California Nonprofit Articles of Incorporation

Published on: by Gene Takagi Category:CALIFORNIA LAW, STARTING A NONPROFIT

A California nonprofit corporation is formed by the filing of nonprofit articles of incorporation (Articles). There are three types of California nonprofit corporations: public benefit corporations, mutual benefit corporations, and religious corporations. Because they are governed by different laws, the Articles must reflect the appropriate type. In this post, we’ll focus on Articles of a nonprofit public benefit corporation, which is the appropriate type of corporation for a nonprofit intending to be or already exempt under either (1) IRC § 501(c)(3) (with an exempt purpose that is not primarily religious) or (2) IRC § 501(c)(4).

Some Key Provisions

Name. In choosing the legal name of the corporation, the founder(s) must be careful in selecting a name that does not infringe on the trademark / serivcemark rights of another person or entity.

Purpose Statement. The Articles must include the following statement:

“This corporation is a nonprofit Public Benefit Corporation and is not organized for the private gain of any person. It is organized under the Nonprofit Public Benefit Corporation Law for [public purposes, charitable purposes, or public and charitable purposes].”

Charities seeking state tax-exemption (under RTC § 23701d) should select either charitable or public and charitable purposes. The selection of only public purposes, which would be appropriate for a 501(c)(4) social welfare organization, may not be appropriate for a charity. In the context of the Nonprofit Public Benefit Corporation Law, the term “charitable” is broader than its meaning under 501(c)(3) and will encompass all of the other 501(c)(3) exempt purposes.

Determining just how specific or broad to make the purpose statement in the Articles, which may be differentiated from the corporation’s mission statement is a matter of balancing rigidity against flexibility.

We’ve previously written about the purpose statement in nonprofit articles of incorporation here and here.

Street Address of Principal Office in California. The initial street address of the corporation must be included. A P.O. Box may not be used to substitute for a street address. And the city must not be abbreviated (e.g., stating “L.A.” would subject the Articles to rejection). The Articles should also include the initial mailing address of the corporation if different from its street address.

Many small corporations choose the founder’s home or business address as the initial street address of the corporation. The Articles may not, however, include “in care of” as part of the street address. Particularly if there will be more than administrative services run though the business address or the corporation attracts visitors, local zoning laws should be considered. Further, because the Articles are public documents that are readily accessible, privacy concerns should also be considered. In some cases, virtual office and coworking companies may provide suitable alternatives.

Agent for Service of Process. An Agent for Service of Process (Agent) is responsible for accepting legal documents (e.g. service of process, lawsuits, other types of legal notices, etc.) on behalf of the corporation. If the Agent fails to deliver service of process or a complaint to the corporation’s responsible person(s), the corporation could be subject to serious negative repercussions, including losing a default judgment for nonappearance in a case in which it would have otherwise won on the merits. A negligent Agent could find themselves held responsible for not properly delivering such legal documents. Accordingly, it’s very important for a corporation to make sure it selects a responsible Agent who will be available at all times to receive and convey such legal documents as necessary.

If the corporation selects an individual to serve as Agent (which is very common), the Agent’s street address (not a P.O. Box) must be included in the Articles. Again, privacy issues should be considered. Alternatively, if the corporation selects a registered corporate agent qualified with the California Secretary of State (Registered Agent), the Resident Agent’s address need not be included in the Articles. See List of Registered Corporate Agents here.

501(c)(3) Organizational Test Statement. The Organizational Test under 501(c)(3) requires that the Articles state that corporation is organized and operated for one or more of the exempt purposes listed in IRC § 501(c)(3): religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals.

The form Articles provided by the California Secretary of State includes the following optional statement, which the Instructions provide may not be altered if included: “This corporation is organized and operated exclusively for the purposes set forth in Article 4 hereof within the meaning of Internal Revenue Code section 501(c)(3).” However, Article 4 in the form Articles may only provide for a “charitable” purpose or may provide for both “public” and “charitable” purposes, which could very much limit the purposes of the corporation if they are intended to be broader than simply charitable or could theoretically result in the denial of 501(c)(3) status because a “public” purpose is not one of the exempt purposes in 501(c)(3) and may be considered permissive of “social welfare” purposes described in 501(c)(4). This is one reason we discourage use of the form Articles. But if the form Articles are used, it may be critical to include any additional 501(c)(3) exempt purposes desired in the blank space for describing the specific purpose statement. For example, the blank space might be filled out as follows:

The specific purpose of this corporation is to further religious, charitable, scientific, and educational purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code.

501(c)(3) Lobbying and Political Campaign Intervention Statement. The following provision (or something similar) should be included to qualify under 501(c)(3):

No substantial part of the activities of this corporation shall consist of carrying on propaganda, or otherwise attempting to influence legislation, and this corporation shall not participate or intervene in any political campaign (including the publishing or distribution of statements) on behalf of any candidate for public office.

501(c)(3) Dedication Clause. The following provision (or something similar) should be included to qualify under 501(c)(3):

The property of this corporation is irrevocably dedicated to [list the 501(c)(3) purposes included in the purpose statement] purposes and no part of the net income or assets of this corporation shall ever inure to the benefit of any director, officer or member thereof or to the benefit of any private person.

501(c)(3) Dissolution Clause. The following provision (or something similar) should be included to qualify under 501(c)(3):

Upon the dissolution or winding up of this corporation, its assets remaining after payment, or provision for payment, of all debts and liabilities of this corporation shall be distributed to a nonprofit fund, foundation or corporation which is organized and operated exclusively for [list the 501(c)(3) purposes included in the purpose statement, but for flexibility, provide the conjunction “or” rather than “and” (e.g., religious, charitable, scientific, or educational] purposes  and which has established its tax-exempt status under Internal Revenue Code section 501(c)(3).

Notwithstanding the foregoing, the corporation may name one or more qualifying organizations to receive its remaining assets upon dissolution so long as the Articles include caveat that they must meet the 501(c)(3) and compatible purpose provisions at such time.

Welfare (Property Tax) Exemption. Not all 501(c)(3) exempt purposes qualify a corporation for property tax exemption under the welfare exemption. To be eligible for the welfare exemption, Revenue and Taxation Code (RTC) section 214(a)(6) requires both that (1) property is irrevocably dedicated to religious, hospital, scientific, or charitable purposes, and (2) upon liquidation, dissolution or abandonment by the owner, property will not inure to the benefit of any private person except a nonprofit fund, foundation, or corporation organized and operated for religious, hospital, scientific, or charitable purposes. The Articles must limit the corporation’s exempt purposes and its dedication and dissolution clauses in order to qualify. Note that “educational” is not among the qualifying purposes for the welfare exemption. However, the term “charitable” includes certain educational purposes and activities, and educational nonprofits owning property may qualify for the welfare exemption if they have the proper references to RTC § 214 in their Articles. See our blog post on the welfare exemption and Exhibit C in the BOE’s Publication 149 for more information.

Optional Provisions

The Articles may contain other provisions, including those related to:

  • a limitation on the duration of the corporation’s existence;
  • a head organization – subordinate organization relationship;
  • the names and addresses of the persons appointed to act as initial directors;
  • the classes of members, if any, and if there are two or more classes, the rights, privileges, preferences, restrictions and conditions attaching to each class;
  • the allowance of a member to have more or less than one vote in any election or other matter presented to the members for a vote;
  • a requirement that an amendment to the Articles or to the Bylaws, and any amendment or repeal of that amendment, must be approved in writing by a specified person or persons other than the Board or the members; and
  • any other matter, not in conflict with law, for the management of the activities and for the conduct of the affairs of the corporation, including any provision that is required or permitted to be stated in the Bylaws (note that the Articles will supersede any contrary provision in the Bylaws).

Tip: If control is a major issue for the corporation, establishing control in the Articles may be important and may be more protective of such control mechanism than a comparable provision in the Bylaws that might be superseded by an amendment to the Articles.

Amending the Articles

See Amending California Nonprofit Articles of Incorporation.