(4), IRC 501(c)(5), 501(c)(6), 501(c)(7), 501(c)(19). Most of the income and donations received by these organizations are exempt from taxation.

Donors to certain tax exempt organizations, especially those exempt under Internal Revenue Code § 501(c)(3), may offer personal tax deductions to donors for contributions given. When available, these personal tax deductions may act to significantly stimulate donor contributions.

Burdens on Tax Exempt Nonprofits

The potential costs and regulatory burdens of tax exempt operation should be considered before applying for exempt status. The tax exempt status alone is costly and may consume a great deal of a nonprofit's time. Tax exempt organizations also must frequently prepare filings and reports and are subject to public inspection. Tax exempt organizations are commonly subjected to tax and other government audits. Nonprofits having obtained tax exemption face numerous restrictions on activities, management, control and asset allocation and sources.

Table of Tax Exemptions