The California Nonprofit Mutual Benefit Corporation Law applies to nonprofit organizations without tax-exempt status under Internal Revenue Service (IRS) code 501(c)(3). The term usually refers to a group of people or businesses working toward a common goal. Some examples of this type of legal entity are associations formed to operate a condominium complex, a downtown business district, or a homeowners' organization.

What Is a California Nonprofit Mutual Benefit Corporation?

This type of organization has a legal existence separate from the individuals who start or operate it. Those members, agents, directors, and officers enjoy limited protection from liability related to involvement in the business. The corporation can enter into legally binding agreements and take on liabilities as its own without obligating the individuals. Both the federal and state governments have specific filing requirements for this type of entity.

Members join a nonprofit mutual benefit corporation to meet like-minded people and work toward an agreed upon goal, such as improving a community, completing a project, growing a sport, or just sharing interests. An organization like this may see some benefits to exemption from federal, state, and franchise taxes if it seeks exemption under sections 501(c)(6), 501(c)(7), 501(c)(8) or 501(c)(10) of the IRS code and the equivalent sections of the laws of its state.

California nonprofit mutual benefit corporations have two main characteristics that make them unique.

  • The company's assets can only be disbursed to members if the company is dissolved. This cannot happen while the business is actively operating. This is different than a for-profit company, which can distribute assets anytime through dividends to encourage shareholders to invest more.
  • The entity can have any legal purpose. It does not have to be charitable in nature or beneficial to the general public as would be required of a nonprofit public benefit corporation like a school or hospital that enjoys tax-exempt status under section 501(c)(3) of the IRS code. It must, however, focus on a benefit to its members rather than earning a profit, which is why the nonprofit designation can be helpful.

How Is a California Nonprofit Mutual Benefit Corporation Managed?

This type of entity is led by a Board of Directors, just like any other type of corporation. That group of individuals is responsible for the operation of the business. They elect officers among themselves, at minimum a president, secretary, and treasurer.

The corporation can also have members who can vote on some matters. The membership may have a role in electing the Board members, similar to the rights given to shareholders in a for-profit corporation. Another possible arrangement is to have a membership that doesn't vote. Members receive certain benefits like discounts, access to events, or newsletters but have no role in governance.

How Is a California Nonprofit Mutual Benefit Corporation Established?

  1. Assemble your first set of Board members, a group of people interested in governing the organization.
  2. Layout your plans for how the corporation will operate. Decide what activities the group will engage in and create a preliminary budget of income and expenses. These early discussions should involve who the managers will be and what authority they will have. The requirements for membership must be decided upon as well as what benefits members will receive.
  3. Using the decisions from step two as a guide, put together your Articles of Incorporation and make sure they meet the requirements to submit to the appropriate agency. At a minimum, the Articles must include the company's name and the address of the resident serving as the agent for service of process. If the corporation plans to apply for tax-exempt status, you'll need to include language to support that decision.
  4. Have the appropriate parties sign the documents and mail to Secretary of State, Document Filing Support Unit, P.O. Box 944260, Sacramento, CA 94244-2600 along with the filing fee. You can also choose to hand deliver them to a regional office in Los Angeles or Sacramento for an additional handling fee.
  5. Once you receive approval of the Secretary of State's office, you're ready to draft your bylaws as required by California law. This document goes into more detail on the management of the nonprofit, the address, the membership and governance policies, the bookkeeping methods, and reporting requirements.

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