Non-Profit Governance

California Nonprofit Corporations

Nonprofit organizations are referred to by a number of similar names, such as non-profit, not for profit, not-for-profit, and non-governmental organization (NGO).

There are four main types of legal structures for nonprofit organizations in California. These are unincorporated associations, trusts, corporations, and limited liability companies. For a number of reasons, the most common type of California nonprofit organization is the corporation.

Most California nonprofit corporations fall within one of three major classifications: public benefit, mutual benefit, or religious.

Public Benefit Corporations

A California public benefit corporation may be formed to benefit the general public, or segments of the general public, for charitable, educational, social, or recreational purposes. These include promoting the social welfare (for example, aid the poor), the advancement of education or science (for example, schools, or science institutes), erecting or maintaining public buildings or works (for example, community centers), or aiding the government. This type of corporation is never permitted to make a distribution of corporate assets to members. Upon dissolution, after liquidating all its liabilities, this type of corporation is permitted (with California Attorney General approval) to transfer its remaining assets to another public benefit organization. Contributions to a public benefit corporation can be tax-deductible provided the organization qualifies with the IRS under section 501(c) of the Internal Revenue Code.

Mutual Benefit Corporations

A California mutual benefit corporation may be formed for any lawful purpose, but most are formed and operated for their members’ benefit. These include social clubs (such as college fraternities and sororities, fraternal orders, country clubs, hunting, fishing, tennis, swimming and other sports clubs, and hobby clubs), trade associations, homeowners’ associations, and similar organizations. This type of corporation is permitted to make distributions of corporate assets to its members on dissolution (but not before).

Religious Corporations

California religious corporations may be formed primarily or exclusively for religious purposes, such as to operate a church, synagogue, seminary, and other religious organizations, such as schools or hospitals. A religious corporation has restrictions on the distribution of assets that are similar to those imposed on public benefit corporations.

Non-Profit Myths

One myth about nonprofit corporations is that being a nonprofit corporation means that the corporation has tax-exempt status. That’s not necessarily so. To be tax-exempt, the organization must file an application with the IRS under section 501(c) of the Internal Revenue Code and receive approval. Only certain types of nonprofit organizations qualify for tax-exempt status. Different rules may apply at the state level.

And simply because a nonprofit organization has qualified as a tax-exempt organization with the IRS under section 501(c) does not necessarily mean that contributions are tax-deductible. Usually, a nonprofit must be qualified under section 501(c)(3) (or certain other sections) for a contribution to be tax-deductible.

Another myth about nonprofit corporations is that they must not make a profit. Again, not so. A nonprofit is permitted to operate at a profit, and for some nonprofits, it is essential that they make a profit so they can prosper and grow.

If you are interested in forming a California nonprofit corporation or if you would like help with amending the articles or bylaws of an existing California nonprofit corporation, call Richard Burt at (408) 286-733 or contact us online today!

Governing Documents for a California Nonprofit Corporation

A California nonprofit corporation may have a number of governing documents, but typically the most important ones are the articles of incorporation and the bylaws.

Typically the articles of incorporation for a California nonprofit corporation run two or three pages, and except for the purpose of the corporation and any clauses required for tax-exempt status, the text is similar from corporation to corporation. By limiting the scope of the articles of incorporation, the corporation has greater flexibility in operating because many rules can be established by the bylaws. The bylaws can be amended without the need for a filing with the Secretary of State while the articles of the organization require such a filing and may be subject to restrictions.

In the case of California homeowners’ associations, the declaration of covenants, conditions, and restrictions (CC&Rs) for the project will also be a governing document. As a practical matter, it is difficult to amend CC&Rs.

The bylaws for a California nonprofit corporation is where the action is when it comes to fine-tuning how the organization functions and the bylaws are typically subject to amendment either by the board acting alone or by the requisite vote of the members.

Bylaws

Although the articles of incorporation for a California nonprofit corporation may specify whether or not the corporation will have members, the articles typically don’t address that issue. This allows the corporation to make the decision of whether to admit people to membership or to have no members. If neither the articles nor the bylaws provide for members, then the corporation has no members. In that case, the general rule is that any corporate action requires only approval of the board. If their members, then certain corporate action would require the approval of the board and of the members.

Other matters typically addressed by bylaws include:

  • If there are members, setting the manner of admission, withdrawal, suspension, and expulsion of members, and creating different classes of members with different rights and powers.
  • Fixing the authorized number of directors and specifying the qualifications, duties, and compensation of directors, their terms of office, and the time of their election.
  • Setting out the time, place, and manner of calling and conducting meetings of directors or of members, including whether mail ballots can be used.
  • Fixing the quorum and vote requirements for meetings directors or of members.
  • Addressing the appointment, duties, compensation, and tenure of officers.
  • How dues, assessments, and admission fees may be set, imposed, and collected.

As can be easily imagined, a carefully written set of bylaws can avoid internal disputes.

Moreover, directors have legal responsibilities that can expose them to personal liability, and a carefully written set of bylaws can help the directors comply with their duties and alert them to danger zones. Bylaws can help inform directors of their duty of care, the duty of inquiry, and duty of loyalty imposed by law (violation of which can result in personal liability by a director).

In some cases, there are specific statutory provisions of which directors are often not aware but to which they can be alerted by bylaws. For example, transactions between a director and the corporation may be subject to a statute restricting such “self-dealing.” Provisions in the bylaws can alert directors that they may be treading on thin ice and that the corporation should employ legal counsel to help the directors avoid personal liability (or worse, in the case of a tax-exempt organization, losing the tax-exemption).

Get Help – California Nonprofit Corporation Formation Attorney

If you are interested in forming a California nonprofit corporation or if you would like help with amending the articles or bylaws of an existing California nonprofit corporation, call Richard Burt at (408) 286-733 or send an email inquiry today!