Corporations in California

There are different types of corporations in California, and they are basically categorized as either profit or non-profit. Both federal and state laws make very precise distinctions between non-profit and for-profit corporations, as there are various structural differences in their organization, as well as differences with tax implications.

For-profit corporations are formed for the purpose of making money to benefit the individual shareholders of the business. Non-profit corporations, on the other hand, are formed for different purposes. The purpose by which a non-profit corporation is formed depends on what type of non-profit corporation it is, specifically.

Non-profit corporations are subcategorized as a public benefit, mutual benefit, or religious entity. A public benefit is formed for charitable purposes, like the Red Cross and the National Kidney Foundation. Mutual benefit corporations include professional organizations and entities like AARP and NAACP.

Structural Differences of Profit and Non-Profit Corporations

Both non-profit and for-profit organizations are formed through State Law and are governed by a board of directors, but the main difference in their structure is that for-profit corporations are owned by shareholders, while non-profit corporations are not. More specifically, non-profit organizations do not have any owners at all. A non-profit corporation’s assets are, in effect, held in a trust. Assets are also used to advance the specific purpose of the organization.

Although both kinds of corporations have a board of directors, the board of directors of a for-profit organization may have only one member, and non-profit organizations are required by the state to have two or more directors.

Differences in Tax Implications between Profit and Non-Profit Corporations

Non-profit corporations enjoy many tax benefits that are not available to for-profit organizations. One benefit is that if a non-profit organization qualifies under section 501(c) of the IRS code, it may be exempt from paying federal taxes. If a non-profit organization does not qualify under that section, there are other benefits provided for donors, under section 501(c)(3). These benefits for donors are generally not extended to non-profit mutual benefit corporations formed under the other subsections of the law.

A non-profit corporation is a legal entity that has been incorporated under the California state law for purposes other than making profits for its shareholders, owners, or trustees. A nonprofit corporation exists not to earn revenue, but to promote a specific mission. Corporations that are non-profit are often eligible for tax-exempt status, and some may receive tax-deductible contributions. These are the 3 basic subcategories of nonprofit corporations in California:

Forming Public Benefit NonProfit Corps in CA

1. Public Benefit Non-Profit Corporation

Public benefit non-profit corporations are organizations chartered by the California state government primarily (or exclusively) for social, educational, recreational, or charitable purposes. Public benefit non-profit corporations are basically organized to benefit the general public, and not for the interest of their members.

2. Mutual Benefit Non-Profit Corporation

A mutual benefit non-profit corporation, also known as a membership corporation, is a type of non-profit corporation formed under the California state law, solely for the benefit of its individual members. This type of non-profit corporation exists to serve its members in ways other than earning and distributing profit to them. It is not a charity. Therefore, a mutual benefit non-profit corporation is not eligible to apply for a 501(c)(3) non-profit status as a charitable institution.

Mutual Benefit NonProfit Corps in CA

A golf club, for example, is a form of mutual benefit non-profit organization. The club leaders can decide how many members they will have and who is eligible to be members. These details are stipulated in its corporation bylaws. Individuals then pay in order to be a member of the club, and once they are members, they may enjoy the services offered by the club. Their membership may be bought and sold, and if the club dissolves, all properties owned by the club are distributed to its members.

Mutual benefit non-profit corporations still file tax returns and pay income tax, because, unlike public benefit non-profit corporations, they are not formed for a purpose that would benefit the general public. Mutual benefit non-profit corporations are formed for a common gain purpose of their members, and due to this private purpose, this type of corporation pays the same taxes as regular for-profit corporations in California. Nevertheless, a few tax exemptions are still allowed by the IRS, for certain types of mutual benefit nonprofit corporations.

Furthermore, since this is a mutual benefit nonprofit corporation exists only to serve the needs of its members, and not the general public, it is also up to its members to resolve disputes that may arise as to how the corporation is being run.

3. Religious Corporations

Forming Religious NonProfit Corps in CA

Religious corporations are the third of the 3 basic types of nonprofit corporations in California. A religious corporation is formed solely to promote religious purposes. Just like other forms of nonprofit corporations, religious corporations are formed by filing articles of incorporation with the California secretary of state and are regulated by the same government agency. Religious corporations are eligible for many tax exemptions, but unlike other nonprofit corporations, they are subject to less rigorous state and federal filing and reporting requirements.

Religious corporations are allowed to designate a corporation sole and act in his or her capacity. A corporation sole is a person who acts as the official holder of title on the property and other assets of the group.

Incorporating a Business in California

There are many different types of corporations in Orange County, California. Regardless of what type of corporation you intend to form, you need to file the required articles of incorporation with the California secretary of state. Moreover, you need to make sure that every detail in the process of incorporating your business is done right so that you can avoid unnecessary legal problems in the future. It is advisable to have the assistance of a competent incorporation attorney in Orange County, California when you incorporate your business.

Gale and Vallance is a law firm based in Orange County, California that offers many legal services for various businesses. One of the services that they offer is assistance in incorporating a company. Contact Gale and Vallance today at +1 (714) 634-4838.