Selecting the proper nonprofit structure

Dear Mary, I am thinking about forming a nonprofit business, but I have no idea how to structure my business. What are my options?

There are three primary structures for nonprofits in California (although many other forms exist): unincorporated associations, trusts, and corporations. Some nonprofits also use the limited liability company structure.

When you are selecting your legal entity, keep in mind the ease and cost of formation, the flexibility you will have operating your organization, the ability to make contracts and own property, and the limitations on the directors’ and members’ personal liability.

Most nonprofit organizations in California are corporations, so let’s start there. The majority of nonprofit corporations fall into one of these areas: public benefit, mutual benefit, or religious. Each of these three areas has its own separate, self-contained law that governs that kind of corporation. Which category your nonprofit fits into will be based on your purpose, the way your assets are distributed, and the extent to which you are subject to regulation.

Public benefit corporations may be formed for public or charitable purposes. They may not distribute corporate assets to members at any time and they are subject to governmental regulation and supervision. Examples of public benefit corporations include incorporated charitable organizations such as hospitals and schools.

Mutual benefit corporations may be formed for any lawful purpose. They may distribute assets to members if the organization is dissolved, and they have less regulation and supervision. They cannot become tax-exempt as a 501(c)(3). Examples include homeowners associations and social clubs.

Religious corporations may be formed for primarily religious purposes. They may not distribute assets to members at any time, are subject to less regulation and supervision, and can become tax-exempt as a 501(c)(3). Examples include churches and seminaries.

There are other types of nonprofit corporations besides the main three. In California, you can have a cooperative corporation, which may be formed for any lawful purpose, but must be organized and must conduct its business primarily for the mutual benefit of its members as patrons of the organization. Typical examples are organizations formed for recycling or treating hazardous waste.

California also allows for a corporation sole, which can be formed by the presiding officer of a religious denomination, society, or church to manage its affairs. Examples include some dioceses of the Catholic Church and the Episcopal Church. If you have a religious group where the ruling authority is in one person, the corporation sole may be preferable to the religious corporation because it has fewer governmental controls.

There are several special purpose corporations under California law that have special regulations. These include SPCA animal organizations, medical, hospital, or legal services corporations, chambers of commerce, small business development corporations, agricultural nonprofit cooperative associations, and many more.

If you decide the corporation route is not for you, you could also form an unincorporated association, which is a group of two or more persons joined by mutual consent for a common lawful purpose, whether for profit or not.

A nonprofit association is an unincorporated association with a nonprofit purpose. It is a separate legal entity, meaning it can sue or be sued, enter into contracts, and hold intellectual property. The advantage of having an unincorporated association is that it can be organized fairly easily and it’s somewhat informal. Unincorporated associations may register as tax-exempt at the federal and state level.

As you can see, there are many considerations to forming a nonprofit, and no “one size fits all” solution. You may need to speak with a lawyer, CPA, or nonprofit professional to determine what is right for your purposes.

Mary Luros is a business law attorney with Hudson & Luros, LLP, in Napa, and can be reached at mary@hudsonluros.com or 418-5118. The information provided here is not intended as legal advice, nor does it form an attorney-client relationship with the author. The author makes no representations as to the reliability or accuracy of the above information. In a perfect world we wouldn’t need disclaimers — or attorneys.