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Nonprofit Formation

Non Profit Organizations.

How Formed? May be a charitable trust or non profit corporation; the corporate form is usually preferred due to the well-established body of law and the limitation from personal liability which it affords. In California, private foundations and public charities are typically formed under the Nonprofit Public Benefit Corporation Law. Articles of incorporation must provide certain statements, including the fact that it is a nonprofit public benefit corporation. In addition to the usual state corporate filings, an Application for Recognition of Exemption (Form 1023) must be made to the Internal Revenue Service; a similar form (Form 3500) needs to be filed with the Franchise Tax Board. Once recognized as exempt, any tax paid upon the filing of the articles of incorporation will be refunded.  (The California Secretary of State has an online memorandum on how to organize a nonprofit corporation.)

Compensation. Families may wish to set up a private foundation for philanthropy while at the same time employing their children. Federal tax law does not prohibit the payment of reasonable compensation to related parties ("disqualified persons") to accomplish exempt purposes. However, under California law not more than 49% of the corporation's board of directors may be paid employees or independent contractors or any brother, sister, ancestor, descendant, brother-in-law, sister-in-law, son-in-law, daughter-in-law, mother-in-law, or father-in-law of any such person.

Taxation: Separate body of tax law applies (beyond the scope of this topic). Significant differences in reporting requirements and taxation among private foundations, private operating foundations, and public charities. Separate tax on unrelated business income. Cannot be formed or operated such that there is "private inurement" to any individual. There are also restrictions on the political activities of these organizations.  And don't forget the "organizational test."  (See IRS continuing professional education memorandum, "Organizational Test - IRC 501(c)(3)" by Elizabeth Ardoin.)