California recognizes three types of nonprofit corporations: religious, public benefit, and mutual benefit corporations. These types differ in terms of their missions, activities, and fundraising regulations. But they share an essential feature—to further a purpose other than making a profit, and all of them can apply for tax-exemption to avoid federal and state corporate tax.
A mutual benefit corporation stands apart from the other types of nonprofits in that its mission is to serve its members and not the public. Common examples of mutual benefit corporations are homeowners' associations, chambers of commerce, fraternities, and professional associations.
The similarities among the three types of nonprofits are tax-exemption, formation, management, and use of profits. All nonprofits are eligible for tax exemption, meaning the organization can avoid corporate tax, sales tax, franchise tax, and other state taxes (as discussed below). The process of forming and managing each type of nonprofit is also similar. Read on for more information about formation, and review our other articles for more information on nonprofit governance.
Despite the name, nonprofits can make a profit, but unlike for-profit corporations, the organization must use the revenue to further the mission of the organization. Organizers can use profits to pay for operating costs and reasonable salaries, and can save money for future endeavors. While for-profit corporations distribute profits to their owners, in the form of dividends, the law prohibits nonprofits from doing so. To read more about restrictions on the use of profits, which apply to all nonprofit types, see our article on Private Inurement.
Mutual benefit corporations are different from other nonprofit types in terms of their missions, the ease with which they can attract contributions, and the rules for distributing assets following dissolution.
Mutual benefit corporations operate under different fundraising regulations than public benefit and religious nonprofits. In general, mutual benefit corporation fundraisers serve only the organization's members and not the public. As a result, organizers can avoid the fundraising regulations that charities are subject to, which ensure that public charities are using donations for the public good and not to benefit their members. While mutual benefit corporations have more flexibility in fundraising and the use of funds, donations to the organization are not tax-deductible.
If your organization solicits donations, check with the Attorney General to determine whether you must register as a charity (read more about the fundraising registration process here). If your fundraisers are for the benefit of your members only and you communicate this to the participants, you might avoid the registration requirement., Most importantly, when you solicit donations (such as appeals on your website and in newsletters and emails), you must inform potential donors that their contributions are not tax-deductible.
To form a mutual benefit corporation, follow the same steps as you would if you were forming a public benefit or religious nonprofit, but be sure to use the correct articles of incorporation form (ARTS-MU). The steps include:
To learn more about the process for forming a California nonprofit, check out our article, How to Form a California Nonprofit Corporation.
Mutual benefit corporations can apply for tax exemptions with federal and state tax agencies. An attorney or an accountant can help determine whether your organization qualifies for federal tax-exemption and prepare your application, Form 1024, Application for Recognition of Exemption. Once you have your federal tax exemption, you can apply for state tax exemptions to avoid corporate, property, sales, and other state taxes. Contact the California Franchise Tax Board for more information. For additional guidance on nonprofit taxation, check out our book, Every Nonprofit's Tax Guide.