A nonprofit may benefit any number of causes, including sheltering abandoned animals.
Nonprofit entities exist to address unmet social and community needs, as opposed to making profits for business owners or shareholders. Altruism, however, is not always the main reason that people set up nonprofits. Some people form a nonprofit to reap tax benefits and be paid a significant salary for pursuing an interest that is, seemingly, beneficial to the community. In California, nonprofits are regulated by the California Corporations Code: Title 1: Part 2: Section 5110 to 12704: Non Profit Public Benefit Corporations. Nonprofits must also comply with the Nonprofit Integrity Act of 2004.
Incorporation
Many individuals and groups realize the value of setting up a nonprofit to pursue their efforts to help a specific sector of society, whether it be abandoned animals, homeless people or a museum. With a nonprofit corporation, the organization gains recognition, saves money in operational costs, becomes eligible for grants to support its mission, and protects its members and executive board from liability. Nonprofit status is granted by the State of California. Once a corporation has obtained nonprofit status, it must also comply with Internal Revenue Service and Franchise Tax Board requisites to obtain tax-exempt status.
Types
In California there are three types of nonprofit entities: public benefit corporations, formed for a public or charitable purpose; religious corporations set up for religious purposes; and mutual benefit corporations formed solely to benefit its members. Examples of public benefit corporations are homeless shelters, animal shelters and charities to benefit research on disease prevention. Religious corporations are religious orders and places of worship, and mutual benefit corporations are organizations such as golf clubs. The type of entity an organization incorporates under is important in terms of tax liabilities and benefits.
Directorship
Under section 5227, a nonprofit must have at least one director. The number of directors and their duties must be specified in the articles of incorporation or the bylaws of the organization. No more than 49 percent of the members of a board of directors may be interested persons. An interested person is defined as someone who provides other services to the organization for which he gets paid. This also applies to close relatives of the director.
Bylaws
Sections 5150 to 5153 of the California Corporations Code require organizations to keep a copy of their bylaws at the nonprofit public benefit corporation's principal place of business. The bylaws are the rules and procedures by which the organization are governed and operate. There are no set criteria as to what should be included; they generally include information as to the mission of the organization, the governing body, the duties of officers and the manner in which donations will be used.
Nonprofit Integrity Act
Following the huge corporate scandals such as that of Enron, California enacted stricter laws pertaining to the financial operations of all for-profit corporations. It went further still, when on Jan. 1, 2005, it enacted the Nonprofit Integrity Act, which seeks to improve nonprofit governance, limit abuses of executive compensation and prevent commercial fund-raising abuses. It stipulates, among other requirements, that all nonprofit organizations with $2 million or more in annual revenues have an annual audit prepared by an independent firm.
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