California law provides for three different types of nonprofit corporations:
- Public benefit corporations
- Mutual benefit corporations
- Religious corporations
While all types of nonprofit corporations share some characteristics, they also have some differences. As a result, you should consider which type of legal entity to choose when forming your nonprofit organization.
Public Benefit Corporations
According to the California Attorney General’s Office, most California nonprofit corporations are public benefit corporations. Individuals form public benefit corporations for public or charitable purposes, not for any individual’s private gain. For instance, these corporations may have a social, educational, or recreational purpose. A public benefit corporation cannot distribute profits or dividends to any individual; it must solely benefit the public. These corporations may pay their directors and other staff members reasonable salaries and related benefits.
Many public benefit corporations qualify for tax-exempt status under section 501(c)(3) of the Internal Revenue Code. However, along with tax-exempt status comes specific restrictions necessary to maintain that status. For instance, tax-exempt organizations cannot directly or indirectly engage in political campaigns for elected office or engage in lobbying or other legislative activities.
Although many public benefit corporations qualify as tax-exempt, not all do. However, a lack of tax-exempt status does not exempt public benefit corporations from other requirements of charitable organizations under state or federal law.
Some common examples of public benefit corporations include schools, hospitals, and many charities, such as the Red Cross.
Mutual Benefit Corporations
Individuals organize mutual benefit or membership corporations for the benefit of their members. These corporations cannot be exclusively for charitable purposes. However, unlike for-profit corporations, mutual benefit corporations exist for a purpose other than earning and distributing profit to their members.
Members typically pay specific fees to become members of mutual benefit corporations. Membership then entitles them to certain benefits, such as using a golf course or other recreational facilities.
Mutual benefit corporations may qualify for different tax benefits than public benefit corporations. In most cases, these corporations pay the same taxes as for-profit corporations. However, a few tax exemptions exist for some types of mutual benefit corporations.
Common examples of mutual benefit corporations include private homeowners’ associations, private golf or country clubs, and trade or professional associations.
Religious corporations are the third form of nonprofit corporations and include many sectarian schools and churches. These corporations are often exempt from paying income taxes and exempt from other state and federal regulations or laws that affect most other nonprofit corporations. As their name indicates, individuals form religious corporations for religious purposes.
Articles of Incorporation and Nonprofit Organizations
Despite the different types of nonprofit organizations, individuals must form each type of organization by filing articles of incorporation. The articles of incorporation for these organizations have many features in common. They generally will all contain:
- A statement of purpose
- The street address of a principal office within the state
- The agent of the corporation for service of profit
- Procedures for appointing and removing directors from the board of directors
- Procedures for amending the articles of incorporation
Of course, the articles of incorporation for public benefit corporations will include various statements necessary to qualify it as tax-exempt under section 501(c)(3) of the Internal Revenue Code.
Allow Us to Meet Your Legal Needs Church Law Center dedicates its efforts to the legal matters that nonprofit organizations, religious organizations, and churches face daily. Call us today at (949) 892-1221 or online and set up a time to talk to us about your case. Get your questions answered and learn more about how we can help.