What is a California Nonprofit Corporation? A Quick Primer

As the name would imply, a nonprofit corporation is a corporation that is formed for any purpose other than trying to make a profit. Charity and religious organizations are good examples. That is not to say that a nonprofit does not sell goods and services, raise money, and make a “profit.” Rather, selling goods and services and making a profit is not the goal of the organization; rather, those are byproducts or means of supporting the nonprofit goal. As examples, consider a charity bake sale, a church basement rummage sale, or a candy drive. The purpose of those activities is to raise money, but not for personal gain of the owners, but rather for helping to pay for the operating costs of the nonprofit. Here is a quick primer on California nonprofits.

California Nonprofit Corporations: How are They Formed?

Like all California corporations and related corporate forms, a California nonprofit is formed by filing the appropriate organizational documents with the Secretary of State. Further, a nonprofit must be formed for a “charitable purpose” which is generally defined as:

• Relief of poverty
• Advancement of education or religion
• Promotion of health
• Governmental or municipal purposes OR
• Purposes beneficial to the community

There are several options available in terms of the exact nonprofit corporate form. The three most commonly used nonprofit forms are:

• Public benefit corporations
• Mutual benefit corporations and
• Religious corporations

All corporate entities, including nonprofits, have annual filing requirements, must maintain a registered agent for service of process, and have notice requirements if there is a change of address, for example. In general, for-profit corporations are governed by the California Franchise Tax Board and nonprofits are governed by the California Office of the Attorney General. See here for a detailed Guide to Charitable Organizations issued by the Attorney General’s Office.

California Nonprofit Corporations: Legal Status

Like other corporate entities, a nonprofit corporation has an independent legal existence under California law that is distinct and apart from the natural persons that formed the nonprofit. A nonprofit can own property, can sue and be sued in court, can hire employees, and can enter into contracts like any other corporate entity. Likewise, the directors and employees of a nonprofit enjoy are protected by the corporate shield providing legal liability protection.

In this regard, nonprofits are subject to the same laws in the same manner as other corporations. For example, if a nonprofit hires employees, the nonprofit is subject to applicable labor laws and regulations.

California Nonprofit Corporations: Ownership and Management

Unlike regular for-profit corporations, nonprofits are not “owned.” There are no stock certificates or shares or ownership interests issued. Rather, depending on the formation documents, a nonprofit might have only a self-electing Board of Directors or might have “members” (for example, a church).

A nonprofit is run and managed by its Board of Directors. As noted, the board might be self-selecting, might be appointed by some outside person/entity, or might be elected by the members of the nonprofit. The mechanism of election depends on how the nonprofit is organized. Like a for-profit corporation, the nonprofit board must meet regularly to decide and vote on goals for the organization and, often, the board hires upper management to run the day-to-day operations of the nonprofit.

California Nonprofit Corporations: Taxation on Profits

One of the main benefits of being a nonprofit is the ability to obtain tax-exempt status. However, tax exempt status is not automatic, but must be applied for through the US Internal Revenue Service or through the California Franchise Tax Board. Once granted tax-exempt status, the nonprofit avoids paying various forms of taxation including income, property, and sales taxes. Not all nonprofits qualify. For example, political organizations are generally nonprofit, but they do not qualify for tax exempt status.

That being said, under some circumstances, nonprofits will be taxed on various aspects of their operations.

California Nonprofit Corporations: Dissolution

Unlike a for-profit corporation, assets of a nonprofit are expected and required under California law to remain assets dedicated to non-for-profit purposes. Thus, if a nonprofit dissolves or ceases to exist, any and all assets must be distributed to other similar tax-exempt non-profit groups.

California Nonprofit Corporations: Distinguishing Social Purpose Corporations

A nonprofit is different than a social benefit or social purpose corporations. As we have written, a social purpose corporation is a hybrid between a for-profit and a nonprofit entity. Instead of having only one purpose — making money OR doing charitable work — a social purpose corporation combines the two, seeking to make profits but also having a stated social purpose such as positively impacting society, the environment, etc.

Contact San Diego Corporate Law Today

If you would like more information about corporations generally and/or nonprofits specifically, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Nonprofit corporations need skilled and dedicated business lawyers, too. Mr. Leonard has been named a “Rising Star” for 2017 by SuperLawyers.com. Mr. Leonard has the experience to help you form a nonprofit corporation or any other corporate entity. Even a nonprofit corporation needs a good business attorney like Mr. Leonard to review, draft and assist in executing business contracts and with other business-related matters. Mr. Leonard can be reached at (858) 483-9200 or via email.

You Might Also Like:

Business And Corporate Forms Compared
Social Purpose Corporations

Forming Medical Corporations