California law recognizes three different types of nonprofit corporations: public benefit, mutual benefit, and religious nonprofit corporations. All these nonprofit corporations are eligible for tax exemption under state and federal law but under differing sections of the Internal Revenue Code (IRC). However, they have other more distinct differences related to their missions, activities, fundraising abilities, and political involvement. If you have questions or concerns about any legal restrictions on your nonprofit corporation, contact the California Center for Nonprofit Law at (949) 892-1221 today. Here is a complete description of the four major differences between public benefit, mutual benefit, and religious nonprofit corporations.
- Mission Statements and Nonprofit Corporations
While public benefit and religious nonprofit corporations serve others, mutual benefit nonprofit corporations serve their members. Common types of mutual benefit nonprofits include chambers of commerce, fraternities, homeowners’ associations, professional or trade associations, social clubs, and unions.
In contrast, public benefit nonprofit corporations have a purely public or charitable purpose. They cannot distribute profits or dividends to individuals, as the organization must solely benefit the public. However, a public benefit nonprofit can pay its director and other staff members reasonable salaries. Common examples of public benefit nonprofits include hospitals, schools, and charitable organizations like United Way.
Likewise, religious nonprofits have purely religious purposes. In many cases, they are sectarian schools or churches.
- Fundraising and Nonprofit Corporations
Donations made to mutual benefit nonprofit organizations generally are not tax-deductible to the donor. However, donations made to public benefit and religious nonprofits are tax-deductible to the donor. As a result, mutual benefit nonprofits typically are funded through membership dues paid on a monthly, quarterly, or annual basis. Those membership fees entitle members to certain benefits, such as using a clubhouse or golf course or receiving snow removal services in a housing development. In contrast, public benefit or religious nonprofits raise funds through public donations.
- Taxation and Nonprofit Corporations
Mutual benefit nonprofit organizations qualify for federal tax-exempt status under IRC §§501(c)(4) or 501(c)(6). They do not qualify for federal tax-exempt status under IRC §501(c)(3), which is for many (but not all) charitable nonprofit organizations, such as public benefit and religious nonprofits. As a result of this distinction, donations to mutual benefit nonprofits are typically not tax-deductible, as they are to public benefit and religious nonprofits that qualify as tax-exempt under federal law.
- Political Involvement and Nonprofit Corporations
Mutual benefit nonprofits have more flexibility concerning political activities than religious or public benefit nonprofit corporations. Specifically, mutual benefit nonprofit organizations can engage in legislative advocacy. In contrast, public benefit and religious nonprofits that are tax-exempt under IRC §501(c)(3) generally are limited to an “insubstantial degree” of lobbying or the limits imposed under the Section 501(h) expenditure test. Additionally, public benefit nonprofits can engage in public education on general policy issues without running afoul of restrictions on their tax-exempt status.
Mutual benefit nonprofits also can engage in candidate-related election advocacy to a limited degree. Conversely, public benefit and religious nonprofits cannot engage in this type of advocacy at all without endangering their federal tax-exempt status. However, all three types of nonprofit corporations – mutual benefit, public benefit, and religious – may engage in unlimited public advocacy unrelated to legislation or election of candidates, such as nonpartisan voter registration drives.
Contact Us Today for Legal Assistance with Nonprofit Corporations
The California Center for Nonprofit Law focuses its practice on legal matters that affect private foundations and other nonprofit organizations in California. This unique focus allows us to concentrate on keeping abreast of the ever-changing laws and policies as they develop over time. We are here to represent the interests of your nonprofit organization throughout every stage of your legal matter. Call us at (949) 892-1221, email us at firstname.lastname@example.org, or fill out our contact form online and schedule a consultation about your nonprofit organization today.