Starting a Nonprofit Print E-mail

A tax-exempt organization is not required to be formed as a corporation, though this is the most common type. Other types are the unincorporated association and the charitable trust.

z1_santa_cruz_mission_bordergap.pngThe questions every promoter of a charitable enterprise should ask are basically three: (1) How easy and costly will it be to form the organization? (2) How will the particular form chosen affect the personal liability of directors and members? (3) How easy will it be to run the organization, including its ability to exercise legal rights such as property ownership?

While the costs of incorporation and the need to observe “corporate formalities” are deemed disadvantages by some, the nonprofit corporation remains the preferred manner of conducting charitable enterprises. First, its standards of operation are well set-forth in the statutory law, and each of the various functions and stages in its corporate life can be clearly understood and followed.

Each type of nonprofit corporation is governed by its own set of statutes, supplemented by general provisions which apply to them all. The three types addressed here are public benefit, mutual benefit, and religious corporations.

z1_civic_auditorium_bordergap.pngPublic benefit corporations, controlled by Corp.C. §§5110-6910, “may be formed under this part for any public or charitable purposes.” (Corp.C. §5111.) Unlike mutual benefit corporations, they may not make any distributions to members. These are subject to the most extensive regulation and supervisions by government agencies. Examples of such corporations are those which engage in environmental or scientific study, exist as foundations or community chests, and the like. While foundations, hospitals and schools may also be public benefit corporations, those that are operated by religious organizations may instead choose to form them as religious corporations.

Mutual benefit corporations, controlled by Corp.C. §§7110-8910, “may be formed under this part for any lawful purpose.” (Corp.C. §7111.) However, a corporation which would otherwise comply with the public benefit corporation law with respect to distributions on dissolution may not be formed as a mutual benefit corporation. There is less government oversight of a mutual benefit corporation. Examples of these types of corporations are clubs, trade associations, fraternal orders, and other organizations that are formed for the benefit of its members, even where such organization engages in some charitable work, as is typical for fraternal orders.

z_congregational_church_bordergap.pngReligious corporations, controlled by §§9110-9690, “may be formed under this part primarily or exclusively for any religious purposes.” (Corp.C. §9111.) They combine that feature of public benefit corporations which prohibits distributions to members, with the lesser oversight of mutual benefit corporations. The best examples of such corporations are churches and seminaries, but schools, hospitals and foundations may also be formed in this manner.