Schneiders & Associates, L.L.P. May newsletter

Welcome to our special nonprofit edition newsletter! In this month's newsletter you will see a special focus on the legal aspects of operating a nonprofit. As part of our commitment to pubic service, Schneiders & Assoicates, L.L.P. serves tax-exempt organizations and foundations throughout California.

Q&A with Roy and Ted Schneider

"Will I be tax-exempt if my Articles of Incorporation state that I am a nonprofit?"

"No. First, there are several different types of nonprofit designations, and the Articles must set forth the proper one. Second, if the nonprofit is to be a tax-exempt entity, it must file an application with and be approved by the IRS and the California Franchise Tax Board."

Considerations In Converting A For-Profit Into A Nonprofit

Business owners may decide to make the switch from a for-profit corporation to a 501 (C) (3) tax-exempt nonprofit organization when their purpose has shifted from making a profit to furthering a social or charitable cause. There are several factors to consider before making this important decision which include the loss of individual control, primary goals and activities of the corporation and the appropriate method of transition.

A nonprofit corporation is a legal entity that has no ownership, so existing shareholders must give up their ownership. Appointed board members will have control over the governance and oversight of the corporation. The board of directors’ primary goal must be something other than making a profit. There is no longer an obligation by the board to increase profits. There are also special rules that apply to directors. In California, a nonprofit cannot have more than 49% of its directors be “interested persons”, which includes any person receiving compensation from the nonprofit for services rendered within the past 12 months and their close family member.

In addition, activities performed by the tax-exempt nonprofit corporation are performed at the direction of the board. The activities of the nonprofit must be consistent with its 501(c)(3) tax-exempt status.

Shareholders must also consider the method of converting to a nonprofit, whether it be through an amendment to the articles of incorporation or by forming a new nonprofit and transferring the corporation’s assets and programs. The conversion of a for-profit corporation to a nonprofit requires that the corporation lock all assets in a charitable trust and may only be used for charitable purposes. Alternatively, assets can be gifted from the for-profit shareholders to the nonprofit which may make the process easier to obtain tax exemption from the IRS. In other words, it may be simpler to form a new nonprofit corporation as opposed to the conversion from a for-profit to obtain tax exemption from the IRS.

Whether you are considering converting a For-profit corporation to a nonprofit or forming a new nonprofit, our knowledgeable attorneys at Schneiders & Associates, L.L.P. can guide you through the process and assist with all nonprofit related legal matters.

Made with Adobe Slate

Make your words and images move.

Get Slate

Report Abuse

If you feel that this video content violates the Adobe Terms of Use, you may report this content by filling out this quick form.

To report a Copyright Violation, please follow Section 17 in the Terms of Use.