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.