WHAT IS THE LEGAL FORMATION OF A NONPROFIT ORGANIZATION?
The primary business entity formation for a nonprofit organization is the corporation. The corporation is a separate legal entity from the people who own, manage, and operate it. The corporation is composed of a Board of Directors and officers. The Board is responsible for overseeing and supervising the officers and employees of the corporation. The officers are responsible for the daily operations of the corporation. The directors and officers have limited personal liability for the business debts of the nonprofit organization. Creditors can only satisfy their debts incurred by the nonprofit organization from the corporate assets.
The difference between a for-profit corporation and a nonprofit corporation is that the for-profit corporation has shareholders who are the owners of the corporate property. Nonprofit corporations cannot have owners of the corporate property. There can be no private inurement or improper private benefit to anyone involved in the nonprofit. Whereas, a for-profit corporation can distribute its assets to its shareholders at any time during its operation through dividends. This encourages investment in the for-profit corporation and allows the shareholders to obtain a return on their investment. Nonprofit corporations do not allow this type of distribution.
A nonprofit is a corporation that:
(1) Has a mission to undertake activities in which profit is not the primary goal,
(2) Nobody has ownership of shares or interest in its property, and
(3) The property and income of the corporation are never distributed to any of its members, but are instead distributed to support the charitable activities.
DISSOLUTION OF NONPROFIT
Upon dissolution of the nonprofit, the earnings and assets of the nonprofit are directed toward the charitable activities rather than distributed to individuals for personal gain. Even if the organization fails to obtain tax exempt status by the Internal Revenue Service (IRS), the funds must still be used for charitable purposes and cannot be refunded or distributed to the donors.
CALIFORNIA NONPROFIT ORGANIZATION
California recognizes three types of nonprofit corporations: (1) Public Benefit Corporations, (2) Mutual Benefit Corporations, and (3) Religious Corporations.