Non-Profits
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.
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.