Attorney General’s
Guide for Charities
Best practices for nonprots that
operate or fundraise in California
California Department of Justice
Charitable Trusts Section
Protecting Charitable Assets and
Donations for the People of California
MESSAGE FROM THE ATTORNEY
GENERAL
What makes California great? The generous people who live here.
Californians are big-hearted and charitable. We step up to help those in
need, whether in response to natural catastrophes, man-made tragedies,
or families struggling in our local communities. In 2019, charities
operating in California reported receiving over $293 billion in revenue, an
increase of $57 billion from 2017.
We put our faith in charities to carry out our charitable intent, and many
charities work tirelessly to serve our local communities. Day in and day
out, they provide critical assistance to families during challenging times,
exemplifying what it means to be a good neighbor. Whether they provide
scholarships to our future leaders, help our veterans, or deliver meals to
our seniors, the charities of California are living proof of our state’s unique
spirit of giving.
As the chief law enforcement officer in the state, I am committed to
protecting donors and charitable assets, and ensuring that donations are
not diverted or misspent. The Guide for Charities was published to give
charities the tools they need to comply with our laws. It seeks to promote
best practices to help directors and officers of charities better understand
their responsibilities.
I hope charities find this guide helpful as they continue to make a real
difference in the lives of Californians. The California Department of
Justice stands ready to support their efforts to serve the great people of
our state.
Sincerely,
ROB BONTA Attorney General
| iii
INTRODUCTION
Welcome to the California Attorney General’s Guide for Charities. We
hope that charitable organizations – including charities, charitable trusts,
and other nonprofits – and fundraising professionals find this guide to be
an invaluable resource to help them understand their responsibilities and
comply with California law.
HOW THIS GUIDE IS ORGANIZED
Chapter 1 provides an overview of the charitable sector and explains the
most common legal forms of charitable organizations that may be created
under the statutes of California. Chapter 2 explains the steps of forming a
nonprofit corporation, while Chapter 3 explains the tax-exempt application
process. Chapter 4 provides information about legal requirements
involving employment practices. This guide also explains other
obligations, including fiscal responsibility requirements in Chapter 5,
government reporting requirements in Chapter 6, director and officer
obligations in Chapter 7, membership rights in Chapter 8, and fundraising
obligations in Chapter 9. Chapter 10 and Chapter 11 explain the Attorney
General’s oversight over charities and nonprofit transactions. Meanwhile,
Chapter 12 discusses the Attorney General’s oversight of charitable
trusts, religious nonprofits, and non-California entities.
LEGAL NOTICES
This publication does not constitute legal advice. Moreover, it is not
intended, does not, and may not be relied upon to create any rights,
substantive or procedural, enforceable at law by any party in any matter
civil or criminal. No limitations are hereby placed on otherwise lawful
investigative and litigation prerogatives of the California Department of
Justice.
Moreover, the website and PDF links reflected within this publication are
intended to be as accurate as possible, yet may have changed over time.
They are provided for informational purposes only.
This publication may be copied, provided that (1) the meaning of the
copied text is not changed or misrepresented, (2) credit is given to the
California Department of Justice, and (3) all copies are distributed free of
charge.
| iv
CONTENTS
Chapter 1 Understanding the Charitable Sector 1
Chapter 2 How to Form a Public Benefit Corporation 7
Chapter 3 Obtaining Tax-Exempt Status 13
Chapter 4 Charities as Employers 22
Chapter 5 Exercising Fiscal Management 32
Chapter 6 Reporting Requirements 38
Chapter 7 Directors & Officers of Public Benefit Corporations 50
Chapter 8 Members of Public Benefit Corporations 64
Chapter 9 Charitable Fundraising 68
Chapter 10 Attorney General’s Role with Charities 82
Chapter 11 Reviewing Nonprofit Transactions 87
Chapter 12 Charitable Trusts, Religious, & Foreign Entities 96
Appendices 107
| 1
CHAPTER 1 UNDERSTANDING THE CHARITABLE
SECTOR
Courts in
California define
“charitable
purpose”
very
broadly.
In This Chapter
Charitable Sector Overview
The Legal Forms of Charitable Organizations
CHARITABLE SECTOR OVERVIEW
Charities represent an important economic sector in California and
significantly impact the communities they serve. In January 2021, there
were over 118,000 charitable organizations registered with the Attorney
General’s Registry of Charitable Trusts. As of June 2019, these
registered charities reported total revenues over $293 billion and total
assets over $854 billion.
Historically, charities developed to meet certain needs of society. They
were formed to do “public good,” and to provide aid to segments of the
community that fell outside of the general scope of government
assistance.
In common usage, the term “charity” refers to an organization that
provides charitable programs or sets aside any funds to be used for
charitable purposes. Courts in California define “charitable purpose” very
broadly to include the following:
Relief of poverty;
Advancement of education or religion;
Promotion of health;
Governmental or municipal purposes; and
Other purposes beneficial to the community.
1
Put another way, a central aspect of being a charitable organization is to
benefit a significant segment of the community, as opposed to specific,
private individuals.
As a result of the public benefits provided, charities are granted special
legal status and benefits not available to for-profit enterprises. One such
benefit is that charities can qualify for tax-exempt status. The IRS and
California Franchise Tax Board administer and provide parameters on
what a charitable organization must do to obtain and retain tax-exempt
status. This tax-exempt benefit reflects the public policy favoring
1
(Lynch v. Spilman, (1967) 67 Cal.2d 251, 261; Estate of Breeden (1989)
208 Cal.App.3d 981, 985; Rest.3rd Trusts, § 28.)
Attorney General’s Guide for Charities | Understanding the Charitable Sector | 2
charitable giving and the recognition that many charities relieve the
government from the burden of financing various community and human
services. Also, state and federal tax laws
2
encourage the making of
charitable gifts, which support the existence of charitable organizations.
The Attorney General has oversight over charities, charitable trusts, as
well as individuals and other organizations who hold charitable assets
3
or
engage in fundraising for charitable purposes.
4
“Is Our Organization a Charity?”
Many people contact the Attorney General's Registry of Charitable Trusts
to ask if their organization in California is a charity. If the organization is
classified as a California nonprofit public benefit corporation
5
or has
received federal tax exemption under Internal Revenue Code section
501(c)(3), it is considered a charity.
Note, however, this guide frequently uses the term charity to include other
legal forms of charitable organizations, such as charitable trustees and
unincorporated associations.
THE LEGAL FORMS OF CHARITABLE ORGANIZATIONS
California statutes establish the types of charitable organizations that may
be formed in California. A charity may operate in California under any of
2
(E.g., Rev. & Tax. Code, §§ 17201, 24357-24359.1; Int.Rev. Code, §
170.)
3
(E.g., Gov. Code, § 12580 et seq., known as the Supervision of
Trustees and Fundraisers for Charitable Purposes Act; Corp. Code, §
5250 [nonprofit public benefit corporations]; Corp. Code, § 7240 [nonprofit
mutual benefit corporations]; Prob. Code, §§ 17200-17210 [voluntary
trusts]; Civ. Code, §§ 2223-2224.5 [involuntary trusts]; Cal. Code Regs.,
tit. 11, § 300 et seq.; In re Los Angeles County Pioneer Society (1953) 40
Cal.2d 852; Holt v. College of Osteopathic Physicians and Surgeons
(1964) 61 Cal.2d 750, 754; Hart v. County of Los Angeles (1968) 260
Cal.App.2d 512, 517 [Attorney General authority includes trusts exempted
from Supervision of Trustees and Fundraisers for Charitable Purposes
Act]; Estate of Clementi (2008) 166 Cal.App.4th 375; Summers v. Colette
(2019) 34 Cal.App.5th 361, 370-71.)
4
(E.g., Gov. Code, § 12580 et seq.; Bus. & Prof. Code, § 17510 et seq.
[charitable solicitations]; Cal. Code Regs., tit. 11, § 300 et seq.; People v.
Orange County Charitable Services (1999) 73 Cal.App.4th 1054, 1074-
1076.)
5
(Corp. Code, § 5110 et seq.)
Attorney General’s Guide for Charities | Understanding the Charitable Sector | 3
The majority of
the registered
nonprofit
corporations in
California are
organized as
public benefit
corporations.
several legal forms, including as a nonprofit corporation, trust, or
unincorporated association. Yet regardless of the legal form chosen, this
does not provide the charitable organization with the tax-exempt benefits
described above. As discussed in Chapter 3
, obtaining tax-exempt status
involves another process after the organization has been legally formed.
Nonprofit Corporate Forms
Most California charities are organized as nonprofit corporations.
6
The
three most common types of nonprofit corporations under California law
are:
1. Public benefit corporations;
2. Mutual benefit corporations; and
3. Religious corporations.
Public Benefit Corporations
The majority of the registered nonprofit corporations in California are
organized as public benefit corporations.
Under California law, a public benefit corporation must be formed for
public or charitable purposes and may not be organized for the private
gain of any person. A public benefit corporation cannot distribute profits,
gains, or dividends to any person.
Public benefit corporations often qualify for exemption from income tax.
However, the failure of a public benefit corporation to qualify for income
tax exemption does not necessarily free the organization and its
responsible directors or officers from accountability of charitable assets.
Public benefit corporations (except, for example, educational institutions
and hospitals) must register and report to the Attorney General’s Registry
of Charitable Trusts.
7
Mutual Benefit Corporations
Mutual benefit corporations
8
are organized most often for the benefit of
their own members. They may not be formed exclusively for charitable
purposes. Examples include private homeowners’ associations, private
clubs, and trade and professional associations. Mutual benefit
corporations may qualify for different income tax benefits than public
6
(Corp. Code, §§ 5000-10841.)
7
(Gov. Code, §§ 12585, 12586, subd. (a); Cal. Code Regs., tit. 11, §§
300-307.)
8
(Corp. Code, § 7110 et seq.)
Attorney General’s Guide for Charities | Understanding the Charitable Sector | 4
benefit corporations. Because they serve their members and are not
formed exclusively for charitable purposes, they are not considered
charities and are typically exempt from registration and reporting
requirements with the Attorney General’s Registry of Charitable Trusts.
But if a mutual benefit corporation solicits donations for a charitable
program or holds some of its assets for charitable purposes, it must
register and report on those charitable assets.
Religious Corporations
Religious corporations
9
are organized for religious purposes. They are
usually exempt from income tax, and are not required to register or file
annual financial reports with the Attorney General’s Registry of Charitable
Trusts. See Chapter 12
for more information.
A religious organization may also be legally formed as a “corporation
sole,”
10
which is another type of corporation specific to religious purposes.
Trusts
A trust
11
may be created by language in a will or written trust instrument.
The trust creates legal obligations for the person, called a “trustee,” who
holds title to and manages the assets of the trust.
When the trust has a charitable purpose, the trust is called a “charitable
trust.”
12
Charitable trusts are subject to the Attorney General’s oversight
and the trustees must register and file annual reports.
13
For more
information, see Chapter 12.
Charitable Trustees
It is not essential to form a nonprofit corporation, trust, or other legal entity
to hold assets for a charitable purpose.
14
In California, any individual or
organization that solicits charitable funds is considered a “charitable
trustee” or “trustee for charitable purpose,”
15
and is accountable for such
funds.
In addition, the failure of a trustee for charitable purposes to qualify for
income tax exemption does not necessarily free the trustee from
9
(Corp. Code, § 9110 et seq.)
10
(Corp. Code, § 10000 et seq.)
11
(E.g., Prob. Code, §§ 15200-15210.)
12
(E.g., Estate of Clementi (2008) 166 Cal.App.4th 375, 385.)
13
(Gov. Code, §§ 12582, 12585, 12586, subd. (a); Cal. Code Regs., tit.
11, §§ 300-307.)
14
(E.g., Civ. Code, §§ 2223-2224.5.)
15
(E.g., Bus. & Prof. Code, § 17510.8; Gov. Code, § 12582.)
Attorney General’s Guide for Charities | Understanding the Charitable Sector | 5
accountability of charitable assets. An example of a charitable trustee is a
commercial fundraiser, also referred to as fundraising professional, who
solicits donations. Given he or she holds or controls assets for charitable
purposes, this type of fundraiser is considered a charitable trustee. A
commercial fundraiser is required to register and file annual financial
reports with the Attorney General’s Registry of Charitable Trusts even
though they are not operating a tax-exempt organization.
16
Unincorporated Associations
Any individual or group of persons who operates a charitable
organization, but does not create a nonprofit corporation or a trust, may
be treated under California law as an “unincorporated association.”
17
Unincorporated associations that solicit charitable donations are under
the oversight of the Attorney General and must register and file annual
reports.
18
Under this classification, the individuals may be exposed to
substantial risk of personal liability if the association is sued.
Other Legal Forms
Although charities may be formed as limited liability companies
19
or
limited partnerships,
20
exercise caution and consult with legal counsel
before using these legal forms. To the extent a limited liability company or
limited partnership accepts property to be used for charitable purposes,
these entities are also considered charitable trustees and are required to
register and report to the Attorney General’s Registry of Charitable
Trusts.
21
Additionally, there are two for-profit corporate forms in California that
allow organizations to pursue worthy purposes and to provide a return to
shareholders, but without the tax-exempt benefits that nonprofits typically
enjoy.
Social purpose corporations
22
describe their purposes in their
articles of incorporation. Directors take into account these
purposes as well as the overall prospects of the corporation in
16
(Gov. Code, §§ 12581-12582, 12599, subds. (a)-(c) & (g); Cal. Code
Regs., tit. 11, § 308.)
17
(Corp. Code, § 18000 et seq.)
18
(Gov. Code, §§ 12581, 12585, 12586, subd. (a); Cal. Code Regs., tit.
11, §§ 300-307.)
19
(Corp. Code, § 17701.01 et seq.)
20
(Corp. Code, § 15900 et seq.)
21
(Gov. Code, §§ 12582, 12585, 12586, subd. (a); Cal. Code Regs., tit.
11, §§ 300-307.)
22
(Corp. Code, § 2500 et seq.)
Attorney General’s Guide for Charities | Understanding the Charitable Sector | 6
their decision-making.
23
The organization’s annual report must
include “management discussion and analysis” of the steps taken
to pursue the corporation’s purpose.
24
Benefit corporations
25
pursue a material and positive impact on
society and the environment as measured by a third party
standard. Directors of benefit corporations consider the interests
of the corporation as an entity, the corporation’s workforce, the
environment, and society. It is designed for social enterprises to
pursue both for-profit and nonprofit objectives. With this corporate
form, corporate officers and directors may take into account a
triple bottom line of “profit, people, and planet” when making
business decisions.
As for-profit entities, social purpose corporations and benefit corporations
are accountable to their shareholders, although the laws governing them
also require posting of specified information to their websites for a
measure of public accountability.
26
They are also distinguished from more
traditional charitable organizations that require a greater measure of
public accountability and transparency, including oversight by the
Attorney General (unless deemed charitable trustees). Consult with legal
counsel before using these corporate forms as well.
23
(Corp. Code, § 2700.)
24
(Corp. Code, § 3500.)
25
(Corp. Code, § 14600 et seq.)
26
(Corp. Code, § 3500 [social purpose corporation’s annual report must
be available on the corporation’s web site or through similar electronic
means]; Corp. Code, § 14630 [benefit corporation’s annual benefit report
must be posted to the corporation’s web site or available on request, and
sent to shareholders].)
| 7
CHAPTER 2 HOW TO FORM A PUBLIC BENEFIT
CORPORATION
In This Chapter
Introduction
Preliminary Considerations: Is Forming a Nonprofit Corporation
the Right Option?
Steps to Form a Public Benefit Corporation
Frequently Asked Questions
INTRODUCTION
As discussed in Chapter 1, charities in California are typically formed as
public benefit corporations, the most popular type of nonprofit corporation.
This guide does not discuss the advantages or disadvantages of forming
a charity as a public benefit corporation compared to other corporate
forms, or as trusts. Nor does this guide address how public benefit
corporations are formed in other states. Contact legal counsel for such
guidance.
The basic steps and minimum requirements for forming a public benefit
corporation are summarized in this chapter. However, forming the entity
as a public benefit corporation does not make the organization tax-
exempt under state or federal law. For discussion of tax exemption as a
charity, see Chapter 3
.
PRELIMINARY CONSIDERATION: IS FORMING A
NONPROFIT CORPORATION THE RIGHT OPTION?
Although public benefit corporations may qualify for important benefits,
including exemption from income tax, they are subject to important legal
restrictions. One critical restriction is that the assets of a public benefit
corporation are considered irrevocably dedicated to charitable purposes,
and cannot be distributed for private gain.
1
If the corporation’s board of
directors later decides they do not wish to operate the corporation as a
charity, they may dissolve the corporation, but cannot take back its
assets. Legally, those assets must be used for the charitable purposes for
which they were raised, and must be transferred to another nonprofit that
has the same or similar purposes. Therefore, it is important to carefully
consider the practical implications before taking any steps to form a public
benefit corporation. Some important factors to consider:
1
(E.g., Corp. Code, §§ 5130, 5237, 5410.)
Attorney General’s Guide for Charities | How to Form a Nonprofit Corporation | 8
What is the purpose of the new organization? Will it be operated
exclusively for charitable purposes, or might there also be a
business or commercial purpose?
Are other organizations addressing the same charitable need that
will compete for funds and resources? If other charities provide
the same service, would it be better to collaborate with them,
rather than form a new entity?
Are the potential benefits of nonprofit status important to the
founders and donors (for example, exemption from income tax,
property tax, and reduced-rate mailing privileges)? If so, will the
corporation be prepared to maintain compliance with government
regulations and filing requirements for nonprofits? See Chapter 6
.
How important is the confidentiality of executive compensation,
corporate transactions, and other financial information?
How much flexibility over operations is desired?
What are the projected expenses and sources of revenue? Will
donations or grants be an important source of revenue or will the
corporation seek investors?
What are the government regulations and filing requirements for
nonprofit corporations as compared to for-profit business
corporations?
How will any “surplus” revenue be used?
How do the standards of liability for directors vary between
nonprofit and for-profit corporations, and as compared to trusts
and unincorporated associations?
This guide may help to answer some of these preliminary questions;
however, it does not constitute legal advice. Additional guidance from a
qualified attorney or other tax expert may be appropriate.
STEPS TO FORM A PUBLIC BENEFIT CORPORATION
A California public benefit corporation may be formed by completing the
steps summarized here:
1. Choose a corporate name. The first step is to identify an
appropriate and available name for the corporation, which is a
distinct legal entity under California law. California law does not
require any particular words (such as “incorporated” or “inc.”) to be
included in the name of a public benefit corporation, but it prohibits
the use of a name that is likely to mislead the public or is the same
name of an existing corporation.
2
Once a corporate name is
2
(Corp. Code, § 5122, subd. (b).)
Attorney General’s Guide for Charities | How to Form a Nonprofit Corporation | 9
selected, request a free preliminary check of the availability of that
name by submitting a Name Availability Inquiry Letter to the
California Secretary of State, by mail or in person. To reserve an
available name, this can be done for a fee and for a period of 60
days by submitting a completed Name Reservation Request Form
to the Secretary of State, by mail or in person. For additional
information, contact the Secretary of State or view its Name
Availability website.
2. Draft and file articles of incorporation with the Secretary of
State. A new corporation is “born,” that is formed, when persons
acting as “incorporators” or the initial board of directors, file what
is called “articles of incorporation” with the Secretary of State.
3
The articles of incorporation of a California public benefit
corporation must state the name of the corporation, particular
language indicating the corporation is a public benefit corporation
and is not organized for the private gain of any person, the
corporation’s public and/or charitable purposes, the name and
address of the corporation’s agent for service of process, and the
initial street and mailing addresses of the corporation.
4
The
articles of incorporation may contain additional provisions as set
forth in California’s Corporations Code.
5
There are also special
requirements for the articles of incorporation if the organization
has been operating as an unincorporated association that is now
incorporating.
6
If the corporation plans to apply for exemption from
federal income tax under Internal Revenue Code section
501(c)(3), or for property tax exemption in California, the articles
of incorporation must also contain particular statements regarding
the corporation’s purposes and the distribution of its assets upon
its dissolution. For sample articles of incorporation, see the
Secretary of State’s Form ARTS-PB-501(c)(3)
.
3. Draft the bylaws of the corporation. Bylaws serve as the
operating manual for the corporation and set forth the basic rules
for the corporation’s governance, including how directors and
officers are elected and removed, how board and membership
meetings may be called, how certain corporate decisions are
made, how committees operate, and other key provisions. The
Corporations Code specifies the rules regarding provisions that
must be included in the bylaws, provisions that may be modified in
3
(Corp. Code, § 5120.)
4
(Corp. Code, § 5130.)
5
(Corp. Code, §§ 5131-5132.)
6
(Corp. Code, § 5121.)
Attorney General’s Guide for Charities | How to Form a Nonprofit Corporation | 10
the bylaws, and default provisions that apply if the bylaws are
silent.
7
4. Draft an action of incorporator and have it signed by all
incorporators. If the articles of incorporation were signed only by
an incorporator and not by the initial board of directors, the
incorporator needs to appoint the first members of the board of
directors by signing an “action by sole incorporator.” If desired, the
incorporator may take other actions at the same time, including
adopting the bylaws, appointing the initial officers, and authorizing
the opening of bank accounts.
8
5. File an application for a federal Employer Identification
Number with the IRS. Once confirmation has been received that
the articles of incorporation has been filed with the Secretary of
State, the corporation has been formed and one may
apply for a
federal employer identification number online. One may also apply
by mail, fax, or phone in some circumstances by using Form SS-4.
See Chapter 4 for more information.
6. Hold the first meeting of directors. Shortly after the corporation
is formed, the first meeting of the board of directors should be
held. Agenda items for the first meeting typically include adopting
bylaws, electing officers, adopting a conflict of interest policy,
establishing a bank account, setting the accounting year, planning
a budget for the first year, and adopting procedures for
safekeeping of minutes, bylaws, and other corporate records. It is
important for someone (often the corporate secretary) to record
and keep minutes of all meetings of the board of directors and all
committees, and to certify those minutes are true copies.
9
7. File a Statement of Information with the Secretary of State.
The Statement of Information, Form SI-100, must be filed with the
Secretary of State within 90 days of filing the initial articles of
incorporation, and may be filed online for most organizations.
Most California nonprofit corporations have to file this form again
at least every second year during the life of the corporation. See
Chapter 6.
8. Register with the Attorney General's Registry of Charitable
Trusts. All California public benefit corporations, and other
persons or entities holding assets in trust for charitable purposes
7
(See generally Corp. Code, §§ 5150-5153, 5211-5222, 5224-5225,
5227.)
8
(Corp. Code, § 5134.)
9
(Corp. Code, § 5215.)
Attorney General’s Guide for Charities | How to Form a Nonprofit Corporation | 11
in California, must register with the Attorney General’s Registry of
Charitable Trusts within 30 days of first receiving the assets. The
initial registration is completed by filing the Initial Registration
Form (Form CT-1
), along with a copy of the corporation’s articles
of incorporation, bylaws, and a registration fee. Also provide
copies of the corporation’s application for recognition of federal tax
exemption and the determination letter issued by the IRS, if this
process has begun or been completed. All California public benefit
corporations required to register with the Registry of Charitable
Trusts must also renew their registration by filing an Annual
Registration Renewal Free Report (
Form RRF-1). If applicable, an
Annual Treasurer’s Report (Form CT-TR-1) must also be filed.
See Chapter 6.
9. File applications for tax exemptions with the IRS and
California Franchise Tax Board (FTB). California nonprofit
corporations are not automatically exempt from income or other
applicable taxes. If the corporation desires to be recognized as
exempt from federal income tax, it should file Form 1023 or
Form
1023-EZ with the IRS as appropriate. If the corporation also
desires to be exempt from the California franchise tax (including
the minimum franchise tax of $800 that applies to most California
corporations), it should file
Form 3500 with the FTB. If the
corporation has already been recognized as exempt by the IRS,
Form 3500A may be used to obtain recognition of exemption from
the FTB. See Chapter 3 for more information.
10. Determine whether there are any additional permits,
licensing, or registration requirements at the local, state, or
federal level, and establish procedures to ensure satisfaction
of ongoing filing requirements. It is important to ensure the
organization has satisfied and continues to satisfy all filing,
registration, permit, and licensing requirements. These filing
requirements are not optional; they are legal requirements
mandated by law. The failure to abide by these requirements may
lead to the assessment of late fees and penalties, the loss of tax-
exempt status, and the forfeiture of corporate status. Avoidable
penalties generally constitute waste of charitable assets and
damage to the charity. Also, a director who has committed a
breach of fiduciary duty or breach of trust by allowing avoidable
penalties may be liable for any damage to the charity.
10
10
(E.g., Bus. & Prof. Code, § 17510.8; Corp. Code, §§ 5210, 5231, 5239.)
Attorney General’s Guide for Charities | How to Form a Nonprofit Corporation | 12
FREQUENTLY ASKED QUESTIONS
“What is the simplest legal form to use in creating a charity?”
The public benefit corporation is the recommended legal form for most
California charities. The procedures for operation and the rights and
duties of directors, officers, and members are more clearly set forth for
public benefit corporations. This may be helpful during the operating life
of the corporation.
“Is it necessary to hire an attorney to form a public benefit
corporation?”
No, California law does not require an attorney to form a corporation.
However, as noted earlier, there are many questions to review and
consider before deciding to form a public benefit corporation. An attorney
who specializes in the area of nonprofit corporations could assist in this
review, and guide the organizers through the steps to incorporate and
apply for tax exemption.
“How does a nonprofit obtain tax-exempt status?”
A public benefit corporation is not automatically tax-exempt. To obtain
exemption from federal income tax, it is necessary to apply to the IRS for
recognition as an exempt organization under Internal Revenue Code
section 501(c)(3). Most California charities also apply to the FTB for
parallel exemption from California income taxes. If the organization does
not obtain recognition of exemption from California income taxes, it may
be subject to the minimum franchise tax (currently $800) annually, even if
it has no profits. The basic steps and the necessary application forms are
described in Chapter 3
.
“How does a charitable organization register with the Attorney
General’s Registry of Charitable Trusts?”
Registration with the Attorney General’s Registry of Charitable Trusts is
required for all California public benefit corporations and other types of
organizations that hold assets for a charitable purpose. The requirements,
instructions, helpful webinars and forms are available on the Attorney
General’s Charities website
. The initial registration is completed by filing
the Initial Registration Form (Form CT-1), along with a copy of the
corporation’s articles of incorporation, bylaws, and a registration fee. Also
provide copies of the corporation’s application for recognition of federal
tax exemption and the determination letter issued by the IRS, if this
process has begun or been completed. Note that all California public
benefit corporations must also renew their registration annually by filing
an Annual Registration Renewal Fee Report (
Form RRF-1). If applicable,
an Annual Treasurer’s Report (Form CT-TR-1) must also be filed. See
Chapter 6 for more information.
| 13
CHAPTER 3 OBTAINING TAX-EXEMPT STATUS
In This Chapter
Introduction
Requirements for Tax-Exempt Status
How to File for Tax-Exempt Status
Public Charity or Private Foundation?
Unrelated Business Income Is Taxed
Property Tax Exemption
Sales Tax Exemption
Frequently Asked Questions
INTRODUCTION
One benefit to being a charity is that charities can obtain exemptions from
paying federal and state income taxes. Obtaining tax-exempt status also
allows donors to obtain a tax deduction for their gifts to the charity. The
initial steps in the process of obtaining recognition as a charitable
organization exempt from paying federal or state taxes are:
1. Forming a nonprofit corporation or other suitable nonprofit entity
under the laws of a state (e.g., see Chapter 2
); and
2. Applying for tax-exempt status with the IRS, by completing and
filing Form 1023 or Form 1023-EZ (as discussed below).
There are several different kinds of tax-exempt designations permitted by
the Internal Revenue Code. Most public benefit corporations apply for and
hold tax-exempt status through Internal Revenue Code section 501(c)(3).
Having “section 501(c)(3) status” qualifies the organization to be both tax-
exempt and to receive tax deductible donations.
Charitable public benefit corporations incorporated or operating in
California also typically seek exemption from state income tax under
California’s Revenue and Taxation Code section 23701d.
REQUIREMENTS FOR TAX-EXEMPT STATUS
To obtain tax-exempt status under Internal Revenue Code section
501(c)(3), an organization must operate in compliance with certain
restrictions:
The organization must have a charitable purpose;
Private benefits to individuals with control over the organization
are prohibited;
The organization cannot promote or oppose candidates for public
office; and
Attorney General’s Guide for Charities | Obtaining Tax-Exempt Status | 14
Lobbying activities are restricted.
1
A tax-exempt charitable organization under Internal Revenue Code
section 501(c)(3) must be “organized and operated exclusively for
religious, charitable, scientific, testing for public safety, literary, or
educational purposes, or to foster national or international amateur sports
competition…, or for the prevention of cruelty to children or animals.”
2
In
other words, the organization must satisfy, what the IRS calls,
“organizational” and “operational” tests.
3
The organizational test is met if the articles of incorporation or similar
founding document includes language limiting the purposes of the
organization to one or more of the exempt purposes specified in Internal
Revenue Code section 501(c)(3). A more detailed discussion on
permissible section 501(c)(3) activities is included in Chapter 3 of IRS
Publication 557
, Tax-Exempt Status for Your Organization. In addition,
the founding document must require the organization to expressly
dedicate its assets to exempt purposes in the event of dissolution.
The operational test requires the organization to be primarily engaged in
charitable activities which accomplish one or more of the exempt
purposes specified in Internal Revenue Code section 501(c)(3). The test
will not be met if “more than an insubstantial part” of the organization’s
activities is not in furtherance of exempt purposes.
4
Examples of
impermissible conduct include diversion of charitable assets to private
individuals, excessive compensation to officers and directors, and
engaging in certain prohibited political activities, such as participation in
political campaigns on behalf of or in opposition to candidates for public
office, or substantial lobbying.
The organization is also required to serve public, rather than private
interests; generally, this means that its activities benefit a large and
indefinite class of individuals, as opposed to a small, identifiable group. In
particular, the organization may not be organized or operated for
impermissible private interests, such as those of specifically designated
individuals, the founder of the organization, the founder’s family, or
persons or companies controlled by such private interests.
5
To obtain recognition of tax-exempt status in California, public benefit
corporations may also be required to show that at least 51% percent of
the organization’s directors or their close relatives are “disinterested
1
(See generally Int.Rev. Code, § 501(c)(3).)
2
(Int.Rev. Code, § 501(c)(3).)
3
(26 C.F.R. § 1.501(c)(3)-1(a) (2020).)
4
(26 C.F.R. § 1.501(c)(3)-1(c)(1) (2020).)
5
(26 C.F.R. § 1.501(c)(3)-1(d)(ii) (2020).)
Attorney General’s Guide for Charities | Obtaining Tax-Exempt Status | 15
persons,” as defined in California Corporations Code section 5227. Also
see Chapter 7.
The law of tax-exempt organizations is highly complex, and this
discussion is only intended as a broad overview of the requirements for
exemption. Organizations with special problems or that need more
assistance should consult a qualified attorney or tax expert.
HOW TO FILE FOR TAX-EXEMPT STATUS
Obtaining federal tax exemption under Internal Revenue Code section
501(c)(3) requires submission to the IRS of an Application for Recognition
of Exemption under Section 501(c)(3); either the full Form 1023
or the
streamlined application Form 1023-EZ, if eligible.
Form 1023 is available in standard PDF and accessible PDF versions. It
generally must be filed within 27 months (15 months plus an automatic
12-month extension) from the end of the month of incorporation, together
with a fee. If filed within the 27-month period, tax-exempt status – if
granted by the IRS – will be retroactive to the date of incorporation. When
Form 1023 is filed after the 27-month period, the IRS grants section
501(c)(3) status retroactive to the date postmarked on the application
envelope, absent certain circumstances. More information regarding the
criteria and procedures for applying for federal tax exemption can be
found in IRS
Publication 557, Tax-Exempt Status for Your Organization.
Form 1023-EZ can only be filed at Pay.gov. Organizations that project to
have annual gross receipts of less than $50,000 in each of the first three
years of operations may be eligible to file Form 1023-EZ if they meet
certain criteria. If an organization expects receipts to exceed $50,000 in
any of the next three years, it is ineligible to use Form 1023-EZ. To
determine if an organization qualifies, complete the Form 1023-EZ
Eligibility Worksheet reflected in the Instructions for Form 1023-EZ.
A similar procedure at the state level requires the filing of Form 3500 with
the California Franchise Tax Board (FTB), together with a filing fee.
Alternatively, an organization may wait until it receives federal tax-exempt
status and then file with the FTB its short exemption form, Form 3500A.
The FTB will notify the applicant of its decision on exempt status, and
also sends instructions for the annual filing of its Form 199. Note that the
organization’s state tax return may need to be filed before the IRS has
notified the organization of its tax-exempt status; therefore, it may be
prudent for the organization to file a taxable entity return or
Form 3500
contemporaneously with IRS Form 1023 or Form 1023-EZ.
Attorney General’s Guide for Charities | Obtaining Tax-Exempt Status | 16
Organizations
that qualify for
exemption under
Internal Revenue
Code section
5
01(c)(3) will be
classified by the
IRS as either a
“
public charity”
or
“private
foundation.
”
More About IRS Form 1023
In general, Form 1023 requires the organization to submit the following
documents and information:
A conformed copy of the organization’s articles of incorporation
(trust instrument, or other founding document);
The bylaws (if a nonprofit corporation);
A conflict of interest policy (although technically not required, the
IRS strongly suggests every organization adopt a conflict of
interest policy; the Instructions for Form 1023 include a sample
document that can be used);
Employer Identification Number of the organization (to obtain this
number, see Chapter 4);
A statement of receipts and disbursements;
A current balance sheet; and
Other financial information, including a proposed budget for the
current and following two years in the case of newly formed
organizations.
Form 1023 also asks for information regarding the organization’s
activities, governance structure, and finances. For more information, see
the IRS’ Life Cycle of an Exempt Organization website. This describes all
of the interactions a charitable organization will have with the IRS
throughout its life, from application to dissolution.
It is important to retain copies of all of the organization’s founding records,
including applications for tax-exempt status. Note that federal tax law
requires charitable organizations make available for public review at their
principal offices copies of their exemption application, and annual returns
(Form 990, Form 990-EZ, or Form 990-PF
) for the three most recent
years. Individuals who have been denied access to copies of the
exemption application or the annual return of a charitable organization
may call IRS Customer Account Services at (877) 829-5500; or write to
Internal Revenue Service, TE/GE Division Customer Service, P.O. Box
2508, Cincinnati, OH 45201.
PUBLIC CHARITY OR PRIVATE FOUNDATION?
Organizations that qualify for exemption under Internal Revenue Code
section 501(c)(3) will be classified by the IRS as either a “public charity”
or “private foundation.” Most organizations (with a few exceptions, such
as churches) are presumed to be private foundations unless they receive
a determination from the IRS that they are a public charity.
Attorney General’s Guide for Charities | Obtaining Tax-Exempt Status | 17
An organization will be classified by the IRS as a public charity if it
receives a certain percentage of its total support from government
sources, other public charities, or from a broad base of individual donors.
Nonprofits should be aware that achieving public charity status based on
public donations is a complex calculation and early consultation with a tax
professional is recommended.
A charity’s classification as a private foundation carries some
disadvantages, including an excise tax on the organization’s net
investment income, certain limitations on the deductibility of charitable
contributions by individual donors, a wide range of operational
requirements and restrictions, and additional reporting requirements.
Private foundations are subject to taxes for the following actions:
Acts of self-dealing;
Failure to distribute five percent of its investment asset base, in
the form of a qualifying distribution;
Holding too great a percentage of a trade or business enterprise
(known as excess business holdings);
Investments that jeopardize the foundation’s ability to carry out its
charitable purposes; and
Engaging in taxable expenditures such as for lobbying (with
exceptions), political activity (with exceptions), grants to
individuals (without prior IRS approval), or non-charitable
purposes.
An organization may avoid being classified as a private foundation under
certain conditions, if it:
Meets the IRS’ definition of a church, school, or hospital;
Relies primarily on income earned from its charitable activities
provided to the general public (such as museums); or
Maintains a supporting relationship with one or more public
charities or government entities (this relationship requires the
organization to be organized and operated exclusively for such
public charities or government entities, among other
requirements).
6
For more information on classification as a public charity or private
foundation, review Chapter 3 of IRS Publication 557, Tax-Exempt Status
for Your Organization.
6
(Int.Rev. Code, § 509(a)(3).)
Attorney General’s Guide for Charities | Obtaining Tax-Exempt Status | 18
UNRELATED BUSINESS INCOME IS TAXED
Regardless of the classification as a public charity or private foundation,
organizations with section 501(c)(3) status are subject to taxes on income
derived from actively conducted business activities that are not
substantially related to the organization’s exempt purposes.
7
Business
activities do not become “related” to the charitable purpose just because
the proceeds are used for the exempt purpose. The IRS defines an
organization’s activity as unrelated business, and hence subject to
income taxes, if it meets three requirements:
1. It is a trade or business;
2. It is regularly carried on; and
3. It is not substantially related to furthering the exempt purpose of
the organization.
8
In determining the third criteria, a central question is whether the business
activity contributes importantly to accomplishing the organization’s tax-
exempt purpose or not. For example, if a charity is a museum and
operates a cafeteria for use by its visitors during visiting hours, the
cafeteria can be viewed as contributing importantly to the museum’s tax-
exempt purpose as it helps attract visitors and allows them to spend more
time viewing the museum’s exhibits. Hence, operating the cafeteria would
be deemed a related business and its income would not be taxed.
However, if the same museum has a theater auditorium and regularly
operates it as a motion picture theater for the public when the museum is
closed, this would not contribute importantly to the museum’s purpose.
Such activity would be deemed an unrelated business, and its income
would be taxed.
There are several exclusions and exceptions to the rules governing
unrelated business income. For example, the definition of unrelated
business income does not include the following activities: dividends,
interest, certain other investment income, and royalties. In addition, any
trade or business is excluded where substantially all of the work is
performed for the organization without compensation (i.e., volunteer
labor). For further information, see IRS Publication 598
, Tax on Unrelated
Business Income of Exempt Organizations.
7
(See generally Int.Rev. Code, §§ 501(b), 511(a).)
8
(See generally Int.Rev. Code, § 513(a).)
Attorney General’s Guide for Charities | Obtaining Tax-Exempt Status | 19
Organizations that generate unrelated business income must file IRS
Form 990-T and FTB Form 109. See also Chapter 6.
PROPERTY TAX EXEMPTION
The California State Board of Equalization and local county assessors
administer the welfare exemption from property taxation.
9
In general, the
welfare exemption from local property taxes is available for property of
organizations that:
1. Are formed and operated exclusively for qualifying purposes
(religious, scientific, hospital, or charitable);
2. Use their property exclusively for those qualifying purposes; and
3. Have a current tax exemption letter from the IRS or FTB.
There are many requirements for obtaining a welfare exemption from
property taxes. For further information, see the Board of Equalization’s
Publication 149, Property Tax Welfare Exemption. See also Chapter 6
.
SALES TAX EXEMPTION
A charity that sells items may be required to collect and remit state sales
taxes on goods sold. In California, as administered by the California
Department of Tax and Fee Administration, there is no general exemption
from sales tax for charities. Rather, a variety of narrow exemptions apply
to certain charitable activities. For further information, see Department of
Tax and Fee Administration Publication 61
, Sales and Use Taxes:
Exemptions and Exclusions, and Chapter 6.
FREQUENTLY ASKED QUESTIONS
“Can we solicit donations pending review of our tax exemption
applications with the IRS and FTB?”
Yes, but the donor’s contributions will not qualify as charitable deductions
until tax-exempt status is obtained. Newly formed nonprofit organizations
should not state they have obtained recognition of tax-exempt status until
recognition is officially granted. This is particularly important for
organizations that wish to fundraise during the period after either
Form
1023 or Form 1023-EZ has been filed, but before receiving confirmation
of tax-exempt status from the IRS.
Once granted, the tax-exempt status is generally retroactive to the date of
organization). Contributions made after the date of organization would
then be deemed tax-deductible. However, if the organization ultimately
9
(Rev. & Tax. Code, § 214 et seq.)
Attorney General’s Guide for Charities | Obtaining Tax-Exempt Status | 20
does not qualify for exemption, the contribution would not be tax-
deductible.
“If the IRS denies the application by our organization for recognition
of income tax exemption, what can we do with the funds already
donated to the organization?”
In almost all cases, funds collected by a charitable organization are
irrevocably dedicated to charitable purposes. Even if the organization fails
to be recognized as tax-exempt by the IRS, the funds must be used for
charitable purposes and cannot be refunded to the donors.
In special circumstances, such as where an organization was formed as a
public benefit corporation by mistake, where its organizers intended it to
be a mutual benefit corporation, and where all the funds received were
dues from members, the organization may be allowed to terminate as a
charity and refund the dues and other assets to members, rather than to
charity. However, the Attorney General’s written consent must be
obtained if the organization was formed as a public benefit corporation.
10
“Our charitable organization has special tax problems. Where can
we find an expert on charitable tax-exempt organizations?”
The law on charitable tax-exempt organizations is complex and
specialized. When hiring a tax attorney or other tax expert, be certain the
person is knowledgeable about this particular area of tax law. Ask the tax
attorney or accountant if they have worked with nonprofits before
agreeing to retain them. One may contact any of the following for referrals
to tax experts in the area of expertise sought:
A local county bar association referral service;
Accredited law schools in a local region usually have a tax
specialist on their faculty who may be able to refer an attorney
who specializes in tax-exempt organizations; and
Large charitable organizations nearby may be able to provide the
names of tax experts who have assisted their organizations.
“If our charity is recognized as exempt from federal and state
income taxes, does the charity have to pay property tax on property
it owns? Does the charity have to pay sales tax on items it sells?”
A charity exempt from income tax may still have to pay property taxes
and sales taxes. The rules that apply to exemption from property and
sales taxes are different from the rules for exemption from income tax.
Contact the Board of Equalization
and the applicable local county
assessor’s office for additional information on property taxes, and the
Department of Tax & Fee Administration regarding sales taxes.
10
(Corp. Code, § 5813.5.)
Attorney General’s Guide for Charities | Obtaining Tax-Exempt Status | 21
“Our charity lost its tax-exempt status with the IRS and FTB. Do we
still have to register and report to the Attorney General’s Registry of
Charitable Trusts? And what can we do to get our tax-exempt status
back?”
Even without tax-exempt status, a charity is required to register and file
annual financial reports with the Attorney General’s Registry of Charitable
Trusts because it holds charitable assets. Charities that have lost tax-
exempt status may be able to have such status reinstated. See the
resources on the IRS’ website, Revoked Reinstated Learn More
, and the
FTB’s website, Charities and Nonprofits.
| 22
CHAPTER 4 CHARITIES AS EMPLOYERS
In This Chapter
Introduction
Application for Federal Employer Identification Number
Employer Wage Reporting, Taxes, and Withholding Requirements
Personnel Policies
Compensation Issues
Fair Treatment/Anti-Discrimination Practices
Workplace Safety Rules
Independent Contractors
Volunteers and Interns
Frequently Asked Questions
INTRODUCTION
A number of state and federal laws govern the relationship between
employers and employees. This chapter describes a few of the important
legal obligations of employers, as well as those applying to organizations
that receive services through independent contractors and volunteers.
Most of these laws and obligations apply equally to nonprofit and for-profit
organizations.
APPLICATION FOR FEDERAL EMPLOYER
IDENTIFICATION NUMBER
The IRS uses an identification number system in its administration of tax
laws, including tax exemption laws. This identification number is known
by a number of names and abbreviations, including “federal tax
identification number” (sometimes abbreviated to FEIN) and “employer
identification number” (EIN). The nine-digit number is the organizational
equivalent of an individual’s Social Security number.
Entities must obtain this identification number even if they do not plan to
hire employees. If employees are to be hired, an organization must apply
for an identification number within seven days of paying wages that are
subject to the Federal Insurance Contributions Act.
1
The IRS also advises
organizations to be formed legally before applying for an identification
number.
2
1
(26 C.F.R. § 31.6011(b)-(1)(a)(2) (2019).)
2
(E.g., IRS, Employer ID Numbers,
<https://www.irs.gov/businesses/small-businesses-self-
employed/employer-id-numbers> [last updated Apr. 14, 2021].)
Attorney General’s Guide for Charities | Charities As Employers | 23
Trusts and estates may also need to obtain this number to report income
they may earn.
3
See the IRS’ Employer ID Numbers website or Publication 1635,
Employer Identification Number Understanding Your EIN, for options in
obtaining this identification number. The online approach is the fastest;
other options include applying by fax and mail. There is no charge to
obtain the number.
EMPLOYER WAGE REPORTING, TAXES, AND
WITHHOLDING REQUIREMENTS
Even when a charitable organization’s revenue is exempt from paying
federal and state taxes, the income paid to staff as wages generally are
subject to taxes. As a result, when tax-exempt organizations pay their
staff, they are obligated to report that income, and make tax and
withholding payments to federal and state governments.
Employers must withhold federal income tax from wages paid to their
employees. In addition, employers must withhold Social Security and
Medicare taxes from their employees’ wages, while also paying the
employers’ share of these taxes. These requirements are sometimes
referred to as “FICA payments,” which stands for the Federal Insurance
Contributions Act.
4
Certain high income individuals may be subject to
additional Medicare taxes.
5
In addition, employers pay federal
unemployment tax, unless the entity is specifically exempt from applicable
requirements, such as organizations that hold federal income tax-exempt
status through Internal Revenue Code section 501(c)(3).
6
These are
sometimes referred to as “FUTA payments,” which stands for the Federal
Unemployment Tax Act.
7
The IRS explains these requirements in
Publication 15 (Circular E), Employer’s Tax Guide.
The following is a list of forms and withholding returns that employers
must both maintain and file with the federal government:
Employee’s Withholding Certificate, Form W-4;
Employment Eligibility Verification, Form I-9;
3
(IRS, Employer Identification Number Understanding Your EIN
Publication 1635 <https://www.irs.gov/pub/irs-pdf/p1635.pdf> [last
updated Feb. 2014].)
4
(Int.Rev. Code, §§ 3101-3128.)
5
(Int.Rev. Code, § 3101(b).)
6
(Int.Rev. Code, §§ 3301, 3306(c)(8).)
7
(Int.Rev. Code, §§ 3301-3311.)
Attorney General’s Guide for Charities | Charities As Employers | 24
Employer’s Federal Quarterly Withholding Returns, Form 941, and
bank deposits of withheld income taxes and Social Security taxes;
Annual Federal Wage and Tax Statement, Form W-2; and
Employer’s Annual Federal Unemployment Tax Return, Form 940.
California also requires employers to withhold state income tax from
wages paid to employees. There are also three other state payroll taxes:
State disability insurance, which are withheld from employees’
wages;
Unemployment insurance, which the employer pays; and
Employment training tax, which the employer also pays.
California’s Employment Development Department (EDD) administers
these requirements. The EDD explains employer obligations in
Publication DE 44
, California Employer’s Guide. Withholding
requirements are strictly enforced. Failure to comply may result in
penalties against the organization, its directors, and employees. The
penalty is generally equal to the tax evaded or not collected.
Unless a waiver is received, employers must electronically file their state
employment tax returns, wage reports, and payroll tax deposits with the
EDD through an e-Services for Business
account. Other filings, such as
registering for an employer payroll tax account number and reporting new
employees, can also be submitted electronically. Applicable forms and
instructions are also listed on EDD’s
Payroll Taxes – Forms and
Publications website.
See Chapter 6 for other reporting requirements required by law.
PERSONNEL POLICIES
Legally, a charitable organization is treated like any other employer. To
promote evenhanded personnel practices and avoid misunderstandings
with employees (which can lead to lawsuits), it is a best practice to put
personnel policies in writing. The organization’s personnel policies should
include policies pertaining to:
Hiring (including the organization’s commitment to equal
employment opportunity);
Performance evaluation and review procedures;
Working hours and any flex time;
Leave policies, including sick leave, vacation leave, and family
medical leave;
Employee benefits, including health and insurance plans;
Expense reimbursement requirements;
Attorney General’s Guide for Charities | Charities As Employers | 25
Discrimination, harassment, and grievance procedures;
Discipline and termination procedures;
Whistle-blower protection;
Workplace safety and injury prevention;
Volunteers and interns;
Employee privacy; and
Policies about the use of the organization’s assets and authority to
speak to third parties on behalf of the organization.
These policies must be consistent with federal, state, and any local laws.
They should also be consistent with one another. Another sound
employment practice is to have written job descriptions or duty
statements for all employees. Personnel policies are typically assembled
into staff and volunteer handbooks that can be shared when an individual
joins the team. As part of this process, individuals must sign a form
acknowledging they have received and read the information. Employers
must also post a variety of notices in the workplace to help employees
understand their rights. Additional information and sample notices are
available from the United States Department of Labor and
California
Department of Industrial Relations websites.
COMPENSATION ISSUES
Minimum Wage
Federal, state, and local laws specify what minimum wage rates
employees must be paid. In 2021, the minimum wage in California was
$13 or $14 per hour depending on the number of employees. California
law also mandates the California minimum wage will increase to $15 an
hour by 2023.
8
Several California municipalities have minimum wage laws
that must be reviewed by employers operating within their jurisdiction.
The California Department of Industrial Relations’ Minimum Wage
website answers questions on the intersection of federal, state, and local
minimum wage requirements and exceptions. The website also enables
employers to verify the current minimum wage rates in California.
Other Wage and Hour Issues
Charitable organizations are subject to the employment rules addressing
overtime pay, required break periods, recordkeeping, and related issues
under both federal
9
and state
10
law. The United Sates Department of
Labor administers federal wage and hour laws and provides helpful
information about these laws on its Wages and the Fair Labor Standards
Act website. The Department of Industrial Relations administers
8
(Lab. Code, § 1182.12.)
9
(29 U.S.C. § 201 et seq.)
10
(Cal. Code Regs., tit. 8, § 11000 et seq.)
Attorney General’s Guide for Charities | Charities As Employers | 26
As part of their
supervision of
charitable
organizations
and their assets,
the IRS and
Attorney General
may review
compensation
paid to an
organization’s
higher
-level
employees. The
goal of this
review is to
ensure charitable
assets are not
b
eing diverted
for private gain.
California’s laws, and answers Frequently Asked Questions on its
website.
Charitable employers should be especially careful to classify employees
correctly for purposes of exemption from overtime status under federal
and state wage and hour laws. The use of staffing agencies and other
sources of full- or part-time workers may cause a charity to be deemed a
joint or co-employer with unexpected liability for compensation, taxes, and
other employer liabilities.
Excessive Compensation Issues
As part of their supervision of charitable organizations and their assets,
the IRS and Attorney General may review compensation paid to an
organization’s higher-level employees. The goal of this review is to
ensure charitable assets are not being diverted for private gain.
The IRS looks at whether compensation packages are reasonable based
on a comparative analysis of what similar organizations would pay for
such services under similar circumstances. For more information about
how the IRS approaches this issue, see its
Intermediate Sanctions –
Compensation website. More specifically, the IRS has a three-step
process organizations should follow to demonstrate that a compensation
package is reasonable.
Larger organizations must disclose their compensation practices in their
annual informational returns (Form 990). Penalties for missteps in this
area may include sanctions for both the organization and management. In
severe situations, the organization’s tax-exempt status may be revoked.
Likewise, the Attorney General may audit an organization if there is
suspicion of unreasonable compensation. California law requires the
board of directors or its equivalent to review and approve the
compensation, including all benefits, paid to the president or chief
executive officer, treasurer or chief financial officer, and/or those with
comparable powers, duties, or responsibilities, to assure that the
compensation is just and reasonable.
11
This review is required initially
upon hiring, whenever the terms of employment is renewed or extended,
and whenever the officer’s compensation is modified. For more
information, see Chapter 7
.
FAIR TREATMENT/ANTI-DISCRIMINATION PRACTICES
Generally, charitable organizations are subject to the same laws
governing the terms and conditions of employment and prohibitions on
discrimination that apply to for-profit corporations. Under federal, state,
11
(Gov. Code, § 12586, subd. (g); Cal. Code Regs., tit. 11, § 312.1.)
Attorney General’s Guide for Charities | Charities As Employers | 27
and local law, a nonprofit employer may not refuse to hire an applicant, or
treat an employee less favorably in the terms and conditions of
employment, or terminate an employee, because of the race, color,
religion, gender, gender identity, pregnancy, marital status, disabling
condition, age, or national origin of the applicant or employee.
Is a Nonprofit Organization a “Covered” Employer?
The federal Age Discrimination in Employment Act
12
governs employers
of 20 or more employees. The federal Americans with Disabilities Act
13
governs employers of 15 or more employees. California’s Fair
Employment and Housing Act
14
governs certain nonprofits with five or
more employees. A private employer is also covered by the federal
Family and Medical Leave Act
15
and the California Family Rights Act
16
if it
employs 50 or more employees for each working day during each of 20 or
more calendar workweeks in the current or preceding calendar year.
Religious organizations may be exempt from some of the above laws and
restrictions.
WORKPLACE SAFETY RULES
Federal and state law also impose various requirements on employers
involving workplace safety, including a requirement to prepare an injury
and illness prevention program. For more information on these
requirements, see the Department of Labor’s
Occupational Safety and
Health Administration Employer Responsibilities website, as well as the
Department of Industrial Relations’ Cal/OSHA website.
Also, California imposes strict liability for on-the-job injuries. Insurance is
available from both the State Compensation Insurance Fund or private
carriers. For more information, visit the Department of Industrial
Relations’ Employer Information website
, and the State Compensation
Insurance Fund’s Employers website.
INDEPENDENT CONTRACTORS
When charitable organizations retain independent contractors, additional
legal requirements arise from these arrangements. As with any contract, it
is good practice to put such agreements in writing so both parties are
clear on the scope of the agreement, and to minimize misunderstandings.
12
(29 U.S.C. § 621 et seq.)
13
(42 U.S.C. § 1201 et seq.)
14
(Gov. Code, § 12900 et seq.)
15
(29 U.S.C. § 2601 et seq.)
16
(Gov. Code, §§ 12945.1-12945.2, 19702.3.)
Attorney General’s Guide for Charities | Charities As Employers | 28
Organizations must report income over $600 paid to unincorporated
independent contractors on IRS Form 1099. The basic test for
determining whether a worker qualifies as an independent contractor or
as an employee is whether the principal has the right to control the
manner and means by which the work is performed. When the principal
has the “right of control,” the worker is considered an employee, even if
the principal never actually exercises control. If the principal does not
have the right of control, the worker will generally be considered an
independent contractor.
Ultimately, the IRS (for federal employment tax purposes) and the EDD
(for California employment tax purposes) decide if the people who work
for a charitable organization are employees, for whom tax withholding and
reporting by the employer apply, or independent contractors for whom
these employer obligations do not apply.
The IRS provides guidance on this topic on its
Independent Contractor
(Self-Employed) or Employee website. The California agencies involved
with worker classifications, including the EDD, also provide some
guidance at the state level.
An employer who incorrectly classifies employees as independent
contractors may be held personally liable for penalties and damages if the
IRS disagrees with the classification. If an organization plans to work with
independent contractors, consider consulting with an attorney or other
expert about IRS guidelines for such classification.
VOLUNTEERS AND INTERNS
Volunteers and interns are a tremendous resource to the nonprofit sector.
Because organizations frequently benefit from volunteer assistance in
pursuing their missions, it is important that organizations understand the
legal and practical differences between paid and unpaid personnel. The
use of volunteers and interns entails a certain level of risk both to and
from an organization, including labor law violations for misclassification of
the worker as a volunteer or intern when the worker, in fact, qualifies as
an employee under the law. Other issues may arise, such as liability of
the volunteer or organization to third parties for acts committed by the
volunteer, misappropriation by the volunteer of the organization’s tangible
or intangible property, and unintended tax consequences for any benefits
provided to the volunteer that are not exempt (e.g., living allowances or
other in-kind benefits that do not qualify as de minimis fringe benefits
excluded from tax).
If the volunteer is not a true volunteer and receives some form of
compensation, the labor and other laws pertaining to employees
Attorney General’s Guide for Charities | Charities As Employers | 29
discussed in this chapter must be followed, such as minimum wage and
overtime rates and anti-discrimination standards.
Also, if the organization has an internship program, the program must
meet the criteria set forth by federal and state law. Failure to meet these
criteria could result in the application of labor and other laws pertaining to
employees to the organization’s interns. The Department of Labor’s
Fact
Sheet 71, Internship Programs Under The Fair Labor Standards Act,
outlines a list of criteria.
Risk Management Tips
Here are some best practices for charitable organization that use
volunteers and interns:
Document employee, intern, and volunteer policies in separate
manuals;
Provide intern and volunteer job descriptions in writing;
Establish policies about hours of service;
Proceed with care when paying volunteers and interns;
Establish a grievance procedure for volunteers and interns to
address any issues that may arise; and
Verify whether volunteers and interns are covered by the
organization’s worker’s compensation or other insurance.
FREQUENTLY ASKED QUESTIONS
“During the early years of operation, our charity had insufficient
funds to pay key employees the true value of their services. Now
that we have adequate revenues, can we pay our employees
retroactively?”
Unless there is a contractual obligation, a charitable organization may not
retroactively pay compensation or retirement benefits.
17
Moreover,
charitable assets may not be distributed as profits or dividends to any
person.
18
Retroactive payment of charity funds as a gift or bonus to any
person may be an illegal distribution of charitable assets. A person who
works as a volunteer for a charity has no legal right to payment of
compensation from the charitable organization, but actual expenses may
be reimbursed.
“Our charity has been sued by an employee for breach of
employment contract and for discrimination. Will the Attorney
General act as an attorney to defend our charity and save us the
expense of hiring a private attorney?”
17
(Queen of Angels Hospital v. Younger (1977) 66 Cal.App.3d 359.)
18
(Corp. Code, §§ 5237, 5410.)
Attorney General’s Guide for Charities | Charities As Employers | 30
No, the Attorney General acts to protect all beneficiaries of charitable
assets against fraud and mismanagement of those assets. In other types
of cases, where directors and the charitable organization are sued by
employees or other persons for violations of contract, injuries, or other
civil wrongs, it is the obligation of the directors to hire an attorney to
defend the charitable organization.
“If an employment-related lawsuit is filed against our charity, will
insurance pay for the costs of an attorney to defend the corporation
and its officers and directors?”
Whether the charitable organization can look to its insurance carrier to
defend the action depends on the type of insurance coverage purchased.
A “general liability” insurance policy may provide for legal assistance, but
may exclude coverage for employment matters.
The charitable organization, therefore, may choose to purchase “directors
and officers” insurance, which covers individuals for many types of civil
claims, including some employment-related lawsuits. If the corporation’s
employment force is large enough, the corporation may choose to obtain
an “employment practices liability” policy. This type of policy usually
covers the organization and all of its officers, directors, employees,
agents, and subsidiaries for employment-related claims within the scope
of the policy. It may be prudent to obtain coverage for volunteers and
interns of the organization as well.
We just learned that an employee embezzled substantial funds from
our charity. What can we do about it?
A charitable organization should take reasonable steps to try to recover
the funds and refer the matter to the local police or district attorney for
possible criminal prosecution. The charitable organization may also
consider retaining a private attorney to file a civil suit for restitution
against the employee. Directors must evaluate whether the prospect of
recovery outweighs the probable costs of suit. The charity should also
consult with its insurance carrier to determine if the loss is covered. Some
insurance policies include coverage of employee theft and dishonesty.
The loss must also be reported in the charity’s annual filings with the
Attorney General’s Registry of Charitable Trusts on its Form RRF-1
with
an explanation of all actions taken by the charitable organization to
recover the loss and prevent such occurrences from happening in the
future. For more information on the Form RRF-1, including when it must
be filed, see Chapter 6.
Finally, the loss must be reported to the IRS on Form 990 (specifically
Part VI, item 5, for organizations required to file a full 990 tax return).
Attorney General’s Guide for Charities | Charities As Employers | 31
Organizations may also report the embezzlement to the IRS via Form
3949-A, which alerts the agency to suspected tax fraud (assuming the
embezzler did not report the amounts taken on his or her tax filing). This
form provides contact information and other information about the
embezzler, which may enable the IRS to pursue the conduct as a tax
evasion matter.
Additionally and as discussed in Chapter 5, directors should scrutinize the
organization’s internal controls practices for weaknesses. Typical
practices to prevent and detect embezzlement include requiring dual
signatures on checks, segregation of financial functions, proper
documentation and authorization for expenses, annual inventories of
equipment, background and credit checks on prospective employees, and
annual audits under the supervision of a board audit committee. The
organization should encourage and protect those who come forward with
evidence of wrongdoing, often referred to as “whistle-blower” protection.
19
We would like to avoid laying off some of our employees. Can we
share our work force with other organizations?
Sharing of employees may be a viable option to avoid layoffs, provided
the organization has the means to properly supervise and protect against
potential conflicts of interest. Organizations in California can participate in
a work sharing program
established by the Employment Development
Department, when the program’s requirements are met.
19
(Lab. Code, § 1102.5-1106.)
| 32
CHAPTER 5 EXERCISING FISCAL MANAGEMENT
While the daily
operations of a
charity may be
delegated to
reliable and
competent staff,
directors are
required to
exercise
ultimate
authority
over
all corporate
activities.
In This Chapter
Responsible Fiscal Management
Preventing Internal Fraud and Theft of Charitable Assets
Components of an Accounting System
Frequently Asked Questions
RESPONSIBLE FISCAL MANAGEMENT
Charitable organizations, such as public benefit corporations in California,
are required to maintain adequate and correct financial records and
books. The board of directors should vigorously promote accurate fiscal
management practices as officers, directors, and employees may be
liable for “mak[ing], issu[ing], deliver[ing], and publish[ing]” any report,
financial statement, balance sheet, or document “respecting the
corporation or its… assets, earnings, liabilities, or accounts which is false
in any material respect.”
1
Good internal controls help safeguard charitable assets, prevent loss, and
ensure reliability of financial records. One of the responsibilities of a
director is to make certain the charity operates in a fiscally sound manner,
has mechanisms in place to keep it fiscally sound, and is properly using
any restricted funds. While the daily operations of a charity may be
delegated to reliable and competent staff, directors are required to
exercise ultimate authority over all corporate activities.
2
Directors may be accountable for the misappropriation, waste, or misuse
of charitable assets if the loss was the result of deficient or nonexistent
internal controls, lack of due care, or reasonable inquiry. Because of this,
the charity’s directors should play a key role in establishing internal
controls for the charity. Their approval of policies and procedures
determines the fiscal management system. An effective internal control
system includes budgets, segregation of duties, policy and procedures
manuals, clear definition of and adherence to set procedures for
management authority and control, and periodic review of the control
system.
Directors have an absolute right at any reasonable time to inspect and
copy all books, records and documents of every kind pertaining to the
corporation.
3
A realistic budget should be developed early enough so that
the entire board can be involved in its review and approval before the
1
(Corp. Code, § 6215; see also Corp. Code, §§ 6320, 6812.)
2
(Corp. Code, §§ 5210, 5231, subd. (a).)
3
(Corp. Code, § 6334.)
Attorney General’s Guide for Charities | Exercising Fiscal Management | 33
beginning of the fiscal year. Management should produce accurate
income and expense statements, balance sheets, and budget status
reports in a timely manner ahead of board meetings. Directors should
monitor the budget and anticipated revenue. Any sizable differences
between expected and actual revenue should be investigated by directors
or designated officers to obtain a full explanation. The same should be
done for expenditures. The directors or their designee should review the
charity’s bank account statements, check reconciliations, and the books
of account for any obvious irregularities.
Annual independent audits can also help protect against internal fraud
and fiscal mismanagement. Independent audits can be expensive,
however, and may be beyond the budgets of small charities. A good
alternative is to retain an independent accountant to conduct a review of
the charity’s financial statements, and issue a review report to the
directors. Many directors seek expert advice from a professional
accountant to assist in designing and implementing the fiscal
management system. Choose an accountant carefully, and be specific
about the charity's needs. Ask the accountant about his or her prior
experience with other charitable organizations, and check references.
PREVENTING INTERNAL FRAUD AND THEFT OF
CHARITABLE ASSETS
Diversion of charitable assets can occur at either the receipt or
disbursement phase. The person tasked to receive and record the cash
and checks could, without proper controls, deposit those funds into
unauthorized bank accounts without other employees or directors
becoming aware. No single employee should receive, record, deposit,
and reconcile the charity’s receipt of funds. Assigning different people to
the separate tasks of recording receipts and making bank deposits
minimizes the risk of theft and embezzlement. Also because cash is
untraceable and easily lost, it is a best practice to have two employees or
volunteers simultaneously count the cash to ensure accuracy.
At the disbursements level, funds are at risk when no controls are in
place, or controls are not being enforced. Payment requests or requests
for cash disbursement should be accompanied with invoices, receipts, or
other documents showing the payments are justified and appropriate. Do
not have the same person approve and make the payments, as this may
facilitate embezzlement. It is best to have one employee or volunteer
authorize the payment of an expense only after submission of proper
receipts, bills, or invoices, and have a different employee issue the
payment after proper approval has been provided.
Other internal controls to consider include the following:
Attorney General’s Guide for Charities | Exercising Fiscal Management | 34
Adopt controls to monitor invoices. Software packages are
available to prevent making duplicate payments on the same
invoices. Beware of invoices that include rounded-amounts, have
unfamiliar or fuzzy logos, have spelling errors, or have a post
office box as an address. Staff should also monitor irregular
invoice volume activity, and question any abnormal patterns.
Ensure that credit card charges are made for the charity’s
business and not for personal expenses. Under no circumstances
should the person submitting credit card charges be the same
person who authorizes their payment.
The charity’s bank accounts should be reconciled periodically to
ensure that disbursements match entries made in the books.
The board should guard bank accounts and limit the number of
signatories on the accounts. Another suggestion is to have two
signatures on all checks drawn on the charity’s bank account for
expenditures over specific amounts. The dual-signature
requirement reduces the risk of fraudulent practices, such as
writing checks for non-existent expenses or paying fictitious
creditors or phantom grantees. Checks should never be pre-
signed.
COMPONENTS OF AN ACCOUNTING SYSTEM
A charity’s accounting system should reflect accurate understandable
data that is useful in making management decisions and preparing
reports. Accounting records should generally adhere to “generally
accepted accounting principles.”
4
The books and records of the
organization must correctly identify revenue, expenses, assets, and
liabilities and have back-up documentation such as receipts, invoices,
contracts, or cancelled checks.
The actual books of accounts to be maintained depend on the type of
organization. For example, a grant-making organization would have
different accounting needs than a nonprofit health clinic or museum.
Generally, an organization's books of accounts include the following:
1. General Ledger: A general ledger consists of a number of
accounts representing stored information about a particular kind of
asset, liability, fund balance, revenue, or expense. Information is
taken from the general ledger to prepare financial statements such
as a balance sheet or income and expense statement. The
amounts reported in the general ledger accounts are often totals
4
(Bus. & Prof. Code, § 17510.5.)
Attorney General’s Guide for Charities | Exercising Fiscal Management | 35
for a given time period for various accounts detailed in subsidiary
ledgers.
2. Subsidiary Ledgers: Subsidiary ledgers provide greater detail for
a particular account. For example, an accounts receivable
subsidiary ledger lists information on each customer’s purchases,
payments, and balance. The general ledger contains one figure
representing the total for a period from all subsidiary ledgers for
that account.
3. Journals: Information from business papers is recorded in
chronological order in journals. Depending on the nature of the
business, a charity may have multiple journals, such as:
a. Sales journals record sales as they are made, with usually
all information taken from invoices;
b. Disbursement journals record cash or checks going out to
pay for expenses, acquiring assets, or making grants;
c. Receipts journals record cash or checks coming into the
organization; and
d. General journals record non-repetitive types of
transactions, corrections, or adjustments.
4. Fixed Asset Inventories: The charitable organization should
have a list of fixed asset inventory, including vehicles and
equipment such as computers, printers, and other office goods.
The inventory list should be annually updated, and checked to
ensure that no previously recorded equipment has been lost.
In addition to an accurate system for recording fiscal data, a charity needs
a filing system that allows easy access to various business documents.
This helps an accountant prepare informational returns, financial reports,
and management reports. A good fiscal management system allows a
charitable organization to trace any transaction from the financial reports
to the general ledger, subsidiary ledgers, journals, and other financial
records.
FREQUENTLY ASKED QUESTIONS
“What specific fiscal management procedure will help to protect our
charity against fiscal mismanagement and embezzlement?”
Generally, fiscal management policy should provide for careful periodic
review of financial records by directors and independent accountants.
Procedures such as a dual-signature requirement on all charity bank
Attorney General’s Guide for Charities | Exercising Fiscal Management | 36
accounts, periodic review of monthly statements by the board, and an
annual independent audit are highly recommended.
“I was recently appointed to the board of directors of a charity, and I
discovered the charity's records are disorganized and incomplete. I
also suspect a former director misused the charity’s funds. What
should I do?”
Consider writing a report summarizing all concerns, communicate them to
the board, and ensure board minutes reflect those concerns. The
organization should establish controls to address those concerns and
prevent future problems. The board, or a competent and trusted
designee, should also conduct an independent review to investigate the
conduct of the former director.
If the investigation confirms the loss, diversion, or misuse of charitable
assets, the board should take appropriate action to recover these funds.
This includes reporting the loss in the charity’s annual filings to the
Attorney General’s Registry of Charitable Trusts on Form RRF-1
. The
loss must also be reported to the IRS on Form 990 (specifically Part VI,
item 5, for organizations required to file a full 990 tax return).
Organizations may also report the embezzlement to the IRS via Form
3949-A, which alerts the agency to suspected tax fraud (assuming the
embezzler did not report the amounts taken on his or her tax filing).
Any person who suspects fiscal abuse regarding charity assets is
encouraged to report the matter to the Attorney General’s Charitable
Trusts Section. Any evidence of criminal activity, such as embezzlement
of charitable assets, should be reported to the local police or district
attorney for possible criminal prosecution.
“We learned our charitable organization was assessed penalties by
the Franchise Tax Board. As members of the board, do we have an
obligation to pay the penalties or can we pay the penalties by using
the organization’s revenue?”
Avoidable penalties generally constitute a waste of charitable assets and
damage to the charity. If the charitable organization did not have
processes in place to protect the organization, one can argue the
penalties were assessed because of a lack of oversight and management
by the directors, and that the payment should be made by the directors
and not the charitable organization.
5
The best course of action is to report the penalties to the Attorney
General’s Registry of Charitable Trusts on the charitable organization’s
Form RRF-1
, and indicate the name and title of the person responsible
5
(Corp. Code, §§ 5210, 5231, 5239.)
Attorney General’s Guide for Charities | Exercising Fiscal Management | 37
and explain why the payment was made with the organization’s funds.
Also report the name of the government agency that issued the fine,
penalty or judgment; the date of payment; and the amount of the fine,
penalty, or judgment. Provide copies of communications with any
governmental agency regarding the fine, penalty, or judgment. And
importantly, describe procedures the organization implemented to prevent
a reoccurrence of the fine, penalty, or judgment. Note that Registry staff
reviews any such Form RRF-1
filing to determine whether payment of the
penalty from the charity’s revenue is appropriate given all of the
explanations provided.
| 38
CHAPTER 6 REPORTING REQUIREMENTS
In This Chapter
Overview
IRS
Franchise Tax Board
Board of Equalization, Department of Tax and Fee Administration,
and Local Agencies
Secretary of State
Attorney General
Other States
Frequently Asked Questions
OVERVIEW
Charitable organizations have annual reporting obligations with various
federal and state government agencies. For instance, even though
nonprofit organizations do not pay taxes, they are required to file what are
called “informational returns” with taxing authorities each year. State
property tax and sales tax reporting obligations may also apply.
Moreover, California nonprofit corporations file reports with the California
Secretary of State to keep their corporate information current.
Charitable organizations, including trustees, subject to the Attorney
General’s supervision also must register and annually report to the
Attorney General. If a charitable organization operates or fundraises in
other states, those states may have similar or additional reporting
requirements.
IRS
Form 990 and Its Alternative Informational Returns
Most tax-exempt organizations must file an annual informational return
with the IRS.
1
The most common informational return is Form 990, which
is comprised of a 12-page core form and various “schedules” to be
completed as needed. However, organizations can file a shorter version
of Form 990 instead, called Form 990-EZ, if it has gross receipts and total
assets below a certain threshold for the relevant tax year (currently, gross
receipts less than $200,000 and total assets less then $500,000). For
smaller organizations that do not normally receive more than $50,000 in
annual gross receipts, they can choose to file an electronic notice,
Form
990-N. This notice, also called an e-Postcard, reports only basic
1
(Int.Rev. Code, § 6033.)
Attorney General’s Guide for Charities | Reporting Requirements | 39
organizational information. Form 990-PF is the appropriate annual
informational return for tax-exempt private foundations.
2
Churches and certain religious organizations affiliated with a church are
not required to file these returns or notices with the IRS.
Failure to file an informational return for three consecutive years results in
the organization losing tax-exempt status. The informational return must
also be filed on or before the 15th day of the fifth month following the
close of an organization’s annual tax accounting period (i.e., May 15 for a
calendar-year organization). Failure to file in a timely manner may result
in penalties of $20 per day, with a cap the lesser of $10,500 or 5% of the
organization’s gross receipts for the year. However, for larger
organizations (currently those with gross receipts exceeding $1,028,500
for any year), the penalty is $105 per day, with a cap of $53,000.
3
The
penalty may be abated if reasonable cause can be shown. An incomplete
informational return may be treated as a failure to file, with penalties
assessed.
Form 990-T and Unrelated Business Income
As previewed in Chapter 3, a tax-exempt organization with more than
$1,000 of “unrelated business income” in a taxable year must report such
income to the IRS on Form 990-T. This is filed in addition to the Form 990
informational return or its alternatives. Exempt organizations are also
required to make quarterly estimated unrelated business income tax
payments, calculated at corporate rates. Penalties apply for late filing, late
payment, or underpayments of taxes on income reportable on
Form 990-
T.
Public Disclosure of Exemption Application and Informational
Returns
A charitable organization must furnish a copy of its federal tax exemption
application, IRS Form 1023 or Form 1023-EZ (also see Chapter 3), to any
person who requests a copy. Also, an organization tax-exempt under
Internal Revenue Code section 501(c)(3) and classified as a public charity
must furnish copies of its annual informational returns (e.g.,
Form 990
and Form 990-T if applicable) for its three most recent tax years upon
request.
4
2
(26 C.F.R. § 1.6033-2(a)(2)(i) (2019).)
3
(IRS, Instructions for Form 990 Return of Organization Exempt From
Income Tax <https://www.irs.gov/pub/irs-pdf/i990.pdf> [last updated Jan.
2021]; see also Int.Rev. Code, § 6652(c)(1)(A).)
4
(Int.Rev. Code, § 6104(d).)
Attorney General’s Guide for Charities | Reporting Requirements | 40
If a request for an exemption application and/or informational return is
made in person, the organization must provide a copy on the day the
request is made. However, in unusual circumstances where this would be
unreasonably burdensome, the organization may provide a copy the next
business day. If the request is made in writing, the organization must
provide a copy within 30 days. An organization may charge a reasonable
fee for providing copies and actual postage costs, which can be collected
before providing copies.
An organization may avoid the requirement of providing copies of its
exemption application and informational return when they are made
“widely available,” such as by positing them on the organization’s website,
or on another organization’s website as part of a database of similar
materials.
Returns and Reports for Organizations with Employees
As mentioned in Chapter 4, there are additional requirements for
organizations that have employees. From an IRS perspective, this
involves the following:
Federal income tax withholding: most tax-exempt organizations
are required to withhold and pay federal income tax with respect
to wages of their employees in the same manner as for-profit
organizations.
Social Security and Medicare taxes: most tax-exempt
organizations are required to withhold and pay these taxes, also
known as Federal Insurance Contributions Act taxes, in the same
manner as for-profit organizations. Generally, employers deposit
these tax payments (and the withheld income mentioned above),
and file IRS Form 941
on a quarterly basis.
Federal unemployment taxes: tax-exempt organizations under
Internal Revenue Code section 501(c)(3) are not required to pay
federal unemployment taxes, but may elect to participate in a state
program. If applicable, employers file IRS Form 940
to make these
payments.
Wage and Tax Statements for Payees: tax-exempt organizations
are required to prepare and annually file certain forms to report
amounts paid to employees and others, in the same manner as
for-profit organizations. These include Form W-2 and Form 1099
.
See Chapter 4 for information on classification of a worker as an
independent contractor or employee.
The IRS’ Publication 15 (Circular E), Employer’s Tax Guide, also contains
helpful information on these employer obligations.
Attorney General’s Guide for Charities | Reporting Requirements | 41
FRANCHISE TAX BOARD
Form 199 and Form 199N Annual Information Returns
In addition to complying with the IRS’ reporting requirements, most tax-
exempt organizations in California must file an annual informational return
with the California Franchise Tax Board (FTB). Most charitable
organizations, including those tax-exempt under Internal Revenue Code
section 501(c)(3) and classified as a public charity, file FTB Form 199
.
Churches and certain religious organizations affiliated with a church are
not required to file.
Small organizations (i.e., those that do not normally receive more than
$50,000 in annual gross receipts) are not required to file Form 199.
Instead, they may file an annual electronic notice reporting basic
organizational information on FTB Form 199N, also called the 199N
California e-Postcard. Private foundations are not eligible to use Form
199N, and must file Form 199.
Form 199 or Form 199N must be filed on or before the 15th day of the
fifth month following the close of an organization’s annual tax accounting
period (i.e., May 15 for a calendar-year organization). Failure to file either
form for three consecutive years results in loss of tax exemption. Also,
late filings, or filing with incomplete information, may result in penalties.
Form 109 and Unrelated Business Income
A tax-exempt organization with more than $1,000 of unrelated business
income in a taxable year must report such income on FTB Form 109. This
is filed in addition to Form 199. California and federal laws are generally
the same with regards to unrelated business income. For form
instructions, search by form number on the FTB’s Forms and Publications
Search website.
MyFTB
Available on the FTB’s website, MyFTB provides tax account information
and online services to organizations, their representatives, and tax
preparers. Once a nonprofit organization is registered, it can access
account information, such as tax returns, and update contact information
through
MyFTB. MyFTB includes the option to chat with FTB
representatives about confidential matters
BOARD OF EQUALIZATION, DEPARTMENT OF TAX AND
FEE ADMINISTRATION, AND LOCAL AGENCIES
The California State Board of Equalization (BOE), in coordination with
local government agencies, administers property taxes that apply to
nonprofit organizations, unless exempt. Meanwhile, the California
Department of Tax and Fee Administration (DTFA) administers sales
Attorney General’s Guide for Charities | Reporting Requirements | 42
taxes, which vary locally. The following provides an overview of these
taxes, applicable exemptions, and reporting requirements.
Property Taxes
California imposes a tax on real property and certain kinds of
personal/moveable property.
5
Nonetheless, the California Constitution
exempts certain kinds of property from this form of taxation (e.g., property
used for libraries and museums that are free and open to the public,
6
property used for higher education,
7
and property used for religious
worship
8
). The California Constitution also authorizes the Legislature to
exempt property used exclusively for religious, hospital, or charitable
purposes, which are owned by entities that are organized and operating
for such purposes.
9
This is known as the “welfare exemption” from
property taxes. The Legislature has also adopted a series of more
specific exemptions, such as the religious,
10
church,
11
and college
12
exemptions.
Organizations that wish to claim the welfare exemption should consult
BOE’s Publication 149, Property Tax Welfare Exemption, and its
Welfare
Exemption website. The process involves filing forms with both BOE and
the county assessor in the county in which a given property is located.
BOE’s Exemptions website also has information on other property tax
exemptions, such as those for museums, public schools, and religious
organizations.
After an organization has demonstrated its entitlement to exemption from
property taxes on a given piece of property, it needs to demonstrate its
continued entitlement on an annual basis. Organizations do this through
filing Form BOE-267-A
or its equivalent with the county assessor where
the property is located.
5
(See generally Cal. Const. art. XIII, §§ 1-25.5; Cal. Const. art. XIIIA;
Rev. & Tax. Code, §§ 50-5911.)
6
(Cal. Const. art. XIII, § 3, subd. (d); Rev. & Tax. Code, §§ 202, subd.
(a)(2), 202.2.)
7
(Cal. Const. art. XIII, § 3, subd. (e); Rev. & Tax. Code, §§ 203, 203.1.)
8
(Cal. Const. art. XIII, § 3, subd. (f); Rev. & Tax. Code, §§ 206, 206.1.)
9
(Cal. Const. art. XIII, § 4, subd. (b); Rev. & Tax. Code, § 214.)
10
(Rev. & Tax. Code, § 207.)
11
(Rev. & Tax. Code, § 206.)
12
(Rev. & Tax. Code, § 203.)
Attorney General’s Guide for Charities | Reporting Requirements | 43
Sales Taxes
California imposes taxes on the sale of tangible personal property.
13
What
people often informally refer to as the “sales tax” is actually three taxes:
1. The tax on in-state retail sales;
2. The transactions and use tax, which are add-on taxes approved
by local voters; and
3. The “use tax” which applies to retail purchases made from
vendors outside of California.
The second kind of tax explains why sales tax rates vary from county to
county. DTFA’s
California City and County Sales and Use Tax Rates
website lists tax rates by city and county. Review DTFA’s Sales and Use
Tax in California website for general information on sales taxes.
If charitable organizations are involved in the sale of tangible personal
property, they will likely need to obtain a “seller’s permit” from DTFA. See
DTFA’s Obtaining a Seller’s Permit website
for more information, and visit
the Registrations section of DTFA’s Online Services website to apply for
this permit.
To report taxable sales, DTFA assigns a filing schedule based on
anticipated taxable sales at the time of registration. For information on
filing dates, see DTFA’s Filing Dates for Sales and Use Tax Returns
website.
Although there is no general exemption from the obligation to charge and
remit sales taxes for charitable organizations, there are some exceptions
that may be of special interest to charitable organizations. Review DTFA’s
Publication 61
, Sales and Use Taxes: Exemptions and Exclusions to
learn more.
SECRETARY OF STATE
Tax-exempt organizations formed as California nonprofit corporations
(including public benefit corporations) have reporting requirements with
the California Secretary of State (SOS) as well. California nonprofit
corporations must file a Statement of Information, Form SI-100
, which
asks for the names and addresses of the corporation’s officers and its
agent for service of process.
Form SI-100 is filed within 90 days of incorporation and every other year
after incorporation, by the last day of the month of incorporation. It can
also be filed more frequently in order to update the SOS on changes of
13
(See generally Rev. & Tax. Code, §§ 6001-7176.)
Attorney General’s Guide for Charities | Reporting Requirements | 44
officers, agent for service of process, or other contact information. Such
updates, however, are not automatically shared with other California state
agencies or the federal government.
Form SI-100 can be filed electronically on the SOS’ website
. Penalties
apply for late filings or failure to file.
Foreign corporations, be it out-of-state or out-of-country, also have
reporting requirements with the SOS. Pursuant to California Corporations
Code section 2105, a foreign corporation may not conduct intrastate
business in California (defined in Corporations Code section 191 as
“entering into repeated and successive transactions of its business in this
state”) without first obtaining a Certificate of Qualification from the SOS.
To qualify a foreign nonprofit corporation to transact business in California
and receive a Certificate of Qualification, the corporation must file with the
SOS a Statement and Designation by Foreign Corporation,
Form S&DC-
S/N. Attach to this form a certificate from an authorized public official in
the corporation’s home jurisdiction indicating the corporation is in good
standing; the attached certificate must also indicate the corporation is a
non-stock, nonprofit corporation. Then, foreign nonprofit corporations are
required to file a Statement of Information, but on
Form SI-550. The first
filing is due within 90 days after qualification, and then annually with the
SOS. For more information on these requirements, visit the SOS’
Business Entities Frequently Asked Questions website.
ATTORNEY GENERAL
The Attorney General’s Registry of Charitable Trusts (Registry) regulates
charities and other nonprofit organizations by administering the
registration and reporting requirements in the Supervision of Trustees and
Fundraisers for Charitable Purposes Act (Gov. Code, § 12580 et seq.),
and its regulations. The Registry does this through its various programs:
Initial Registration, Registration Renewals, Delinquency, Dissolution,
Commercial Fundraising, Raffles, Complaints, and Administrative. The
Registry also maintains a searchable database
for the public to research
registered charitable organizations and fundraising professionals.
The following information discusses the registration and reporting
requirements for charitable organizations. For information on fundraising
professionals, refer to Chapter 9
.
Form CT-1 and Initial Registration
Government Code section 12585 requires charitable organizations,
including trustees, to register with the Attorney General’s Registry of
Charitable Trusts within 30 days of first receiving property (i.e., a cash
donation, property donation, or other assets with financial value received
for charitable purposes). The initial registration fee is $25. Charitable
Attorney General’s Guide for Charities | Reporting Requirements | 45
organizations are required to file the Registry’s Initial Registration Form
(Form CT-1), a copy of the organization’s tax exemption application IRS
Form 1023 or Form 1023-EZ (if submitted to the IRS), a copy of the
organization’s IRS determination letter (if received from the IRS), and
copies of the organization’s founding documents as follows:
Corporations: endorsed articles of incorporation stamped with the
corporate number assigned by the SOS (including all endorsed
amendments), current bylaws;
Associations: instrument creating the organization (bylaws,
constitution, and/or articles of association); or
Trusts: trust instrument, or will and decree of final distribution.
Entities organized primarily as a hospital, educational institution, or
religious organization are exempt from the registration and reporting
requirements. Mutual benefit organizations are exempt if they are
operated and funded by their membership, and do not hold assets in trust
for charitable purposes. If exemption is claimed, complete substantiating
documents are required to be submitted to the Registry. Exemption
requests are reviewed on a case-by-case basis by Registry staff.
Also review Chapter 12
for information on the registration obligations of
charitable trustees, religious organizations, and non-California entities.
Form RRF-1 and Annual Reporting
In addition to the initial registration requirement, there are annual
registration renewal requirements.
14
Every charitable organization, such
as charitable trustees and unincorporated charitable associations, must
file an Annual Registration Renewal Fee Report (Form RRF-1). This
form’s filing fee depends on the organization’s gross annual revenue for
the preceding year. Charitable organizations in good standing with the
Registry may file the Form RRF-1 electronically with the Registry. For
information on filing electronically, visit the Online Renewal System on the
Attorney General’s Charities website.
When filing a Form RRF-1, charitable organizations are required to file a
copy of their annual IRS Form 990, Form 990-EZ, or Form 990-PF
informational return. All schedules to these forms filed with the IRS must
also be filed with the Registry, including Schedule B. If a charitable
organization’s total revenue for the fiscal year is under $50,000, Form CT-
TR-1 must be filed along with Form RRF-1. Private foundations are not
required to file Form CT-TR-1 and instead must file IRS Form 990-PF
with Form RRF-1. For more information please review the Attorney
14
(Gov. Code, § 12586.)
Attorney General’s Guide for Charities | Reporting Requirements | 46
A charitable
organization’s
registration must
be current to
operate;
delinquent or
suspended
organizations
may not solicit or
disburse
charitable funds.
General’s Charities website which contains information and webinars on
Annual Registration Renewals and Form CT-TR-1.
Form RRF-1 must be filed within four months and fifteen days after the
end of the organization’s fiscal or calendar year. This generally coincides
with the organization’s reporting requirements with the IRS and FTB. If
the organization obtains an extension to file with the IRS, the Registry
honors that extension.
Form RRF-1 specifically asks whether the registered charitable
organization has audited financial statements. This is particularly relevant
for charitable organizations with gross revenue of $2,000,000 or more
(excluding grants from and contracts for services with government
entities), as Government Code section 12586, subdivision (e), requires
such organizations to have audited financial statements (and an audit
committee if a corporation). The failure to have audited financial
statements when required may result in the
Form RRF-1 being rejected
by the Registry. While the audited financial statements do not need to be
filed with the Registry, they must be available for inspection by the
Attorney General, and made available to the public if requested.
If an organization fails to annually renew its registration, it is listed as
delinquent in the Registry’s publicly available database. Late fees of $25
per month may be assessed, and if the delinquency is not remedied, it
may result in a permanent suspension.
15
A charitable organization’s
registration must be current to operate; delinquent or suspended
organizations may not solicit or disburse charitable funds.
16
For more information on registration and reporting requirements, visit the
Attorney General’s Charities website for the registration guide and
webinar, the annual registration renewal guide and webinars, and
required forms. Registry staff also provide information on these topics to
persons seeking assistance. Visit the Attorney General’s Contacts
website to submit an inquiry to the Registry of Charitable Trusts.
Additional Reporting Requirements
California's Charitable Solicitation Law contains additional reporting
requirements for charitable organizations (and fundraising professionals);
see Chapter 9. Also, charitable organizations have reporting requirements
for certain corporate transactions such as voluntary dissolution, mergers,
or a sale or transfer of all or substantially all of the corporation’s assets.
See
Chapter 11.
15
(Gov. Code, § 12586.1.)
16
(Cal. Code Regs., tit. 11, § 999.9.4.)
Attorney General’s Guide for Charities | Reporting Requirements | 47
OTHER STATES
If a charitable organization conducts activities or fundraising in other
states, the organization should confirm what registration or reporting
requirements may be necessary in those states. For more state-specific
information, visit the National Association of State Charity Officials’
State
Government website.
FREQUENTLY ASKED QUESTIONS
“Should we keep copies of our filings? If so, for how long?”
Charitable organizations must keep records for federal tax purposes for
as long as may be needed to document evidence of compliance with
provisions of the Internal Revenue Code. Keep copies of all filings
permanently.
While there may be statutes of limitations for audits and other inquiries
from some agencies, there is often no statute of limitations applicable for
allegations of fraud or criminal activity.
“What are the consequences of making misrepresentations on any
of the forms we have to file with public entities?”
In most cases, these forms are signed under penalty of perjury. Perjury,
which is knowingly making a false statement, is a serious criminal
offense.
17
Any director, officer, or agent of a public benefit corporation
who knowingly makes false statements in filings may face potential
imprisonment in a county jail for up to a year and fines.
18
In addition, officers, directors, and employees may be liable to both the
corporation and any person injured by such misstatements.
19
The
Attorney General may also seek redress. If so, the potential
consequences include financial penalties, appointment of a receiver to
protect the corporation, removal of the directors, and dissolution of the
corporation.
20
“Our charity has no money. Does this relieve us of the obligation to
register with the Attorney General and file annual reports?”
Every charitable corporation, unincorporated association, and trustee
must register with the Attorney General’s Registry of Charitable Trusts
within 30 days after it initially receives property. Property includes more
than just money, such as supplies, food, clothing, real property, stocks
and bonds, and other tangible gifts. Thus, even if the charity has no
17
(Pen. Code, §§ 118, 129.)
18
(Corp. Code, §§ 6812-6814; Pen. Code, § 1170, subd. (h).)
19
(Corp. Code, § 6215.)
20
(Corp. Code, § 6216; Gov. Code, § 12591.1.)
Attorney General’s Guide for Charities | Reporting Requirements | 48
money, if it has charitable “property,” it must file a Form CT-1 to register
with the Registry, and do so within 30 days of the property’s receipt.
Thereafter, it must annually file a Form RRF-1 with the Registry. For
charities with less than $25,000 in gross annual revenue, there is no filing
fee for the Form RRF-1. Also, charities with less than $50,000 annual
revenue must file an Annual Treasurer’s Report (Form CT-TR-1).
“What is a mutual benefit corporation and when does it have to
register with the Attorney General’s Registry of Charitable Trusts?”
Many mutual benefit corporations are often organized for the benefit of
their members. Examples of mutual benefit corporations include civic
leagues, social welfare organizations, local employee associations,
veterans of foreign wars organizations, homeowners’ associations,
business leagues, and chambers of commerce. Yet, if a mutual benefit
corporation holds any of its assets for charitable purposes, it must register
and report on these charitable assets to the Attorney General.
For instance, mutual benefit corporations that benefit law enforcement,
firefighters, or other public safety personnel that solicit and/or hold
charitable assets are required to register and report annually. However, if
such public safety mutual benefit corporations make clear that the
purpose of all of their solicitations is for the sole benefit of their actual
active membership, and they do not otherwise hold charitable assets,
they would not be required to register and report.
21
“We don’t solicit directly from the public, but we receive donations
at events we hold. Are we required to register and report?”
Yes, all organizations that hold assets in trust for public and charitable
purposes are required to register and report annually. However, if there is
empirical proof the sole purpose of the solicitation is to benefit members,
then the organization would be exempt.
“We don’t solicit directly from the public, but we hold events that are
open to the public and we charge a fee for attendance (i.e., ticket
sales, concessions). Are we required to register and report?”
Yes, all organizations that hold assets in trust for public and charitable
purposes are required to register and report annually. However, if there is
empirical proof the sole purpose of the solicitation is to benefit members,
then the organization would be exempt.
Exemptions are reviewed on a case-by-case basis to determine the
registration requirements pursuant to Government Code sections 12585
and 12586. If exemption is claimed, complete substantiating documents
are required such as the organization’s founding documents, a
21
(Gov. Code, § 12581.2, subd. (d).)
Attorney General’s Guide for Charities | Reporting Requirements | 49
determination letter from the IRS, and a description of the organization’s
funding activities.
“We use a fiscal sponsor to receive donations. Are we required to
register and report?”
Generally, a fiscal sponsor is a charity with tax-exempt status under
Internal Revenue Code section 501(c)(3) that agrees to sponsor another
nonprofit, sometimes called a project of the fiscal sponsor. Many
nonprofits that are not yet financially able to form their own charity pay a
fee for administrative costs, marketing, and personnel to a fiscal sponsor.
In this scenario, the fiscal sponsor generally receives charitable donations
designated for the sponsored project, and then spends or grants the
funds for that project using restricted fund accounting. Also, the fiscal
sponsor retains discretion and control over the donations, and donors can
receive tax deductions for their contributions. These donations would be
reported as revenue on the fiscal sponsor’s annual information return
(e.g., IRS Form 990) and the Registry’s Form RRF-1
(assuming the fiscal
sponsor is registered with the Attorney General’s Registry of Charitable
Trusts).
When a nonprofit is a program of a fiscal sponsor as described above,
and the fiscal sponsor is registered with the Attorney General, the
nonprofit does not need to register and report as well.
However, if the sponsored nonprofit becomes its own standalone charity,
it is required to register and report to the Attorney General. Once the
organization files articles of incorporation with the SOS and receives a
corporate number (if the charity is formed as a nonprofit corporation in
California), obtains its own federal Employer Identification Number and
tax-exempt status with the IRS, or obtains its own Entity Identification
Number and tax-exempt status with the FTB, the organization needs to
register with the Attorney General within 30 days of receiving charitable
assets.
Until registration is required, the Registry requests the fiscal sponsorship
agreement, which is added to the Registry’s database
for public viewing.
| 50
CHAPTER 7 DIRECTORS & OFFICERS OF PUBLIC
BENEFIT CORPORATIONS
In This Chapter
Introduction
Selecting Directors
Selecting Officers
Compensating Directors and Officers
Board Meetings, Minutes, and Other Corporate Records
Officers’ Duties
Directors’ Duty of Care
Directors’ Duty of Loyalty
Self-Dealing Transactions
Loans of Corporate Funds
Distribution of Corporate Assets
Other Liability Issues
Frequently Asked Questions
INTRODUCTION
Every California nonprofit corporation must have a board of directors.
1
Also known as board members, directors serve many important roles:
they oversee the work of officers and other senior management, they
make policy decisions for the charity, and they ensure the organization is
faithfully carrying out its charitable mission. The powers, duties, and
limitations of what is expected and required from directors and officers
are governed by California statutes and common law.
2
For instance,
Corporations Code section 5210 provides that “the activities and affairs of
the corporation shall be managed and all corporate powers shall be
exercised under the ultimate direction of the board.”
This chapter explains some of the powers, duties, and limitations of
directors and officers for public benefit corporations
, including discussions
on compensating directors and officers, and their fiduciary duties. Liability
issues are also explained, such as when directors and officers may be
held personally liable, and options for indemnification and insurance.
1
(Corp. Code, §§ 5210 [nonprofit public benefit corporations], 7210
[nonprofit mutual benefit corporations], 9210 [nonprofit religious
corporations].)
2
(E.g., Corp. Code, §§ 5210-5215.)
Attorney General’s Guide for Charities | Directors & Officers of Public Benefit Corporations | 51
SELECTING DIRECTORS
Legally, a public benefit corporation may operate with only one director.
3
However, most charities operate with three or more directors. This allows
the charity to avoid potential conflict of interest problems, and gives the
board members the ability to share in oversight responsibility.
As for the method of selecting directors, this varies. For instance,
directors may be elected, either by voting members of the corporation (if
any) or by the existing board of directors. Directors may also be
designated by specified persons or entities given such right in the
organization’s governing documents. Additionally, depending on the
bylaws, a corporation may have ex officio directors. Ex officio directors
are individuals who are automatically directors of the corporation because
they hold a particular position within or outside the corporation.
4
Whatever the selection method, the method should be specified in the
corporation’s bylaws, as well as other provisions that govern the board of
directors. This includes specifying the directors’ powers and
responsibilities, and provisions on resignation, removal, terms of office,
and term limits of directors.
In selecting directors for board appointment, consider nominating and
appointing candidates who have the appropriate levels of competency,
experience, integrity, enthusiasm, and commitment to be fully engaged.
Also, ensure the candidates fully realize the expectations and legal
requirements that come with serving as directors, including the need to
attend board meetings, as directors often accept their appointments
without this awareness. Directors should understand they may be called
upon to make difficult decisions to address critical situations on short
notice. To inspire active engagement and responsible performance,
directors should be provided with and encouraged to attend continuing
education opportunities.
The board might also consider adopting bylaws that rotate leadership
positions and limit the terms of the directors. For instance, directors may
sometimes become entrenched in their ideas and positions, or may not
devote enough time and energy needed to support the charity.
SELECTING OFFICERS
Every public benefit corporation must have at least three officer positions:
a president (or chair of the board), a secretary, and a treasurer (or chief
financial officer). Additional officers may be appointed if the corporation’s
bylaws provide for such officers. No person serving as the secretary or
3
(Corp. Code, § 5151, subd. (a).)
4
(Corp. Code, § 5047.)
Attorney General’s Guide for Charities | Directors & Officers of Public Benefit Corporations | 52
treasurer/chief financial officer may serve concurrently as the president or
chair of the board of a public benefit corporation. Also, there can be
separate positions for president and chair of the board. The president is
the chief executive officer of the corporation, unless otherwise specified in
the corporation’s governance documents. If there is no separate
president, however, then the chair of the board often serves as the chief
executive officer.
5
Generally, the president or chief executive officer is
responsible for the day-to-day operations of the corporation. The
treasurer or chief financial officer is responsible for the financial affairs of
the corporation. Meanwhile, the secretary is responsible for maintaining
corporate records, including board minutes.
Before agreeing to serve as an officer, the candidate should carefully
read the description of duties to determine the requirements of the officer
position.
Officers are usually appointed by the board of directors. The duties of
officers and methods of their appointment should be clearly stated in the
corporate governance documents, or in position descriptions adopted by
the board. Charities may also have paid officers, who are employees of
the charity. It may be appropriate to exclude employee-officers from also
being members of the board because employee-officers depend on the
corporation for their livelihoods – and as directors may be called to make
decisions in the best interests of the corporation that might not align with
their personal interests as employees. Also, because the board is
required to exercise oversight over officers who are employees, it may be
wise to exclude these officers/employees from also being members of the
board.
COMPENSATING DIRECTORS AND OFFICERS
Most directors serve as volunteers and are not paid for their service as
directors, other than reimbursement for actual expenses incurred in
attending meetings (e.g., mileage, parking fees, meal costs). While
directors may be paid for their services as directors (or as an officer
should the director also be an officer of the organization), these payments
must be fair and reasonable to the public benefit corporation in light of the
services provided.
6
California law does not suggest what level of
compensation is reasonable. This is determined on a case-by-case basis
according to the particular facts and circumstances.
In California, there is also a limit on how many directors can be
compensated for their professional or employment services; public benefit
5
(Corp. Code, § 5213, subd. (a).)
6
(Corp. Code, § 5235.)
Attorney General’s Guide for Charities | Directors & Officers of Public Benefit Corporations | 53
Both the IRS and
Attorney General
audit allegat
ions
of
excessive
compensation.
corporations must be composed of at least 51 percent of directors who
are “disinterested” persons.
7
Disinterested means that neither the director
nor any member of the director’s family is paid by the corporation to do
anything other than act as a director. For example, a director who is a
paid employee or whose spouse is a paid employee of the corporation is
not a “disinterested person” for the purposes of this limitation.
In addition, the compensation including benefits paid to officers such as
the president or chief executive officer, the treasurer or chief financial
officer, or those with comparable responsibilities, must be reviewed by the
board or an authorized committee, at the time of hiring, whenever the
term of employment is renewed or extended, and whenever such
compensation is modified.
8
In evaluating compensation, the board should
analyze whether the proposed amount to be paid is in the best interest of
the nonprofit. For instance, does the officer bring a lot of experience to
the organization, and has he or she effectively and successfully improved
or promoted the charity’s programs? (Additional factors are listed below.)
Note that if the charitable organization has declining revenue, is
experiencing staff or donor dissatisfaction, or is subject to multiple
lawsuits (which may reflect mismanagement), it may not be in the
corporation’s best interest to give the chief executive officer or chief
financial officer a raise.
Furthermore, compensation paid to officers and directors cannot be
concealed from donors or the public at large. Nonprofits that file IRS
Form
990, Form 990-EZ, or Form 990-PF, must list compensation paid to
directors, officers, trustees, and key employees (as defined by the IRS).
In addition, these forms must list the compensation of its five highest-paid
employees who are not directors, officers, trustees, and key employees,
and earn more than $100,000 annually. The failure to provide this
information may result in IRS fines.
Form 990 also requires the charitable
organization to provide explanations about the methods used to establish
and approve executive compensation levels.
Both the IRS and Attorney General audit allegations of excessive
compensation. The Attorney General may recover excessive
compensation from the directors and officers who received the
overpayment, and from the directors who approved the compensation if
they failed to exercise due care. Likewise, the IRS may levy penalties for
excessive compensation ranging from fines to revocation of an
organization’s tax-exempt status. IRS fines may be levied against both
the person who received the overpayment and the directors who
7
(Corp. Code, § 5227.)
8
(Gov. Code, § 12586, subd. (g); Cal. Code Regs., tit. 11, § 312.1.)
Attorney General’s Guide for Charities | Directors & Officers of Public Benefit Corporations | 54
approved or knew about the excessive compensation, but did nothing to
prevent it.
In evaluating whether compensation is fair and reasonable to the
nonprofit corporation, the board or its authorized committee tasked to
review compensation should consider taking the following steps:
Get the facts on the proposed compensation amount, including all
“fringe benefits.”
Have a clear understanding of the job description, duties, and
functions of the employee.
Find out what other organizations with similar size, location,
comparable programs, assets, and revenue pay their executives
who have functionally comparable positions.
Exclude the employee, director, or officer whose compensation is
being evaluated from participating in the decision and ensure they
have no role in researching or preparing the comparability data, or
hiring a consultant to research and prepare a comparability study.
Before attending any meeting scheduled to approve compensation
packages, be prepared by reviewing the comparability study and
data, review job descriptions, and evaluate past performance.
Document the decision-making process at the time the board
approves or the committee recommends the proposed
compensation.
The board minutes should include detailed discussions of the
deliberative process, including all comparability studies relied
upon, the date of approvals and compensation approved, list all
board members who were present, and those who voted to
approve or disapprove the proposed compensation. The minutes
should also identify any board members who were present and
had a conflict of interest, and what actions, if any, they took at the
meeting.
BOARD MEETINGS, MINUTES, AND OTHER CORPORATE
RECORDS
As demonstrated by the need to review the compensation of officers and
to make other important decisions, the board of directors should meet
regularly. The corporation’s bylaws should contain provisions on board
meetings, such as the required notice for meetings, the quorum
requirement for meetings, the number of votes required for board
approval, actions by unanimous written consent, and actions by
committee. The Corporations Code sets forth requirements for many of
Attorney General’s Guide for Charities | Directors & Officers of Public Benefit Corporations | 55
these items, and default provisions that apply if the bylaws are silent on
these issues.
9
Similarly, directors and officers should ensure compliance with various
recordkeeping requirements.
10
For public benefit corporations, these
include the duty to keep the following records:
Current copies of the articles of incorporation and bylaws;
Minutes of board meetings, committee board meetings, and the
proceedings of its members;
Membership lists (name, address, and type of membership);
Adequate and correct financial and records of account;
11
An annual statement on certain self-dealing transactions or
indemnification payments made to any officer or director, when
these occur;
12
and
An annual financial report, unless the corporation receives less
than $25,000 in gross revenue during its fiscal year.
13
At each board meeting, the directors should be prepared to review the
minutes of the prior board meeting, and discuss any necessary edits
before voting to approve the minutes. Directors should make sure the
minutes accurately portray the board’s discussion and decisions. The
board’s secretary should also provide a certification that the approved
minutes are true and accurate copies.
These records are important not only to provide historical background and
context supporting the board’s decisions, but also because they may be
considered prima facie evidence that meetings were held, and matters
referenced in the minutes were actually decided.
14
False entries in the
books, minutes, records, or accounts of a public benefit corporation or the
9
(Corp. Code, §§ 5151, subd. (e), 5211-5212.)
10
(Corp. Code, §§ 6215, 6813.)
11
(Corp. Code, § 6320.)
12
(Corp. Code, § 6322.)
13
(Corp. Code, § 6321. The annual report shall detail assets and
liabilities, the principal changes in assets and liabilities, revenue or
receipts of the corporation both unrestricted and restricted, and expenses
or disbursements both general and restricted. The annual statement on
certain self-dealing transactions or indemnifications shall also be
incorporated. This report is in addition to any report that may be prepared
by an independent accountant.)
14
(Corp. Code, § 5215.)
Attorney General’s Guide for Charities | Directors & Officers of Public Benefit Corporations | 56
alteration or removal of records may result in an enforcement action by
the Attorney General or a district attorney.
15
OFFICERS’ DUTIES
As indicated above, officers sometimes are not members of the board of
directors. Officers may be paid employees, and have titles such as chief
executive officer, chief financial officer, secretary, chief operating officer,
vice president, or executive director. Regardless of titles, officers are
ultimately those who participate in the management of the corporation,
and have some discretionary authority in managing the corporation’s
affairs.
16
Officers stand in a fiduciary relationship with the corporation. Hence, they
must scrupulously protect the interests of the corporation, exercise their
powers in good faith and with best efforts, and refrain from doing anything
that harms the corporation. For instance, officers cannot use their
positions to further their private interests, or otherwise secure any
Directors are
personal advantage against the corporation.
17
In fact, officers who breach
required to
their fiduciary duty to the corporation may be liable for any damage their
perform with the
actions or inaction caused.
level of care that
an ordinarily
DIRECTORS’ DUTY OF CARE
prudent person in
Directors also act as fiduciaries. For instance, each director owes a duty
a like position
of care to its nonprofit corporation and the corporation’s charitable
would use under
beneficiaries. For public benefit corporations, directors are required to
similar
perform with the level of care that an ordinarily prudent person in a like
circumstances.
position would use under similar circumstances. This includes making
This includes
reasonable inquiries as needed.
18
making
reasonable
To ensure the duty of care is met, a director should review the
inquiries as
corporation’s articles of incorporation and bylaws to better understand the
needed.
corporation’s mission, and the expected roles and responsibilities of
15
(E.g., Corp. Code, §§ 6215-6216, 6812.)
16
(GAB Business Services, Inc. v. Lindsey & Newsom Claim Services,
Inc. (2000) 83 Cal.App.4th 409, 420-421, disapproved on another ground
in Reeves v. Hanlon (2004) 33 Cal.4th 1140.)
17
(Bancroft-Whitney Co. v. Glen (1966) 64 Cal.2d 327, 345; Pigeon Point
Ranch, Inc. v. Perot (1963) 59 Cal.2d 227, 233, overruled on another
ground in Kowis v. Howard, (1992) 3 Cal.4th 888; GAB Business
Services, Inc., supra, 83 Cal.App.4th at pp. 416-417, disapproved on
another ground in Reeves v. Hanlon (2004) 33 Cal.4th 1140; Burt v. Irvine
Co. (1965) 237 Cal.App.2d 828, 850; Daniel Orifice Fitting Co. v. Whalen
(1962) 198 Cal.App.2d 791, 797, 800.)
18
(Corp. Code, § 5231, subd. (a).)
Attorney General’s Guide for Charities | Directors & Officers of Public Benefit Corporations | 57
directors and officers. Directors are also obliged to be informed about the
nonprofit organization’s program and operations.
Directors should also regularly attend board meetings and actively
engage in meetings of the board and any board committees on which
they serve. Before making any decision, directors should request and
obtain all necessary background information and reports to promote
informed decisions. Directors should use their own judgment in voting,
and not simply follow the lead of other board members, or adopt the
recommendations of management or staff. A director should not be afraid
to ask questions at board meetings or request that matters be decided at
a later date to allow for more in-depth deliberation.
In making decisions related to compensation or the charity’s finances,
directors should request reasonable access to management and advisors
such as auditors and compensation consultants. In exercising due care,
directors should proactively demand and review financial reports and
statements.
If directors do not abide by the duty of care owed to their public benefit
corporation, they may be held personally liable to the corporation.
19
DIRECTORS’ DUTY OF LOYALTY
Each director also owes a duty of loyalty to its nonprofit corporation. For
public benefit corporations, this means the director must make decisions
he or she believes is in the best interest of the corporation, as well as act
in such best interest.
20
For instance, the director is obligated to act with
undivided loyalty, be fair in his or her dealings with the nonprofit, and
must not seek to benefit personally from the activities or resources of the
nonprofit.
Duty of loyalty issues typically arise when there is a conflict of interest
between the charity’s best interests and the personal interests of the
director, as exemplified in the Self-Dealing Transactions section below.
And like the duty of care, directors who breach their duty of loyalty may
be held personally liable to the corporation.
21
SELF-DEALING TRANSACTIONS
A self-dealing transaction involves:
19
(Corp. Code, § 5231, subd. (c).)
20
(Corp. Code, § 5231, subd. (a).)
21
(Corp. Code, § 5231, subd. (c).)
Attorney General’s Guide for Charities | Directors & Officers of Public Benefit Corporations | 58
A contract, agreement, or other action affecting the assets or
income of a public benefit corporation;
To which the corporation is a party; and
In which one or more of its directors has a material financial
interest.
22
For example, a self-dealing transaction may occur when a charity pays a
fee, commission, or rent, or enters into a contract with, that results in
giving a material economic benefit to a director, or his or her company or
partnership. Since the director’s first duty of loyalty is to the corporation, it
may be difficult for a director to carry out that duty if he or she is also
looking to make a profit from transacting business with the corporation.
Self-dealing transactions between a director and a public benefit
corporation are inherently suspect. Yet, there are situations when it may
be advantageous for the corporation to enter into such a transaction, such
as when the corporation is treated fairly and the director is not unduly
compensated. This might occur when a corporation has the opportunity to
rent office space from a director at a lower rate than would be available
on the open market.
The board must follow the procedures set forth in Corporations Code
section 5233 to validate a self-dealing transaction and before
consummating it. These procedures require a determination by the board
of directors that the corporation entered into the transaction for its own
benefit, the transaction is fair and reasonable at the time it entered into
the transaction, and that the corporation could not have obtained a more
advantageous arrangement with reasonable effort under the
circumstances. In reaching these conclusions, the board must act in good
faith and there must be a full disclosure of all material facts. Further, the
board must approve the transaction by a majority of directors then in
office without counting the director subject to the conflict of interest.
When a self-dealing transaction is not fair to the corporation and results in
unreasonable charges or excessive profit to the interested director, the
corporation suffers damage. The Attorney General and certain other
persons may sue the directors to recover the actual damage suffered by
the corporation, plus interest, and in some cases punitive damages. Any
damages recovered are returned to the corporation. The Attorney
General typically also seeks the permanent removal of the interested
directors and other directors responsible for the damage.
22
(Corp. Code, § 5233. See also, Corp. Code, § 6322, subd. (b) [officers
and holders of more than 10% of the voting power of a corporation, or its
parent or subsidiary, can also engage in these kinds of transactions].)
Attorney General’s Guide for Charities | Directors & Officers of Public Benefit Corporations | 59
If the “disinterested” directors fail to review a self-dealing transaction in
good faith as provided in Corporations Code section 5233, and instead
simply rubber stamp the transaction or approve the transaction to protect
the interested director, the self-dealing transaction is not deemed
validated and all directors may be held liable for any damages incurred by
the charity.
23
For added protection, the board may consider submitting a notice of the
proposed self-dealing transaction to the Attorney General.
24
This protects
the board against claims of improper transactions and potential damages.
The Attorney General seeks to evaluate these transactions in 60 days.
25
See Chapter 11 for more information.
LOANS OF CORPORATE FUNDS
With narrow exceptions, a public benefit corporation may not grant loans
to its directors or officers without Attorney General approval. One
exception involves advancing money for an expense reasonably
anticipated to be incurred in the performance of a director’s duties,
provided the director would otherwise be entitled to reimbursement for the
expense.
26
The other exceptions involve purchasing a life insurance
policy on the life of a director or officer, or the financing of a principal
residence in California to attract a talented officer.
27
Directors may be
held personally liable for authorizing prohibited loans and guarantees.
28
Unless the loan is specifically exempt by statute, the board of directors
should seek the Attorney General’s approval of a prospective loan.
29
The
Attorney General evaluates all material facts supporting the board’s
proposed decision to grant the loan, including whether the loan is in the
best interest of the charity, whether the loan terms are fair to the
corporation, and whether the loan is secured. The Attorney General also
reviews the corporation’s financial statements, founding records, and
board minutes to evaluate whether the charity is authorized by its bylaws
to grant loans and whether the loan would be a suitable investment given
its financial statements.
30
The Attorney General seeks to respond to
23
(Corp. Code, §§ 5231, 5233, subd. (h).)
24
(Cal. Code Regs., tit. 11, §§ 999.1, 999.2, subd. (b).)
25
(Corp. Code, § 5233, subd. (d); Cal. Code Regs., tit. 11, § 999.1, subd.
(d).)
26
(Corp. Code, § 5236, subd. (a).)
27
(Corp. Code, § 5236, subds. (b)-(e).)
28
(Corp. Code, § 5237, subd. (a).)
29
(Corp. Code, § 5236.)
30
(Cal. Code Regs., tit. 11, § 999.2, subd. (c).)
Attorney General’s Guide for Charities | Directors & Officers of Public Benefit Corporations | 60
requests for approval of loan and guarantee agreements within 60 days
after receipt of all material facts related to the proposed action.
31
DISTRIBUTION OF CORPORATE ASSETS
Directors may also be personally liable for authorizing or receiving a
prohibited distribution of the public benefit corporation’s assets.
32
Examples of prohibited distributions include:
Transfers of corporate funds or assets to directors, officers, or
members without fair consideration;
Payment of excessive or unauthorized salaries, non-contractual
benefits or bonuses;
Improper gifts of the corporation’s assets to individuals; and
Other uses of corporate assets that violate the charitable trust
under which they are held.
OTHER LIABILITY ISSUES
Although situations where personal liability may be incurred are
discussed above and other scenarios may apply,
33
directors and officers
of nonprofit corporations are generally not personally liable for the debts,
liabilities, or obligations of the corporation.
Volunteer Directors and Officers
Along those lines, volunteer directors and officers of public benefit
corporations can avail themselves of statutory liability protections when
certain criteria are met. Under Corporations Code sections 5047.5 and
5239, volunteer directors and officers are protected from liability in legal
actions for claims of negligence involving conduct within the scope of their
duties and performed in good faith. Also, the statutory protections are
expressly conditioned on the corporation maintaining general liability
insurance of certain amounts (based on the corporation’s annual
budget).
34
However, these statutes do not protect a volunteer director’s or officer’s
acts or omissions that are intentional, reckless, grossly negligent, outside
the scope of their duties, or not made in good faith. Also, volunteer
directors and officers are not protected from liability in lawsuits brought by
31
(Cal. Code Regs., tit. 11, § 999.1, subd. (d).)
32
(Corp. Code, § 5237, subd. (a).)
33
(E.g., Corp. Code, §§ 6215, 6811.)
34
(Corp. Code, §§ 5047.5, subd. (e), 5239, subd. (a)(4).)
Attorney General’s Guide for Charities | Directors & Officers of Public Benefit Corporations | 61
Volunteer
directors and
officers are not
protected from
liability in
lawsuits brought
by the Attorney
General or from
lawsuits brought
against them for
self
-dealing
transactions
or
improper
distributions.
the Attorney General or from lawsuits brought against them for self-
dealing transactions or improper distributions.
Who May File Lawsuits
When a fiduciary, such as a director or officer, violates his or her duty of
loyalty or care towards the charitable organization, and it results in lost
income, assets and other damages, a breach of charitable trust action
may be filed. Likewise, if a charitable organization departs from its
charitable purpose or if funds solicited for specific purposes are diverted
for other unrelated purposes, this type of conduct could result in a breach
of charitable trust action to recover the lost donations. A breach of
charitable trust action seeks to recover the loss of charitable assets, for
the benefit of the charitable organization. Various persons have standing
to file a lawsuit to remedy a breach of charitable trust action, such as:
The Attorney General;
Members of the corporation, if the corporation’s bylaws provide for
membership;
The corporation’s directors or officers;
A person with a reversionary, contractual, or property interest in
the assets subject to such charitable trust, and
The corporation itself.
35
The Attorney General files these types of lawsuits as part of his oversight
power to protect charitable assets, and to ensure compliance with trusts,
and a corporation’s articles of incorporation and bylaws.
36
This oversight
is an important function as charitable organizations exist to benefit the
public in general. The Attorney General may intervene in an action
brought by others.
37
A corporation’s members and others can bring a lawsuit in the name of
the corporation. These are called “derivative actions” because they are
filed on behalf of the corporation, and not the person or entity filing suit.
38
Derivative actions against directors and officers usually seek money
damages from the responsible party. Such damages are paid to the
corporation or, when circumstances make it more appropriate, to a charity
with the same or similar charitable purpose. The Attorney General must
be given notice of any derivative action.
39
35
(Corp. Code, § 5142, subd. (a).)
36
(Gov. Code, § 12598, subd. (a).)
37
(Corp. Code, §§ 5142, subd. (a), 5250.)
38
(Corp. Code, § 5710.)
39
(Corp. Code, § 5142, subd. (a).)
Attorney General’s Guide for Charities | Directors & Officers of Public Benefit Corporations | 62
Indemnification and Insurance
California law allows a public benefit corporation to indemnify directors,
officers, and agents of the corporation for costs and expenses of civil
litigation under certain circumstances.
40
The corporation’s articles of
incorporation and bylaws may also contain provisions on indemnification.
Note that any indemnification of directors and officers must be consistent
with California law and the corporation’s governing documents.
Many nonprofit corporations also purchase “directors and officers”
insurance to provide a source of payment for litigation costs, in addition to
the corporation’s own funds. Public benefit corporations may purchase
indemnification insurance to protect directors and officers from liability for
most claims, but not for self-dealing.
41
FREQUENTLY ASKED QUESTIONS
“Our charity has a $200,000 surplus for the current year. How should
the directors invest this surplus?”
Directors are required to make prudent investments of charitable assets
under their control in accordance with applicable law (including the
Uniform Prudent Management of Institutional Funds Act
42
), and are
permitted to rely on the advice of investment experts if it is reasonable to
do so under the circumstances. Directors may be held personally liable if
they fail to act in this way and loss results to the charity. For example,
directors may be liable for lost earnings on surplus funds left in a non-
interest-bearing account, if doing so would not be in accordance with their
duties.
“Our charity is considering paying our chief executive officer a
percentage of the charity’s net proceeds as a bonus. Can we do
this?”
While bonuses can be paid to an officer, if the bonus is tied to revenue, it
may be considered excessive compensation and an improper distribution
of charitable assets.
“The board recently became aware that one of the directors was
engaging in a self-dealing transaction. This interested director
planned our charity event. We thought he was organizing the event
for free. We were not aware, and we did not authorize the payment of
his services from donations he received from ticket sales. What are
our obligations now?”
40
(Corp. Code, § 5238.)
41
(Corp. Code, § 5238, subd. (i).)
42
(Prob. Code, § 18501 et seq.)
Attorney General’s Guide for Charities | Directors & Officers of Public Benefit Corporations | 63
Assuming this was not a theft or embezzlement, but an honest
misunderstanding or miscommunication, the board should demand a full
accounting of all profits and payments received by the interested director.
The board should review the bylaws to consider steps in removing the
interested director. The board of directors should have been told all of the
material facts by the interested director, including payments he
anticipated receiving, before the board gave him authority to plan,
organize, and solicit donations for a charity event. If the accounting
provided by the interested director reveals the payments amounted to a
material financial interest, the board should demand the funds be
returned. If the interested director refuses to return the funds, the board
should consider filing an action against the interested director to recover
the funds and remove the director from the board; the Attorney General
must be joined as an indispensable party.
The self-dealing transaction must also be disclosed on the charity’s
Form
RRF-1 filed with the Attorney General’s Registry of Charitable Trusts,
43
and in IRS filings. The board should also file a complaint with the Attorney
General.
If this transaction was not the result of a miscommunication or
misunderstanding, and instead was embezzlement or theft, the board
should file a complaint with the local police department, and must report
the crime in the Form RRF-1
and in IRS filings.
“Our charity has not had board meetings in many months and we
are having problems scheduling meetings in-person. What are our
options for meeting by phone or video conferencing?”
The board should consult its bylaws to determine if meetings must be in
person. If the bylaws are silent on this issue, Corporations Code section
5211, subdivision (a)(6), allows directors to meet by phone or video
conferencing.
43
(Corp. Code, § 5233.)
| 64
CHAPTER 8 MEMBERS OF PUBLIC BENEFIT
CORPORATIONS
In This Chapter
Members Overview
Frequently Asked Questions
MEMBERS OVERVIEW
A California public benefit corporation may offer membership or create
classes of members to individuals or corporate entities. Such
memberships would be established and defined in the corporation’s
articles of incorporation or bylaws. California law does not require a public
benefit corporation to have members.
1
If a public benefit corporation has members, the members are typically
vested with voting and other rights pertaining to the corporation’s affairs.
And, when the corporation’s articles of incorporation or bylaws give
members certain voting rights, they are called statutory or voting
members. Statutory members have the right to vote for the corporation’s
directors (also known as board members, not to be confused with the
corporation’s membership), to vote on the manner in which the
corporation’s assets will be disposed upon dissolution or merger, or to
vote on changes to the articles of incorporation or bylaws.
2
If members
are deemed statutory members, California law also gives them other
rights, including the rights to:
Inspect certain corporate records;
3
Receive notice of member meetings;
4
Remove directors;
5
and
Sue directors in derivative actions, or third parties on behalf of the
corporation, under certain circumstances.
6
1
(Corp. Code, § 5310, subd. (a).)
2
(Corp. Code, § 5056, subd. (a).)
3
(Corp. Code, §§ 6330, 6333.)
4
(Corp. Code, § 5511.)
5
(Corp. Code, § 5222.)
6
(Corp. Code, § 5710.)
Attorney General’s Guide for Charities | Members of Public Benefit Corporations | 65
Statutory members cannot be abolished by the directors without the
members’ consent.
7
They are also not personally liable for the debts,
liabilities, or obligations of the public benefit corporation.
8
Many public benefit corporations have “honorary members” who receive a
form of “membership” recognition in return for their donations or services.
However, honorary members do not have statutory or voting rights, and
should not be confused with statutory members.
FREQUENTLY ASKED QUESTIONS
“Are public benefit corporations subject to the open meeting
requirements under California law?”
No. Legislative bodies, school districts, and governmental entities are
subject to open meeting law requirements. Most public benefit
corporations do not fall into these categories. Yet, some public benefit
corporations may be considered government entities because of
substantial government funding or government agency affiliation. If a
member believes a public benefit corporation is closely affiliated with a
government agency, contact that government agency to ask about the
public’s rights to attend the corporation’s meetings under open meeting
law requirements.
“I am a member of a public benefit corporation. My request to attend
meetings of the board of directors and inspect the corporation’s
financial records has been denied by the directors. What are my
rights? Can I sue?”
A statutory member has certain rights under California law, including the
right to receive annual reports,
9
to inspect copies of corporation records
(but only for purposes reasonably related to the person’s interest as a
member),
10
and to exercise the member’s voting rights set forth in the
corporation’s articles of incorporation or bylaws. Statutory members are
also entitled to notice and have rights to attend membership meetings,
among other rights.
11
These rights can be enforced in court actions.
Generally, members do not have statutory rights to notice of or
attendance at board of directors’ meetings.
12
7
(Corp. Code, § 5342.)
8
(Corp. Code, § 5350, subd. (a).)
9
(Corp. Code, § 6321.)
10
(Corp. Code, §§ 6330, 6333.)
11
(Corp. Code, § 5510 et seq.)
12
(Corp. Code, §§ 5211, 6333.)
Attorney General’s Guide for Charities | Members of Public Benefit Corporations | 66
“I am a statutory member of a public benefit corporation and would
like to use the corporation’s mailing list to send out information. Am
I entitled to use the mailing list?”
Yes, with limitations. A statutory member’s right to obtain a copy of the
corporation’s member list is limited to purposes reasonably related to the
person’s interest as a member.
13
The corporation cannot refuse a
member’s mailing request based on the message’s content, so long as
the message is reasonably related to the member’s rights as a member.
Note that the corporation or other members may petition a court to limit or
restrict the disclosure of the membership list.
14
“The directors of a public benefit corporation wish to abolish the
class of statutory members because the members are threatening to
sue the directors. Is this possible?”
It will be very difficult. Classes of statutory members cannot be abolished
without their consent, and their member rights may not be adversely
affected without proper notice and due process.
15
“Management has informed me my membership is being terminated
because of my criticism of the board and management. Can they do
this?”
Any expulsion, suspension, or termination of a statutory member must be
done in good faith, and in a fair and reasonable manner. The expulsion
procedures must be set forth in the corporation’s articles of incorporation
or bylaws, or copies of such procedures must be sent annually to all the
members. The member must receive 15-days’ prior notice of the
proposed expulsion, suspension, or termination, and must be provided an
opportunity to be heard. Members can legally challenge their expulsion,
suspension, or termination by filing an action within one year after the
date of their removal.
16
“I want to resign as member of a public benefit corporation. What
steps do I need to take?”
A member can resign from membership at any time. It is best to resign by
submitting a written request. Note that resigning a membership does not
relieve the member from outstanding obligations for charges incurred,
such as assessments or membership fees.
17
13
(Corp. Code, §§ 6330, 6338.)
14
(Corp. Code, §§ 6331-6332.)
15
(Corp. Code, § 5342.)
16
(Corp. Code, § 5341.)
17
(Corp. Code, § 5340.)
Attorney General’s Guide for Charities | Members of Public Benefit Corporations | 67
“Our public benefit corporation has not been able to schedule a
membership meeting in the last few months. Can we have our
meeting by video conferencing?”
Unless prohibited by the bylaws, membership meetings can take place
through electronic video screen communications provided they comply
with Corporations Code section 5510, subdivision (f).
| 68
CHAPTER 9 CHARITABLE FUNDRAISING
In This Chapter
Introduction
Who Can Fundraise and Attorney General Registration
Tips for Selecting Fundraising Professionals
Regulatory Requirements for Fundraising Professionals
General Fundraising Requirements
Fundraising Through Bingo and Raffles
Fundraising Through Telephone and Federal Law
Fundraising Through Online Giving Platforms
Frequently Asked Questions
INTRODUCTION
This chapter discusses the legal issues and requirements under
California and federal law governing charitable solicitations, also known
as fundraising, charitable fundraising, and the soliciting of donations.
Popular fundraising methods include:
In-person requests for donations;
Mail solicitations, including e-mails;
Telephone solicitations;
Solicitations through websites, online giving platforms, and mobile
applications;
Newspaper and magazine advertisements;
Ticket sales for special events, such as annual dinners, auctions,
bingo, and raffles;
Use of collection bins;
Vehicle donation programs; and
Sales of products.
Every year in California, individuals donate billions of dollars in response
to charitable fundraising appeals.
WHO CAN FUNDRAISE AND ATTORNEY GENERAL
REGISTRATION
Most charitable organizations (including others deemed charitable trusts
or trustees) fundraise using their own employees or volunteers. When
doing so, the charity and its employees or volunteers are not required to
register as fundraising professionals (as defined below) with the Attorney
General’s Registry of Charitable Trusts (Registry) pursuant to the
Supervision of Trustees and Fundraisers for Charitable Purposes Act
(Gov. Code, § 12580 et seq.). However, charitable organizations are
required to register with the Registry within 30 days of first receiving
Attorney General’s Guide for Charities | Charitable Fundraising | 69
property, as discussed in Chapter 6.
1
Additionally, when a charity’s
fundraising involves a raffle, additional raffle registration with the Registry
is required, as discussed below.
Some charities also hire outside for-profit businesses to fundraise.
Depending on the services provided, these businesses are referred to as
“commercial fundraisers” or “fundraising counsel,” and are also called
“fundraising professionals or” “professional fundraisers.” Commercial
fundraisers are generally individuals or entities paid to solicit donations for
a charity, and/or to receive or control funds as a result of a charitable
solicitation.
2
On the other hand, fundraising counsel are typically
individuals or entities paid to advise on, plan, manage, or prepare
fundraising materials, but do not actually solicit donations, or directly or
indirectly control or receive solicited charitable funds.
3
Attorneys,
investment counselors, and bankers who give professional legal,
investment, or financial advice are not deemed fundraising counsel.
4
As
discussed below, commercial fundraisers and fundraising counsel are
regulated and must register with the Registry. Also, charities that solicit
funds in California may only contract with commercial fundraisers and
fundraising counsel registered with the Registry.
5
Charitable organizations can also partner with “commercial coventurers.”
Commercial coventurers are individuals or entities engaged in trade or
commerce, and represent to the public that the purchase of a product or
service they sell will benefit a charitable organization or will be used for a
charitable purpose.
6
For example, a commercial coventurer may sell food
products as a trade, and represent that 10 percent of the sale proceeds
will benefit a charitable organization. A commercial coventurer must
register with the Registry prior to soliciting any funds in California unless
exempt by Government Code section 12599.2, subdivision (b). To qualify
for exemption, the commercial coventurer must enter into a signed written
contract with the applicable charitable organization before the charitable
representations are made, as well as transfer and provide an accounting
of all funds received from such representations to the charitable
organization as specified in the statute.
7
1
(Gov. Code, § 12585.)
2
(Gov. Code, § 12599, subd. (a).)
3
(Gov. Code, § 12599.1, subd. (a).)
4
(Gov. Code, § 12599.1, subd. (b)(1).)
5
(Gov. Code, § 12599.6, subd. (c).)
6
(Gov. Code, § 12599.2, subd. (a).)
7
(Gov. Code, § 12599.2, subds. (b)-(c).)
Attorney General’s Guide for Charities | Charitable Fundraising | 70
Fundraising
campaigns are
not always
profitable. That is,
many charities
end up owing
more money to
their fundraising
profe
ssionals
than they gained
from the
solicitation
campaigns.
TIPS FOR SELECTING FUNDRAISING PROFESSIONALS
When charitable organizations use commercial fundraisers or fundraising
counsel, the fundraising campaigns are not always profitable. That is,
many charities end up owing more money to their fundraising
professionals than they gained from the solicitation campaigns. These
losses may be due to multiple circumstances, including hidden or
unexpected costs of their fundraising appeals, the lack of core donors
committed to donating, or because charity officials were swayed by a
fundraising professional’s unrealistic projections.
If charities choose to use fundraising professionals, best practices to
protect charities from these possible adverse consequences include the
following:
Perform online research to uncover possible negative reviews or
complaints.
Contact other trusted charities, local community funds, or a
fundraising professional trade association for recommendations
and reviews.
Ask for references and check them carefully.
Ask for proof of registration with the Registry, and confirm the
fundraiser is registered in all states the charity seeks solicitations
from.
Avoid long-term contracts with the fundraising professional.
Ensure the contract covers all key requirements mandated by
law.
8
Verify the commercial fundraiser is bonded
9
and insured.
Ensure fundraising is done honestly and with integrity by regularly
reviewing fundraising materials for accuracy.
10
Learn how frequently potential donors are contacted and what
practices the fundraising professional implements to prevent
solicitations from being deceptive or coercive.
11
Frequent mailers
and phone drives may lead to donor fatigue and the loss of
goodwill towards the charity.
Determine who owns the donor list, and its terms of use. For
example, is the donor list shared with other charities? Donors who
might otherwise be sympathetic to one charity may become
8
(Gov. Code, §§ 12599, subd. (i), 12599.1, subd. (f), 12599.3.)
9
(Gov. Code, § 12599.5.)
10
(E.g., Gov. Code, § 12599.6, subds. (a), (f)(2).)
11
(E.g., Gov. Code, § 12599.6, subds. (a)-(b) & (f)(2).)
Attorney General’s Guide for Charities | Charitable Fundraising | 71
frustrated with constant appeals for donations from other charities
that use the same donor lists.
Find out what practices the fundraising professional implements to
protect donor privacy, and who is responsible for performing
security data breach notification as required by law.
Clarify the fundraising professional’s rights to fees and payment of
campaign expenses. Ask questions and demand answers about
all costs associated with the campaign, and expected financial
results. Follow up and ask for periodic financial updates to ensure
the campaign is benefitting the charity.
Charity officials who oversee the charity’s fundraising should also
research fundraising professionals in the Attorney General’s Professional
Fundraisers Report, which is published yearly and available on the
Attorney General’s Charities website
. The Report details the amounts
commercial fundraisers raised and percentages paid to a charity, among
other information. By providing these details, charities can learn how
effective particular commercial fundraisers have been with other charities,
and what those charities are paying their fundraisers and getting in return.
The report also promotes transparency and provides a way for the public
to evaluate the charities they support. The Attorney General’s
Charities
website also offers a Professional Fundraising Webinar.
REGULATORY REQUIREMENTS FOR FUNDRAISING
PROFESSIONALS
Registration
Commercial fundraisers must register with the Attorney General’s
Registry of Charitable Trusts and pay a registration fee before soliciting,
and/or receiving and controlling any funds, assets, or property as a result
of charitable solicitations in California. Registration, which involves filing
the Registry’s Annual Registration Form (CT-1CF Form
) along with a
cash deposit or bond,
12
must be renewed annually.
13
Fundraising counsel also must register and pay a registration fee prior to
planning, managing, advising, counseling, consulting, or preparing
material for, or with respect to, the solicitation of charitable funds, assets,
or property in California.
14
Fundraising counsel register and renew their
registration annually through filing the Registry’s Annual Registration
Form (CT-3CF Form
).
12
(Gov. Code, § 12599.5.)
13
(Gov. Code, § 12599, subd. (b).)
14
(Gov. Code, § 12599.1, subd. (c).)
Attorney General’s Guide for Charities | Charitable Fundraising | 72
Contract
As previously mentioned, charities must have a written contract with their
fundraising professionals for each solicitation campaign. The contract
must clearly state the fees and compensation to be paid to the fundraising
professional, and other terms including the campaign’s charitable
purpose, each party’s respective obligations, the effective and termination
dates for service, and cancellation rights.
15
View the Registry’s Basic
Components of a Fundraising Representation Agreement for a model
contract.
Notice
Fundraising professionals must file with the Registry a Notice of Intent to
Solicit for Charitable Purposes – either the CT-10CF Form for commercial
fundraisers or the CT-11CF Form for fundraising counsel – at least 10
working days prior to starting each solicitation campaign. However,
notices of solicitations to aid victims of emergency hardship or disasters
must be filed no later than when the campaign begins.
16
Reporting
Commercial fundraisers must also file an Annual Financial Report, on the
Registry’s CT-2CF Form, accounting for all funds collected during the
preceding calendar year. The report requires a detailed, itemized
accounting of solicited charitable funds, assets, or property, including the
following:
Total revenue;
The commercial fundraiser’s fee or commission;
Salaries paid to the commercial fundraiser’s officers and
employees;
Fundraising expenses;
Distributions to the charity or charitable purpose; and
The names and addresses of any director, officer, or employee of
the commercial fundraiser who is a director, officer, or employee
of any charity listed in the report.
17
Filed reports are used to publish the Attorney General’s Professional
Fundraisers Report, available on the Attorney General’s Charities
website. As previously discussed, this report summarizes the results of
charitable solicitation campaigns conducted in California by for-profit
15
(Gov. Code, §§ 12599, subd. (i), 12599.1, subd. (f), 12599.3.)
16
(Gov. Code, §§ 12599, subd. (h), 12599.1, subd. (e).)
17
(Gov. Code, § 12599, subds. (c)-(d).)
Attorney General’s Guide for Charities | Charitable Fundraising | 73
Charitable
solicitations must
disclose all
mate
rial facts,
and unfair or
deceptive
practices that
may create
confusion or
misunderstanding
are
prohibited….Once
funds have been
donated for a
specific purpose,
charities have a
fiduciary duty to
spend those funds
only on that
purpose.
fundraisers. The report also covers thrift store operations and vehicle
donation programs.
Recordkeeping
Commercial fundraisers must keep detailed records for each solicitation
campaign they participate in for at least 10 years and are subject to
inspection upon demand by the Attorney General. They are required to
retain the following:
The date and amount of each contribution received from a
solicitation campaign, and for non-cash contributions, the name
and address of each donor;
The names and addresses of all solicitation personnel; and
Records of all revenue received and expenses incurred in the
course of the solicitation campaign.
18
GENERAL FUNDRAISING REQUIREMENTS
Regardless of whether a charity performs its own fundraising or retains
fundraising professionals, the fundraising efforts must comply with various
California charitable solicitation laws. For instance, charitable
organizations are responsible for, and must control, their fundraising.
19
Along those lines, persons unaffiliated with a charitable organization
cannot represent that donations solicited in California will be given to a
charitable organization unless that organization provided signed written
consent prior to the solicitation.
20
Also, those responsible for a charity’s operations must review the content
of all fundraising materials, approve all written contracts involving
fundraising, and ensure solicitations are not coercive.
21
Funds raised and
fundraising costs must be accurately reported by the charity as well.
Fundraising Disclosures
Similarly, charitable solicitations must disclose all material facts, and
unfair or deceptive practices that may create confusion or
misunderstanding are prohibited.
22
Charities and their agents may not
misrepresent how they use solicited donations. Once funds have been
donated for a specific purpose, charities have a fiduciary duty to spend
18
(Gov. Code, § 12599.7, subd. (a).)
19
(Gov. Code, § 12599.6, subd. (b).)
20
(Gov. Code, § 12599.6, subd. (f) (5), (11).)
21
(Gov. Code, § 12599.6, subd. (b).)
22
(Gov. Code, § 12599.6, subds. (a), (f); see also Bus. & Prof. Code, §
17200 et seq.)
Attorney General’s Guide for Charities | Charitable Fundraising | 74
those funds only on that purpose.
23
If a charitable organization wants
flexibility to use donations for other services not mentioned in its
solicitation materials, including for general program and administrative
purposes, then consider adding language to the solicitation materials that
includes a broader purpose.
Additionally, before engaging in face-to-face solicitations, a charitable
solicitor must exhibit to the prospective donor a card, brochure, or other
printed material that includes the following information:
The name and address of each organization or fund on whose
behalf the money collected will be used for charitable purposes. If
there is no such organization or fund, the manner in which the
money collected will be used for charitable purposes;
If the organization or fund is not tax-exempt under both federal
and state law, then disclose its non-tax-exempt status; and
The percentage of the gift which may be deducted as a charitable
contribution under both federal and state law. If no portion is
deductible, then state “This contribution is not tax deductible.”
24
Also, if the face-to-face solicitation is on behalf of law enforcement, safety
personnel, or veterans, additional requirements apply. For instance, if the
organization’s name includes the term “officer,” “police,” “highway patrol,”
“firefighter,” or the like, the solicitor must disclose the total number of
members in the organization, and the number of members working or
living within the county where the solicitation is made; and if, the
solicitation is for advertising, the statewide circulation of the publication in
which the ad appears.
25
If the organization’s name includes the term
“veteran” or the like, the solicitor must disclose the total number of
members in the organization, and the number of members working or
living within the county where the solicitation is made, unless limited
exceptions apply.
26
The same disclosures for face-to-face charitable solicitations apply to
charitable solicitations made by letter, radio, television, telephone, and
through the Internet (with some exceptions for radio and television). If a
23
(Bus. & Prof. Code, § 17510.8; Holt v. College of Osteopathic
Physicians and Surgeons (1964) 61 Cal.2d 750, 754.)
24
(Bus. & Prof. Code, § 17510.3, subd. (a).)
25
(Bus. & Prof. Code, § 17510.3, subd. (a)(5).)
26
(Bus. & Prof. Code, § 17510.3, subd. (a)(6).)
Attorney General’s Guide for Charities | Charitable Fundraising | 75
donation is made, the card, brochure, or other printed material shall be
mailed or otherwise delivered to the donor.
27
Commercial Fundraiser Disclosures
Additional disclosures are required by commercial fundraisers. Before
each charitable solicitation by a commercial fundraiser, the prospective
donor must be told the solicitation is being conducted by a commercial
fundraiser, and must provide the commercial fundraiser’s name as
registered with the Attorney General.
28
Also, if a prospective donor
requests the percentage of total fundraising expenses of a commercial
fundraiser, the commercial fundraiser must disclose this information. For
instance, if this is requested during a telephone-based solicitation, the
commercial fundraiser shall immediately disclose this, and follow up with
written disclosure within five working days.
29
For additional requirements for commercial fundraisers performing
telephone-based solicitations, see below.
Attorney General Financial Solicitation Reporting
California’s charitable solicitation laws also require charitable
organizations to file annual reports on their financial solicitations with the
Attorney General’s Registry of Charitable Trusts when certain fundraising
thresholds are met. A charity that collects more than 50 percent of its
annual income and more than $1 million in charitable contributions from
donors in California is required to file the Registry’s Annual Financial
Solicitation Report (CT-694 Form).
30
When applicable, this is in addition
to filing the Registry’s Form RRF-1 discussed in Chapter 6, and reporting
by commercial fundraisers for solicitations on behalf of a charity as
discussed above.
City and County Ordinances
Many local jurisdictions in California also require charitable organizations
to obtain a license or permit before soliciting donations from residents and
in public spaces. Registration and financial reporting may be another
condition in allowing charitable solicitations within a jurisdiction. Comply
with applicable local city and county requirements.
27
(Bus. & Prof. Code, § 17510.4.)
28
(Bus. & Prof. Code, § 17510.85.)
29
(Gov. Code, § 12599, subd. (j).)
30
(Bus. & Prof. Code, § 17510.9.)
Attorney General’s Guide for Charities | Charitable Fundraising | 76
FUNDRAISING THROUGH BINGO AND RAFFLES
Generally, private lotteries, such as bingo and raffles, constitute illegal
gambling. However, there are exceptions for tax-exempt organizations,
thus enabling them to raise charitable funds through such methods.
Bingo
Organizations exempt from taxation under Revenue and Taxation Code
sections 23701a, 23701b, 23701d (analogous to exemption under
Internal Revenue Code section 501(c)(3)), 23701e, 23701f, 23701g,
23701k, 23701l, or 23701w, are authorized to raise money from bingo
when the criteria in Penal Code section 326.5 are met. These criteria
include:
For organizations exempt under Revenue and Taxation Code
section 23701d, all profits from the bingo game are used for
charitable purposes (while for other exempt organizations, all
proceeds are used for charitable purposes after certain bingo
game expenses are paid, such as for prizes, bingo equipment,
and security personnel);
The games are played on property used by the organization as an
office, or to perform its tax-exempt purpose;
The games are open to the public, players are physically present,
and are not minors;
The games are conducted by members of the organization, whom
cannot receive salaries;
The games cannot be conducted online;
The value of prizes for each game do not exceed $500 in cash or
kind;
There is no comingling of bingo money with other funds; and
The organization holds an applicable license issued by the city
and/or county where the bingo is played.
31
In addition, charities must comply with any other local bingo licensing
requirements before operating bingo games. Furthermore, charities must
account to local licensing authorities for all bingo proceeds.
Note that charity bingo start-up costs may range from a few hundred
dollars to many thousands of dollars. Proper planning is essential to
ensure profitable, cost-effective, and legal games.
31
(Pen. Code, § 326.5.)
Attorney General’s Guide for Charities | Charitable Fundraising | 77
Raffles
Charities may operate raffles if they are qualified to do business in
California for at least one year before conducting a raffle. Also, they must
be exempt from taxation under any of the following Revenue and
Taxation Code sections: 23701a, 23701b, 23701d, 23701e, 23701f,
23701g, 23701k, 23701l, 23701t, or 23701w. Additional requirements
include the following:
Charities must register the raffle in advance with the Registry, by
filing an Application for Registration (CT-NRP-1 Form
). This
registration is in addition to the registration discussed in Chapter
6;
Ninety percent of the proceeds from selling the raffle tickets must
be used for a charitable purpose or program;
Raffle tickets cannot be sold online, and cannot be conducted
online;
No individual, corporation, or other legal entity may have a
financial interest in the raffle except the eligible organization
conducting or receiving proceeds from the raffle;
Employees of the eligible organization are the only persons who
can receive compensation in connection with the operation of a
raffle; and
Charities must annually report the results of raffles to the Registry,
by filing a Nonprofit Raffle Report (CT-NRP-2 Form); this report is
in addition to any reports filed, as discussed in Chapter 6 or
above.
32
Note that “50/50 raffles,” where 50 percent of the proceeds from selling
tickets are split between the winner and the eligible organization, are
limited to organizations affiliated with certain major league professional
sport teams or associations. Such organizations register and report their
50/50 raffles with the Attorney General’s Bureau of Gambling Control.
33
FUNDRAISING THROUGH TELEPHONE AND FEDERAL
LAW
Commercial fundraisers that solicit charitable solicitations via telephone
also need to comply with the Telemarketing Sales Rule,
34
a federal law
enforced by the Federal Trade Commission, the Attorney General, and
other State Attorneys General.
32
(Pen. Code, § 320.5; Cal. Code Regs., tit. 11, § 410 et seq.)
33
(Pen. Code, § 320.6.)
34
(16 C.F.R. § 310 (2019).)
Attorney General’s Guide for Charities | Charitable Fundraising | 78
Some Telemarketing Sales Rule’s requirements overlap with
requirements under California’s charitable solicitations laws. For instance,
telephone-based commercial fundraisers generally must not make
misrepresentations during solicitations, including misrepresentations
about the charitable organization’s nature, purpose, or tax-exempt status;
the tax deductibility of a donation; how donated funds will be used and the
amount that goes to the charitable organization; and any false affiliation
or sponsorship with any person, charities, other organizations, or
government entities.
35
Furthermore, other Telemarketing Sales Rule provisions reflect similar
requirements under California charitable solicitation laws. For example,
telephone-based commercial fundraisers must maintain certain records
for two years, such as telemarketing scripts and employee records.
36
Yet,
as discussed above, commercial fundraisers must keep certain records
for 10 years under California law.
37
The Telemarketing Sales Rule also
bans threatening or intimidating conduct during solicitations, while
California law prohibits coercive fundraising activities.
38
Ensure
compliance with all aspects of both laws.
Other key provisions of the Telemarketing Sales Rule are as follows:
Before a charitable solicitation is made, commercial fundraisers
must promptly disclose the identity of the charitable organization
they are calling on behalf of, and that the purpose of the call is to
solicit a charitable contribution.
39
Commercial fundraisers must maintain “do not call” lists for each
charity they solicit charitable contributions for, and ensure they do
not call those who have asked not to be called again.
40
Accordingly, they must obtain and update the do not call lists used
by any prior commercial fundraisers a charity has used.
Commercial fundraisers cannot use prerecorded messages in
solicitations, unless made to the charity’s prior donors or
members. And when prerecorded messages are used in those
35
(Gov. Code, §§ 12599, subd. (j), 12599.6, subds. (a), (f)(2), (5), (8) &
(11); 16 C.F.R. § 310.3(a)(4), (d) (2019).)
36
(16 C.F.R. § 310.5 (2019).)
37
(Gov. Code, § 12599.7, subd. (a).)
38
(Gov. Code, § 12599.6, subd. (b); 16 C.F.R. § 310.4(a)(1) (2019).)
39
(16 C.F.R. § 310.4(e) (2019).)
40
(16 C.F.R. § 310.4(b)(iii)(A) (2019).)
Attorney General’s Guide for Charities | Charitable Fundraising | 79
instances, commercial fundraisers must provide an automated
opt-out mechanism and comply with other requirements.
41
Commercial fundraisers cannot call prospective donors before 8
a.m. or after 9 p.m., and perform other acts considered abusive.
42
For more information on the Telemarketing Sales Rule, visit the Federal
Trade Commission’s Complying with the Telemarketing Sales Rule
website.
FUNDRAISING THROUGH ONLINE GIVING PLATFORMS
Charitable giving on the Internet is no longer limited to giving directly to a
charity through its website. For instance, many companies unaffiliated
with a charity let the public perform the following on their websites and
other Internet-based platforms:
Select a charity to receive a donation from a list or database of
charities;
Fundraise for charities; or
Support charities when making purchases on the platform.
For more information on soliciting through charitable fundraising
platforms, review the Attorney General’s
Guide for Online Charitable
Giving. Charities must ensure their fundraising efforts on these platforms
comply with applicable charitable solicitation laws, as referenced in the
General Fundraising Requirements section above.
FREQUENTLY ASKED QUESTIONS
“One of the director’s friends wants to solicit for our charitable
organization in California and get paid a 10 percent commission for
all revenue raised in the solicitation. What steps does the charity
need to take?”
If the friend is controlling the charitable funds, he or she is a commercial
fundraiser and must register with the Registry in advance, through filing
an Annual Registration Form (CT-1CF Form
), and provide a cash deposit
or bond. The charity must also enter into a written contract with the
commercial fundraiser, and certain terms are required to be included in
the contract.
43
Review the Registry’s Basic Components of a Fundraising
Representation Agreement for a model contract.
The commercial fundraiser also needs to file with the Registry a Notice of
Intent To Solicit for Charitable Purposes (CT-10CF Form) before the
41
(16 C.F.R. § 310.4(b)(v)(B) (2019).)
42
(16 C.F.R. § 310.4(c) (2019); see generally 16 C.F.R. § 310.4 (2019).)
43
(Gov. Code, §§ 12599, subd. (i), 12599.3.)
Attorney General’s Guide for Charities | Charitable Fundraising | 80
solicitation campaign commences. At the end of the campaign, the
commercial fundraiser also files an Annual Financial Report (CT-2CF
Form) for the solicitation campaign. Instructions for these forms are
available on the Attorney General’s Professional Fundraiser Forms
website. He or she must also comply with recordkeeping, distribution, and
solicitation disclosure requirements specific to commercial fundraisers.
44
“Another friend has offered to help the charity raise funds by
researching and applying for grants for a fixed payment. This friend
is not an employee of the charity and she will not control the grant
funds as they will be paid directly to the charity. Does this friend
need to register and report as a commercial fundraiser or
fundraising counsel?”
If this friend is paid a flat fee, and not a percentage, and if this friend does
not control directly or indirectly the funds or assets after they are paid to
the charity, he or she is a fundraising counsel unless he or she falls within
one of the exceptions in Government Code section 12599.1, subdivision
(b), which includes a person whose total annual gross compensation for
writing grants does not exceed $25,000.
“One of our directors suggested we raise money for a raffle, and
reported to the board the charity does not need to register for the
raffle if tickets are also given away for free.”
If participants are required to purchase a ticket in order to have a chance
to win a prize, the drawing is subject to the provisions of Penal Code
section 320.5 and related regulations, which require registration and
reporting. However, a raffle is exempt from Penal Code section 320.5,
including registration with the Registry, if all of the following are true:
It involves a general and indiscriminate distribution of the tickets;
The tickets are offered on the same terms and conditions as the
tickets for which a donation is given; and
The scheme does not require any of the participants to pay for a
chance to win.
45
“Another director suggested we raise money through a hosting a
poker tournament. Is this type of gaming permitted for charity?”
Organizations that have conducted business in California for at least
three years and are exempt under Revenue and Taxation Code sections
23701a, 23701b, 23701d, 23701e, 23701f, 23701g, 23701k, 23701l, or
23701w can fundraise through controlled games, such as poker. This
type of fundraising may occur once annually for up to five consecutive
44
(Gov. Code, §§ 12599, subd. (j),12599.6, subd. (e), 12599.7; Bus. &
Prof. Code, § 17510.85.)
45
(Pen. Code § 320.5, subd. (m).)
Attorney General’s Guide for Charities | Charitable Fundraising | 81
hours, and requires registration with and approval by the Attorney
General’s Bureau of Gambling Control. Business and Professions Code
sections 19985 to 19987 must be fully complied with, such as maintaining
detailed fundraising and accounting records, and at least 90 percent of
the fundraiser’s gross revenue going directly to the tax-exempt
organization. The fundraiser may not be operated or conducted online.
Local ordinances may also require registration and other requirements.
“I am the director of a mutual benefit corporation. When the
organization fundraises, should our solicitations disclose that
donations are not tax deductible?”
California law requires anyone, including mutual benefit corporations
, who
solicits assets for charitable purposes to disclose certain information as
part of a solicitation, including the percentage of a donation that may be
deducted as a charitable contribution under both federal and state law. If
no portion is deductible, then the solicitor must state “This contribution is
not tax deductible.”
46
Hence, when a mutual benefit corporation solicits
donations to benefit a particular charitable cause, the mutual benefit
corporation must disclose the above.
47
In practice, this means the mutual
benefit corporation would disclose the contribution is not tax deductible as
mutual benefit corporations typically are not tax-exempt under Internal
Revenue code section 501(c)(3) and Revenue and Taxation Code section
23701d, which permit tax deductions by donors.
Yet, many mutual benefit corporations
are organized for the benefit of
their members, and do not solicit charitable assets. This occurs when
mutual benefit corporations make clear that the purpose of all of their
solicitations is for the sole benefit of their actual active membership. To
make this clear, the mutual benefit corporation should also state that
contributions are not tax deductible. If not, donors could be confused as
to whether their donations are charitable or not, and confusing
solicitations are prohibited.
48
46
(Bus. & Prof. Code, §§ 17510.3, subd. (a), 17510.4.)
47
If not already registered, this would also cause the mutual benefit
corporation to register with and report to the Attorney General. See
Chapter 6.
48
(E.g., Gov. Code, § 12599.6, subd. (f)(2).)
| 82
CHAPTER 10 ATTORNEY GENERAL’S ROLE WITH
CHARITIES
In This Chapter
Overview
Charitable Trusts Section
Scope of Investigations
Investigation Processes
Frequently Asked Questions
OVERVIEW
The Attorney General has primary responsibility for supervising charities
and charitable trusts in California.
1
This involves protecting charitable
assets and donations, and ensuring compliance with trust documents,
articles of incorporation, and other governing documents of a charitable
organization. In doing so, the Attorney General investigates charities,
charitable trusts, and fundraising professionals, and brings enforcement
actions, as discussed below and in Chapter 11 and Chapter 12
.
CHARITABLE TRUSTS SECTION
Within the Department of Justice, the Attorney General has a specialized
unit, the Charitable Trusts Section, which carries out his regulatory and
law enforcement program. The Charitable Trusts Section is comprised of
the Registry of Charitable Trusts and a Legal and Audits Unit.
Registry of Charitable Trusts
The Registry of Charitable Trusts (Registry) is responsible for
administering the registration and reporting requirements set forth in the
Supervision of Trustees and Fundraisers for Charitable Purposes Act
(Gov. Code, § 12580 et seq.) and its regulations. The Registry does this
through its various programs: Initial Registration, Registration Renewals,
Delinquency, Dissolution, Commercial Fundraising, Raffles, Complaints,
and Administrative. The Registry also maintains a searchable database
for the public to research registered charitable organizations and
fundraising professionals.
The registration and reporting requirements the Registry administers,
discussed in Chapter 6, Chapter 9, and Chapter 12, advance and
promote the Attorney General’s oversight over charities and fundraising
professionals. For instance, Registry staff reviews forms filed by charities
and fundraising professionals, and based on this review, makes referrals
to the Legal and Audits Unit. The Registry also receives complaints from
1
(Gov. Code, § 12598, subd. (a).)
Attorney General’s Guide for Charities | Attorney General’s Role with Charities | 83
the public about charity mismanagement, fraud, diversion of assets, and
fundraising or reporting violations. All complaints are reviewed and
researched by Registry staff and referred to the Legal and Audits Unit.
The Registry’s complaint form (Form CT-9
) is available on the Attorney
General’s Charities website or by writing to the Registry and requesting
the form. The Registry of Charitable Trusts address is P.O. Box 903447,
Sacramento, CA 94203-4470. A completed complaint form and any
attachments should also be mailed to this address.
Legal and Audits Unit
The Legal and Audits Unit is comprised of attorneys, investigative
auditors, and legal assistants. The Unit is tasked with several
responsibilities, such as:
Performing investigations, also referenced as audits, to determine
if directors, officers, or trustees are carrying out their authorized
charitable purposes in a lawful manner.
2
This can involve different
areas of concern, as discussed below;
Reviewing and investigating various nonprofit corporate
transactions, discussed below and in Chapter 11;
Bringing enforcement actions to stop violations of the law, recover
charitable assets due to fiscal abuse, and obtain other remedies;
and
Defending and protecting gifts made to unnamed charitable
beneficiaries in a will or trust (see Chapter 12).
SCOPE OF INVESTIGATIONS
The investigations of the Charitable Trusts Section’s Legal and Audits
Unit include the following areas of concern:
Illegal or improper use of charitable funds;
Diversion or loss of charitable assets;
Losses arising out of speculative investments or the failure to
diversify investments leading to insignificant gains;
Excessive compensation, including salaries, pensions, benefits,
insurance, travel, entertainment, legal and other professional fees;
Breaches of fiduciary duties;
Misleading, deceptive, or coercive charitable solicitations and
fundraising practices;
2
(E.g., Corp. Code, § 5250; Gov. Code, §§ 12588, 12598.)
Attorney General’s Guide for Charities | Attorney General’s Role with Charities | 84
Improper or false statements in reports or filings, including the
annual registration reports, renewal reports, and informational
returns filed with the Registry;
Self-dealing transactions;
Improper loans of charity assets;
Amendments to the articles of incorporation of public benefit
corporations;
Dissolutions;
Sales of charitable assets at an unfair price;
Mergers; and
Conversion of a public benefit corporation to for-profit status.
The Legal and Audits Unit is also tasked to review transactions which
require the Attorney General’s consent or notice. For instance, a
California public benefit corporation must obtain prior written consent from
the Attorney General before converting into or merging with a for-profit
corporation or mutual benefit corporation. Likewise, California law
requires a public benefit corporation that operates or controls a “health
facility” to provide written notice to and obtain the written consent of the
Attorney General prior to any sale or transfer of ownership or control of a
material amount of its assets to a for-profit corporation, mutual benefit
corporation, or another public benefit corporation.
3
For more information,
see Chapter 11.
There are also some matters the Legal and Audits Unit typically does not
investigate. For instance, the Legal and Audits Unit does not become
involved in disputes between charities and third parties over contracts or
torts.
Moreover, the Legal and Audits Unit generally does not get involved in
matters pertaining to internal board disputes, contested elections, and
disagreements between directors and members over policies and
procedures. However, this may not be the case if a complaint also raises
concern that there has been a significant loss of charitable assets.
Also, although the Attorney General has oversight over California mutual
benefit corporations,
4
the Legal and Audits Unit may decline to take
action because members, directors, and officers have standing to
address many corporate law violations involving mutual benefit
3
(Corp. Code, §§ 5914-5925.)
4
(Corp. Code, §§ 7240, 8712.)
Attorney General’s Guide for Charities | Attorney General’s Role with Charities | 85
The failure to
respond and
produce records
can lead to the
suspension of
registrati
on and
assessment of
penalties.
corporations. And oftentimes, these types of complaints do not involve a
loss of charitable assets.
INVESTIGATION PROCEDURES
As for what triggers a Charitable Trusts Section investigation, the
Attorney General receives leads or complaints from many sources
including other government agencies, directors, officers, agents, charity
employees, media reports, donors, and consumers or users of services.
However, even without a complaint, an investigation can occur at any
time to ensure compliance with the laws the Charitable Trusts Section
enforces.
When the Charitable Trusts Section receives complaints, they may be
made confidentially or anonymously. To protect both the complainants
and the targets of the complaints, the Attorney General does not discuss
pending investigations, or confirm or deny the existence of complaints
received.
Frequently, the Legal and Audits Unit sends a written request to a charity
or fundraising professional to investigate a complaint. It is important to
fully cooperate with the investigation process. The failure to respond and
produce records can lead to the suspension of registration and
assessment of penalties.
5
A suspended registrant (as well as a delinquent
or a revoked registrant) is not in good standing, and is prohibited from
engaging in conduct for which registration is required – including
solicitations for charitable purposes.
6
During the audit process, Legal and Audits Unit auditors and attorneys
may interview directors, officers, and other interested parties such as
complainants, volunteers, current and past employees, bookkeepers, and
accountants. Records may be subpoenaed from third parties. Donors
may be contacted to confirm the complaint’s allegations, or to investigate
improper solicitation practices. Depending on the investigation’s
complexity and other work, it can take between six months to a few years
to complete the audit.
In many cases, problems identified in the investigation may be resolved
informally. If the parties are unable to reach a satisfactory resolution
informally, or if the violations are more serious, the Attorney General may
bring a formal enforcement action. Enforcement actions may seek the
recovery of charitable funds including lost income and interest, the
5
(Gov. Code, §§ 12591.1, subd. (c), 12598, subd. (e)(1); Cal. Code
Regs., tit. 11, §§ 315, 999.9.)
6
(Cal. Code Regs., tit. 11, § 999.9.4.)
Attorney General’s Guide for Charities | Attorney General’s Role with Charities | 86
assessment of penalties, injunctive relief orders removing directors and
officers or prohibiting specific acts, and a charity’s involuntary dissolution.
The Attorney General can also recover attorney fees, audit expenses,
and expert costs in successful charitable trust enforcement actions.
7
FREQUENTLY ASKED QUESTIONS
“I have information about fiscal mismanagement of a charity by its
directors. Can I submit a complaint to the Attorney General without
revealing my identity?”
Yes. Many complaints about fiscal abuse of charitable assets are
received by the Attorney General from directors, officers, and employees
of charities who fear loss of their position or employment. Anonymous
complaints
are accepted and reviewed by the Attorney General’s
Charitable Trusts Section.
“When the Attorney General’s Charitable Trusts Section conducts
an audit or investigation of a charitable organization, does it make
public the results of the investigation?”
No, investigations and their findings are confidential unless the Attorney
General brings a formal enforcement action.
“I am a member of a homeowners’ association, and am concerned
about gross mismanagement of our funds. Will the Attorney General
investigate this?”
Homeowners’ association are typically mutual benefit corporations that do
not hold charitable assets. Additionally, its directors, officers, and
members have standing to file lawsuits in court. However, the Attorney
General may investigate these complaints as consumer complaints. See
the Attorney General’s
Homeowner Association/Nonprofit Mutual Benefit
Corporations website.
7
(Gov. Code, § 12598, subds. (b)-(c).)
| 87
CHAPTER 11 REVIEWING NONPROFIT
TRANSACTIONS
In This Chapter
Introduction
Voluntary Dissolutions
Mergers
Sale or Transfer of Corporate Assets
Sale or Transfer of Health Facilities
Corporate Conversions
Self-Dealing Transactions
Loans of Corporate Funds
Frequently Asked Questions
INTRODUCTION
California law requires public benefit corporations formed in California –
and in certain cases mutual benefit corporations or religious corporations
– to give written notice to, or obtain written consent from, the Attorney
General before taking certain actions that will have a significant impact on
the corporation and its assets.
1
Examples of these types of actions are
voluntary dissolutions, mergers, and the sale or transfer of a corporation’s
assets. These are generally called index transactions. As discussed in
Chapter 10
, the Attorney General’s Charitable Trusts Section, specifically
its Legal and Audits Unit, reviews and investigates these nonprofit
transactions. These transaction notification and consent requirements are
described in this Chapter, as well as in the Attorney General’s Nonprofit
Transactions Requiring Notice or Attorney General Approval publication.
VOLUNTARY DISSOLUTIONS
The Attorney General must receive notice of the commencement of
voluntary (and involuntary) proceedings to dissolve. This applies to
California public benefit corporations, mutual benefit corporations (if
holding charitable assets), and religious corporations.
2
Moreover, the Attorney General must be involved in providing a written
waiver of the distribution of the corporation’s assets. A dissolution waiver
can be obtained from the Attorney General by submitting a letter signed
1
(See generally Corp. Code, §§ 5110 et seq. [nonprofit public benefit
corporations], 7110 et seq. [nonprofit mutual benefit corporations], 9110
et seq. [nonprofit religious corporations].)
2
(Corp. Code, §§ 6611-6612, 6615-6617, 6716 [nonprofit public benefit
corporations]; 7238, 8611, 8614, 8716 [nonprofit mutual benefit
corporations]; 9680 [nonprofit religious corporations].)
Attorney General’s Guide for Charities | Reviewing Nonprofit Transactions | 88
by an attorney or director for the nonprofit, detailing all charitable
organizations, individuals, or groups who will be receiving the
corporation’s remaining assets. If no assets remain for distribution, that
information should be provided in the letter. The letter should include the
recipient’s full legal name, address, telephone number, corporate number,
and Federal Employer Identification Number, if any. The letter should also
itemize and list all assets to be distributed (by type and value), provide
the proposed date of distribution, and indicate any restriction on the use
of the assets. Also attach the following records to the letter:
A copy of the recipient’s articles of incorporation;
Endorsed filed copy of the dissolving corporation’s articles of
incorporation, including any amendments;
A signed copy of the Certificate of Dissolution prepared for
submission to the Secretary of State; and
Copies of the dissolving corporation’s last three annual
information returns with the IRS. If the dissolving corporation does
not have any informational returns (because it files an e-
Postcard), it should submit financial statements showing receipts
and disbursements, and balance sheets for the three most current
accounting periods.
For more information on dissolutions, see the Attorney General’s
Charities
website.
MERGERS
The Attorney General must receive 20-days’ prior notice before a
nonprofit corporation consummates its merger with another corporation.
For instance, a merger between two public benefit corporations requires
this advance notice. These notice requirements apply to California public
benefit corporations, mutual benefit corporations (if holding charitable
assets), and religious corporations.
3
In addition to notice, the parties may also require the Attorney General’s
written consent for a proposed merger depending on the corporate forms
of the merging parties. For example, if a public benefit corporation seeks
to merge with a mutual benefit corporation, the proposed merger requires
the Attorney General’s prior consent.
4
3
(Corp. Code, §§ 6010 [nonprofit public benefit corporations]; 7238, 8010
[nonprofit mutual benefit corporations]; 9640 [nonprofit religious
corporations]; Cal. Code Regs., tit. 11, § 999.2, subd. (e).)
4
(Corp. Code, §§ 6010, 8010.)
Attorney General’s Guide for Charities | Reviewing Nonprofit Transactions | 89
Any California nonprofit corporation providing notice of a proposed
merger or seeking approval from the Attorney General of a merger should
include the following information:
A letter signed by an attorney or director for the corporation setting
forth a description of the proposed action;
Copies of the merger agreement, board minutes, and resolutions
authorizing the proposed action;
A copy of the corporation’s current financial statement; and
Copies of the current version of the corporation’s articles of
incorporation, and the articles of incorporation of any other
corporation that is a party to the proposed action.
Also, depending on the nature of the charitable assets, the Attorney
General may request an independent appraisal or other evidence that the
merger’s sale price and terms are fair to the corporation.
SALE OR TRANSFER OF CORPORATE ASSETS
The Attorney General must receive 20-days’ notice before a nonprofit
corporation in California sells, leases, conveys, exchanges, transfers, or
otherwise disposes of all or substantially all of its assets. These
requirements apply to California public benefit corporations, mutual
benefit corporations (if holding charitable assets), and religious
corporations.
5
Information provided to the Attorney General should contain sufficient
information to enable the Attorney General to review and evaluate the
transaction. Any California nonprofit corporation seeking to notify the
Attorney General of a sale of assets should submit the following
information:
A letter signed by an attorney or director of the corporation setting
forth a description of the proposed action;
Copies of the asset purchase agreement(s), board minutes, and
resolutions authorizing the proposed action;
A copy of the corporation’s current financial statement; and
Copies of the current version of the corporation’s articles of
incorporation, and the articles of incorporation of any other
corporation that is a party to the proposed action.
5
(Corp. Code, §§ 5913 [nonprofit public benefit corporations]; 7238, 7913
[nonprofit mutual benefit corporations]; 9633 [nonprofit religious
corporations]; see also Cal. Code Regs., tit. 11, §§ 999.1-999.4.)
Attorney General’s Guide for Charities | Reviewing Nonprofit Transactions | 90
Similar to merger applications, depending on the nature of the charitable
assets, the Attorney General may request an independent appraisal or
other evidence that the assets’ sale price and terms are fair to the
corporation.
SALE OR TRANSFER OF HEALTH FACILITIES
Notice to and approval from the Attorney General is required for the sale
of – or transfer of assets or corporate control by – nonprofit corporations
that operate or control healthcare facilities.
6
This requirement applies to
health care facilities that are licensed to provide 24-hour care, such as
hospitals and skilled nursing facilities.
For transactions involving a general acute care hospital with 50 or more
beds, the Attorney General hires a health care expert to prepare a health
care impact statement. This statement addresses whether the agreement
or transaction may create a significant effect on the availability or
accessibility of health care services to the affected community. This
includes an assessment of emergency services, charity care, services to
Medi-Cal and county indigent patients, community benefit programs,
staffing and employees, mitigation measures, and alternatives.
Sometimes auditors or financial analysts are also consulted for economic
evaluations.
The Healthcare Rights & Access Section reviews these transactions, and
make recommendations to the Attorney General.
The Attorney General may deny the transaction, consent to the
transaction, or issue conditional consent. In making the determination, the
Attorney General considers all relevant factors including the following:
Whether the terms and conditions of the agreement or transaction
are fair and reasonable to the nonprofit corporation;
Whether the agreement or transaction will result in inurement to
any private person or entity;
Whether the agreement or transaction is at fair market value;
Whether the market value has been manipulated by the actions of
the parties in a manner that causes the value of the assets to
decrease;
Whether the use of the proceeds is consistent with the charitable
trust on which the assets are held by the health facility, or by the
affiliated nonprofit health system;
6
(Corp. Code, §§ 5914, 5920, 9634; Cal. Code Regs., tit. 11, § 999.5.)
Attorney General’s Guide for Charities | Reviewing Nonprofit Transactions | 91
Whether the agreement or transaction involves or constitutes any
breach of trust;
Whether the Attorney General was provided sufficient information
and data by the nonprofit corporation to adequately evaluate the
transaction, or the effects thereof on the public;
Whether the agreement or transaction may create a significant
effect on the availability or accessibility of health care services to
the affected community;
Whether the agreement or transaction may create a significant
effect on the availability or accessibility of cultural interests
provided by the health facility in the affected community; and
Whether the agreement or transaction is in the public interest.
7
The Attorney General also conducts one or more public meetings related
to the transaction to obtain public input on the transaction.
8
Confidential
comments can also be provided.
The Attorney General’s conditional consent often requires the
continuation of existing levels of charity care, continued operation of
emergency rooms and other essential services, and other conditions to
mitigate or reduce any significant adverse effects on health care services
to the affected community. See the Attorney General’s
Nonprofit Hospital
Transaction Notices website for more information.
CORPORATE CONVERSIONS
A public benefit corporation that has any assets cannot convert its
corporate form to a mutual benefit corporation, business corporation,
social purpose corporation, or cooperative corporation unless written
consent of the Attorney General has been obtained. The Attorney
General requires certification that all charitable assets will be transferred
to another charity as a condition to consent.
9
Likewise, if a mutual benefit
corporation holds charitable assets, notice of the transaction should be
submitted to the Attorney General.
10
Any public benefit corporation or mutual benefit corporation with
charitable assets applying for approval of corporate conversion should
submit the following information to the Attorney General:
7
(Corp. Code, §§ 5917, 5923; Cal. Code Regs., tit. 11, § 999.5, subd. (f).)
8
(Corp. Code, §§ 5916, 5922.)
9
(Corp. Code, § 5813.5; Cal. Code Regs., tit. 11, § 999.2, subd. (d).)
10
(Corp. Code, § 7820; Cal. Code Regs., tit 11, § 999.3, subd. (d). For
religious corporation conversions, see Corp. Code, §§ 9620, 9621.)
Attorney General’s Guide for Charities | Reviewing Nonprofit Transactions | 92
A letter signed by an attorney or director of the corporation setting
forth a description of the proposed action, and the material facts
concerning the proposed action;
A copy of the resolution of the board of directors authorizing the
proposed action, and board meeting minutes reflecting discussion
of the proposed action;
A copy of the corporation’s current financial statement;
Copies of the current version of the corporation’s articles of
incorporation, and copies of the proposed restated articles of
incorporation;
Any independent appraisals of the value of charitable assets (in
complex conversions of a large corporation, the Attorney General
usually requires independent valuation appraisals or other
evidence that the transaction is fair and reasonable to the
corporation); and
A statement of the plan for distribution of the assets of the
charitable assets to a qualified charitable organization.
SELF-DEALING TRANSACTIONS
As referenced in Chapter 7, self-dealing transactions are presumed to be
detrimental to a public benefit corporation (and a mutual benefit
corporation holding charitable assets) unless specific steps are taken by
the board before consummating the transaction to ensure the transaction
is both fair and reasonable to the corporation.
11
One way the
corporation’s board can protect itself from an unfavorable self-dealing
transaction is to submit the transaction to the Attorney General for
approval. The following information should be submitted:
A letter signed on behalf of the corporation by an authorized
director, officer, or agent setting forth a detailed description of the
self-dealing transaction, the extent to which any director has a
material financial interest in the self-dealing transaction, and all
material facts concerning the self-dealing transaction;
A copy of the corporation’s current financial statement;
A copy of the articles of incorporation of the corporation and any
amendments, if not on file with the Attorney General’s Registry of
Charitable Trusts;
A copy of the bylaws of the corporation and any amendments, if
not on file with the Registry of Charitable Trusts;
11
(Corp. Code, §§ 5233, 7238; Cal. Code Regs., tit. 11, §§ 999.2, subd.
(b), 999.3, subd. (b).)
Attorney General’s Guide for Charities | Reviewing Nonprofit Transactions | 93
Copies of all meetings minutes of the board or its committees that
reflect any discussions or evaluations of the self-dealing
transaction; and
If not covered above, a letter signed by the interested director
setting forth a description of the director’s material financial
interest in the self-dealing transaction, listing all material facts
concerning the transaction, and all facts disclosed by the
interested director to the board concerning the transaction.
Furthermore, the Attorney General may require submission of additional
information by the corporation and its directors in order to complete
analysis of the self-dealing transaction.
12
LOANS OF CORPORATE FUNDS
As discussed in Chapter 7, except in limited circumstances, a public
benefit corporation is prohibited from making any loan (of money or
property) or guaranty to any director or officer, unless approved by the
Attorney General. This also applies to a mutual benefit corporation
holding charitable assets.
13
It may be wise for the corporation’s board to protect itself from improper
loans by seeking the Attorney General’s approval before agreeing to any
loan made to a director or officer. In doing so, submit this information to
the Attorney General:
A letter signed on behalf of the corporation by an authorized
director, officer, or agent setting forth a detailed description of the
loan or guaranty, and all material facts concerning the loan or
guaranty;
A copy of the loan or guaranty agreement, note, and related
security agreements;
A copy of the corporation’s current financial statement;
A copy of the articles of incorporation of the corporation and any
amendments, if not on file with the Registry of Charitable Trusts;
A copy of the bylaws of the corporation and any amendments, if
not on file with the Registry of Charitable Trusts;
Copies of all meetings minutes of the board or its committees that
reflect any discussions or evaluations of the loan or guaranty; and
12
(Cal. Code Regs., tit. 11, §§ 999.1, subd. (a), 999.2, subd. (b), 999.3,
subd. (b).)
13
(Corp. Code, §§ 5236, 7238; Cal. Code Regs., tit. 11, §§ 999.2, subd.
(c), 999.3, subd. (c).)
Attorney General’s Guide for Charities | Reviewing Nonprofit Transactions | 94
If not covered above, a letter signed by the interested director
setting forth a description of the director’s material financial
interest in the loan or guaranty, listing all material facts concerning
the transaction, and all facts disclosed by the interested director to
the board concerning the transaction.
Similar to self-dealing transaction applications, the Attorney General may
require submission of additional information by the corporation and its
directors in order to complete an analysis of the loan or guaranty.
14
FREQUENTLY ASKED QUESTIONS
“How long does it take the Attorney General to review a transaction
for approval of a self-dealing transaction or loan?”
The time required to complete a review of a corporation transaction varies
from two weeks to several months, depending on the facts and
complexity. As a matter of policy, the Attorney General attempts to
respond to requests for approval of self-dealing transactions and loans
within 60 days after receipt of all material facts related to the proposed
action.
“The directors of our public benefit corporation, which operates a
school, voted to convert it to a business corporation. Will the
Attorney General approve this conversion?”
The Attorney General’s answer depends on a thorough review of all the
facts. Conversion is permitted by statute if the terms are approved by the
Attorney General and all of the charitable assets of the converting public
benefit corporation (which are irrevocably dedicated to charitable
purposes) are distributed to another charity with a similar charitable
purpose(s). The Attorney General looks at all material facts of a
conversion to determine whether the transaction is fair to the charity. For
instance:
Is the value assigned to the assets of the converting public benefit
corporation the true fair market value of those assets? Is an
independent appraisal needed?
Will the directors of the public benefit corporation become the
directors and shareholders of the new business corporation?
Are there self-dealing issues?
Are the terms of payment for the school’s assets fair and
reasonable?
14
(Cal. Code Regs., tit. 11, §§ 999.2, subd. (c), 999.3, subd. (c).)
Attorney General’s Guide for Charities | Reviewing Nonprofit Transactions | 95
Is the organization that will receive sale proceeds from the
transaction tax-exempt, and does it have a similar charitable
purpose to the converting corporation?
“I am the last director of the charity. No one is interested in helping
me run the charity. I would like to resign or dissolve the charity.
What are my obligations?”
No director may resign where the corporation would then be left without a
duly elected director in charge of its affairs.
15
If the corporation has no
members, it is possible to start the dissolution process with the vote of
one director. The corporation will need to file a certificate of election to
dissolve with the Attorney General, and obtain a written waiver of
objections to the distribution of the corporation’s assets. A certificate of
dissolution will also need to be prepared for filing with the Secretary of
State.
16
See the Attorney General’s Dissolution website. Alternatively, a
petition for dissolution may be filed with a court.
17
15
(Corp. Code § 5226.)
16
(Corp. Code, §§ 6610, subd. (c), 6610.5, 6611, 6615.)
17
(Corp. Code, § 6617.)
| 96
CHAPTER 12 CHARITABLE TRUSTS, RELIGIOUS, &
FOREIGN ENTITIES
In This Chapter
Introduction
Charitable Trusts
Religious Corporations
Foreign Entities
Frequently Asked Questions
INTRODUCTION
This Chapter discusses charitable trusts, nonprofit religious corporations,
non-California entities, and the jurisdictional reach the Attorney General
has over them. As is the case for charities generally, the Attorney
General’s Charitable Trusts Section – comprised of the Registry of
Charitable Trusts and the Legal and Audits Unit – is responsible for
performing and advising the Attorney General on this jurisdictional
oversight.
CHARITABLE TRUSTS
Understanding Charitable Trusts and Fiduciary Duties
A trust is not a separate legal entity, but rather a legal relationship by
which one person or an entity, holds title to property for the benefit of
another person or entity.
1
This legal obligation is traditionally created by a
written instrument, such as a will when the will is probated (called a
“testamentary trust”), or a trust agreement executed by a living person
(called an “inter vivos trust”). A trust that holds assets for a public purpose
is considered a charitable trust. Public purposes include the relief of
poverty; the advancement of knowledge or education; the promotion of
health; governmental or municipal purposes; and other purposes
beneficial to the community.
2
The trustee, the person with legal title to the property, has a fiduciary duty
to always act in the best interests of the trust and its beneficiaries, who
hold equitable title. California case law defines a fiduciary relationship
wherein one party, such as a trustee, “is in duty bound to act with the
1
(Presta v. Tepper (2009) 179 Cal.App.4th 909, 913-914.)
2
(Lynch v. Spilman, (1967) 67 Cal.2d 251, 261; Estate of Breeden (1989)
208 Cal.App.3d 981, 985; Rest.3rd Trusts, § 28. A charitable trust can
also be created through solicitations for charitable funds. See Chapter 1
.)
Attorney General’s Guide for Charities | Charitable Trusts, Religious, & Foreign Entities | 97
T
he Attorney
General
represents the
public
beneficiaries of
charitable trusts,
and not only has
the right, but the
duty, to protect
charitable gifts
and th
e public
beneficiaries’
interests in
charitable trusts.
utmost good faith for the benefit of the other party,” such as a trust’s
beneficiaries.
3
Trustees are held to a high duty of loyalty and care in managing trust
assets, and fulfilling the trust’s purposes; this includes reporting to
beneficiaries.
4
The fiduciary duties of a trustee may be different and
broader than those for directors of public benefit corporations in
California.
5
Attorney General Oversight
The Attorney General has oversight jurisdiction over trusts that are
created or hold assets for charitable purposes. More specifically, the
Attorney General represents the public beneficiaries of charitable trusts,
and not only has the right, but the duty, to protect charitable gifts and the
public beneficiaries’ interests in charitable trusts.
6
For example, this can occur in a court proceeding, where the parties seek
approval from a probate court to modify or terminate a charitable trust.
7
Yet, the court has no jurisdiction to do so unless the Attorney General is a
party to the proceeding.
8
Another example of Attorney General oversight
is when a charitable trust becomes irrevocable. When this occurs,
California law requires a trustee to serve notice on the Attorney General.
9
Other examples are described below.
Probate Notices
Notice must be given to the Attorney General of any probate proceeding
involving a will or trust that makes a charitable bequest or creates a
3
(Wolf v. Superior Court (2003) 107 Cal.App.4th 25, 29-30; Herbert v.
Lankershim (1937) 9 Cal.2d 409, 483.)
4
(Prob. Code, §§ 16000-16069; see also Prob. Code, § 16102; People v.
Larkin (N.D.Cal. 1976), 413 F.Supp. 978, 982 [self-dealing strictly
prohibited].)
5
(Compare the Trust Law [Prob. Code, § 15000 et seq.] with the
Nonprofit Public Benefit Corporation Law [Corp. Code, § 5110 et seq.].)
6
(Gov. Code, §§ 12591, 12598, subd. (a); Estate of Ventura (1963) 217
Cal.App.2d 50, 57; In re Veterans’ Industries, Inc. (1970) 8 Cal.App.3d
902, 919.)
7
(Prob. Code, § 15409.)
8
(Gov. Code, § 12591; see also In re Los Angeles County Pioneer
Society (1953) 40 Cal.2d 852, 861; Estate of Zahn (1971) Cal.App.3d
106, 114.)
9
(Prob. Code, §§ 16061.5-16061.7.)
Attorney General’s Guide for Charities | Charitable Trusts, Religious, & Foreign Entities | 98
charitable trust.
10
See the Attorney General’s Notice to the Attorney
General in Probate Matters publication for more information.
These notices may result in the Attorney General becoming involved in
those proceedings. For instance, the Attorney General may become
involved when a will or trust provides a gift for charitable purposes (e.g.,
to rescue animals), but does not name a specific charitable organization
to receive it (e.g., a local humane society). Also, if the intended charity
listed in a will or trust is no longer in operation, the Attorney General may
assist the court in identifying the appropriate charity or charities to receive
a gift. The Attorney General may also challenge any probate petition
which seeks to diminish the charitable gifts provided in a will or trust. This
includes challenging a will or trust contest, opposing a petition that seeks
to modify a charitable trust, or filing a petition to remove trustees because
of their breach of a fiduciary duty.
Registration Requirements
A charitable trustee must register and report annually to the Attorney
General’s Registry of Charitable Trusts (Registry), unless exempt.
11
To
commence the registration process, the trustee should file the Registry’s
Initial Registration Form (Form CT-1), along with copies of the trust
instrument, IRS Form 1023 or Form 1023-EZ (if submitted to the IRS),
and an IRS determination letter (if received from the IRS). Thereafter the
trustee is required to file annually an Annual Registration Renewal Fee
Report (Form RRF-1), an Annual Treasurer’s Report (Form CT-TR-1) if
revenue is below $50,000, or the applicable IRS annual informational
return (Form 990, Form 990-EZ, or Form 990-PF).
12
See the Attorney
General’s registration guide and Annual Registration Renewal website for
more information.
The registration requirement for charitable trusts commences on the date
of distribution to the charitable interest. If a charitable trust is created from
a trust instrument, and distribution to charity begins immediately, the date
of the trust document is referenced by the Registry as the beginning date
for registration. When the trust is created from a will, the date of
distribution is the date of the court’s final decree of distribution. If the trust
is a charitable remainder trust, in which non-charitable beneficiaries
receive distributions before the charitable beneficiaries, the registration
date is the date the distributions to charity begin. If the distribution is a
one-time gift, usually from a will, no registration is necessary.
10
(Prob. Code, § 17203.)
11
(Gov. Code, § 12585.)
12
(Gov. Code, § 12586.)
Attorney General’s Guide for Charities | Charitable Trusts, Religious, & Foreign Entities | 99
The registration and reporting requirements allow the Attorney General to
evaluate the financial stability of the trust, to understand whether the trust
is paying excessive trustee or administrative fees, and to ensure the trust
is meeting its charitable mission. As is the case for charities generally, the
Attorney General may also audit the trust and hold the trustee personally
liable for any breaches of a fiduciary duty that lead to the misuse or loss
of charitable assets.
RELIGIOUS CORPORATIONS
The Attorney General’s oversight over religious nonprofits is limited by
statutes.
13
For instance, the Attorney General does not have the legal
authority to file derivative actions to correct and recover damages for self-
dealing transactions, improper distributions, loans, or claims of
mismanagement.
14
However, the Attorney General has the authority to engage in criminal
enforcement, may challenge the classification of a corporation as
religious, and may remove a director for fraudulent acts.
15
The Attorney
General also has oversight over solicitation practices.
16
Furthermore, the
Attorney General may seek redress against the corporation’s directors,
officers, employees, and agents who knowingly make, prepare, issue or
publish false financial statements, books, minutes, and other corporate
records.
17
Also, the notification and consent requirements discussed in Chapter 11
for voluntary dissolutions, mergers, asset sales, and the sale or transfer
of health facilities apply to religious corporations. For example, a religious
corporation is required to obtain Attorney General or court approval for
the distribution of its assets upon dissolution.
18
Likewise, religious
nonprofit organizations operating hospitals covered by Corporations Code
sections 5914 and 5920 must obtain the Attorney General’s consent
before selling or transferring those health facilities.
19
Note that the primary responsibility for protecting religious corporations
and their assets rests with the corporations’ board of directors, officers,
and members. Only the religious corporation’s directors, officers, or, in
13
(Corp. Code, § 9230; see generally Corp. Code, § 9110 et seq.)
14
(Corp. Code, §§ 9142, 9230, 9243, subd. (c), 9610.)
15
(Corp. Code, §§ 9223, 9230.)
16
(Corp. Code, § 9230, subd. (d); Gov. Code, § 12599.6; see also Bus. &
Prof. Code, § 17200 et seq.)
17
(Corp. Code, § 9660, subd. (b).)
18
(Corp. Code, § 9680, subds. (a), (e).)
19
(Corp. Code, § 9634.)
Attorney General’s Guide for Charities | Charitable Trusts, Religious, & Foreign Entities | 100
some cases statutory or voting members, may file a civil action to correct,
obtain damages for, or otherwise remedy breaches of trust under which
the corporation’s assets are held.
20
Religious corporations are not required to register or file annual reports
with the Attorney General’s Registry of Charitable Trusts pursuant to the
Supervision of Trustees and Fundraisers for Charitable Purposes Act
(Gov. Code, § 12580 et seq.). Accordingly, religious corporations
classified as religious by the Secretary of State are automatically
exempted from registration and reporting with the Registry. However,
some religious corporations may opt to register and report despite the
exemption to promote transparency to their donors.
For religious organizations outside of California that claim an exemption,
the Registry evaluates these claims on a case-by-case basis. The foreign
religious organization should submit complete exemption documents,
such as a founding document and IRS determination letter. The Registry
typically exempts any foreign religious corporation that holds property for
religious purposes and is operated primarily as a religious organization.
Note that if a religious organization outside of California has a broad
purpose statement and dissolution clause, or the purpose statement
includes a non-religious purpose (e.g., to build schools internationally,
feed the hungry, or shelter the homeless), the organization might not be
exempt as a religious organization.
FOREIGN ENTITIES
The Attorney General has oversight over foreign entities involved in the
nonprofit sector in California. Foreign entities are organizations legally
formed outside of California (i.e., in another state or country), which
includes foreign nonprofit corporations, charitable trustees, and for-profit
fundraising professionals. This oversight covers not only the Supervision
of Trustees and Fundraisers for Charitable Purposes Act, but other
California laws as well.
Registration Requirements
The Supervision of Trustees and Fundraisers for Charitable Purposes
Act’s registration and reporting requirements apply to persons and entities
that conduct business or hold charitable assets in or from California. This
includes foreign corporations, trustees, and fundraising professionals.
The definition of doing business in California includes:
Actively soliciting donations from Californians through local media
advertisements, mail, telephone, text messages, e-mail, websites,
online social media, other Internet-based communications or
20
(Corp. Code, §§ 9142, 9243, 9245, 9610.)
Attorney General’s Guide for Charities | Charitable Trusts, Religious, & Foreign Entities | 101
platforms, or any other direct (not passive) means from outside of
California;
Regularly receiving substantial donations from Californians;
Conducting charitable programs or services in California, or
targeting Californians with programs or services;
Having directors, officers, employees, statutory or voting
members, or authorized agents that perform work from California,
such as holding meetings or assisting with operations;
Maintaining an office or other operations in California; or
Holding property in California, such as real estate, books and
records, or other tangible property.
Actively soliciting California donors means the foreign entity is targeting or
focusing on Californians for solicitations, as opposed to donors
nationwide. For example, actively soliciting California donors includes the
entity having a fundraising campaign purposefully directed at Californians,
soliciting donations through California work campaigns, sending
fundraising e-mails to those the charity knows or reasonably should know
are California residents (including prior donors that move to California),
targeting Californians with online solicitation ads based on location
information, authorizing crowdfunding campaigns that target California
donors, engaging in cause related marketing with companies that actively
sell goods or services to Californians, or having website or social media
content that targets donations from California and other particular states.
It is important for foreign entities to comprehensively and carefully review
their solicitation activities, offline and online, to learn whether the entity is
targeting Californians in the aggregate, and hence required to register in
California.
Yet, even if foreign entities do not actively solicit California donors, they
may regularly receive substantial donations from Californians which
would trigger registration. For instance, the foreign entity should review
how many donations it received from Californians on an annual basis
(when more than one donation comes from one donor, each donation is
counted separately). The total amount of those donations should also be
reviewed. If the foreign entity is receiving about 200 separate donations
on an annual basis from Californians, this clearly constitutes doing
business in California. However, this number can be much smaller
depending on the total donation amounts, how the donations were
solicited, and other contacts the foreign entity has with California.
As is the case for any charitable organization or trustee, the foreign entity
is required to file the Registry’s Initial Registration Form (Form CT-1
)
within 30 days of first receiving property (i.e., a cash donation, property
donation, or other assets with financial value received for charitable
Attorney General’s Guide for Charities | Charitable Trusts, Religious, & Foreign Entities | 102
purposes) as a result of doing business in California.
21
In addition, the
foreign entity should provide a copy of its tax exemption application IRS
Form 1023 or Form 1023-EZ (if submitted to the IRS), a copy of its IRS
determination letter (if received from the IRS), and copies of its founding
documents as follows:
Corporations: certified articles of incorporation (and any
amendments) that are stamped or fully executed by an authorized
public official in the corporation’s home jurisdiction, current
bylaws, and corporate number (if previously obtained from the
California Secretary of State);
Associations: instrument creating the organization (bylaws,
constitution, and/or articles of association); or
Trusts: trust instrument, or will and decree of final distribution.
Thereafter, the foreign entity is required to annually file an Annual
Registration Renewal Fee Report (Form RRF-1
), an Annual Treasurer’s
Report (Form CT-TR-1) if applicable, and the applicable IRS annual
informational return (Form 990, Form 990-EZ, or Form 990-PF).
22
See the
Attorney General’s registration guide and Annual Registration Renewal
website for more information.
For foreign fundraising professionals, see Chapter 9 for registration,
reporting, and other regulatory requirements.
Foreign Nonprofit Corporations
Even though foreign nonprofit corporations have been formed and
incorporated elsewhere, they may be subject to California corporate law
enforced by the Attorney General. This is particularly the case if the
corporation has little to no contact with the jurisdiction in which it was
incorporated, and when vital California interests are at stake, such as
protecting California residents from harmful conduct,
23
including
protecting the assets meant for California beneficiaries.
Also, sections of the Corporations Code involving the California Secretary
of State apply to foreign nonprofit corporations.
24
See Chapter 6 to learn
about applicable filing requirements.
21
(Gov. Code, § 12585.)
22
(Gov. Code, § 12586.)
23
(Lidow v. Superior Court (2012) 206 Cal.App.4th 351, 362; Friese v.
Superior Court (2005) 134 Cal.App.4th 693, 707-708, citing among other
sources, Rest.2d Conf. of Laws, § 309.)
24
(Corp. Code, § 6910.)
Attorney General’s Guide for Charities | Charitable Trusts, Religious, & Foreign Entities | 103
FREQUENTLY ASKED QUESTIONS
“How can I set up a trust?”
Consult an attorney. The terms of the trust can vary widely depending on
the reasons for its creation and what one intends to accomplish with it.
Creation of a trust can have significant tax and other legal implications.
“I want to leave money to charity in my will. Do I have to register?”
No, but the Attorney General must be given notice at various times in
connection with the probate of a will that includes gifts to charity. For
additional information on notice requirements, see the Attorney General’s
Notice to the Attorney General in Probate Matters publication
.
“My private trust agreement includes gifts to a specific charity when
I die. Do I have to register?”
Maybe. Generally, the trustee is not required to register while the
charitable interest is a future or contingent interest – but must register
within 30 days of any charitable interest becoming a present interest.
25
For example, if the trust agreement provides that a gift is made to a
charity upon the death of the trustor, there is no requirement to register
until the trustor dies. In most cases, if it is a one-time gift, the Attorney
General does not require the trustee to register as long as the trustee
provides proof to the Registry the gift has been made. If the charitable
gifts are payable over time, in installments, or at the discretion of the
trustee, then the trustee must register and file annual reports.
If there is any question about whether a trustee must register, trustees
can contact the Registry at (916) 210-6400.
“I am co-trustee with a bank of a charitable trust. Do I have to file a
financial report every year?”
Yes. There is an exemption from the annual reporting requirements for
banks, but it only applies if the bank is the sole trustee.
26
A trustee who is
a co-trustee with the bank must register and annually file the Registry’s
Form RRF-1, and if applicable Form CT-TR-1
and a copy of the trust’s
IRS annual informational return.
“I am a trustee of a charitable trust created to provide financial
assistance to needy students. I would like to change the trust
purpose to fund environmental projects. Can I do this legally?”
Probably not. The law of charitable trusts requires that trusts created for
specific charitable purposes be carried out for those stated purposes. A
25
(Gov. Code, § 12585.)
26
(Gov. Code, § 12586, subd. (a).)
Attorney General’s Guide for Charities | Charitable Trusts, Religious, & Foreign Entities | 104
rule known as the cy près doctrine allows a court to change the charitable
purposes set forth in the trust document when it becomes illegal,
impossible, or impracticable to do so.
27
The burden of proving, illegality,
impossibility, or impracticability is on the trustee.
Notice of all cy près actions by charitable trustees must be given to the
Attorney General. For more information on modifying charitable trusts,
refer to Probate Code section 18506.
“I have a charitable remainder trust. The trust document has private
information about my personal wishes and gifts to family members
that I do not want to be made public. Do I have to provide a copy of
the trust document to the Registry of Charitable Trusts?”
Yes. But in this case, the Registry would treat the document as
confidential, and would not reflect it in the Registry’s searchable database
for the public (or otherwise make it publicly available).
When submitting the document to the Registry, clearly mark it
“confidential,” and include a cover letter requesting the document be
treated as confidential pursuant to Government Code section 12590. This
section states that “The Attorney General shall withhold from public
inspection any instrument so filed whose content is not exclusively for
charitable purposes.”
It is also a good practice to verify the request by confirming the document
was not inadvertently displayed in the Registry’s database
.
“I am a trustee of a split-interest trust. Do I have to register and file a
financial report every year?”
Whether registration is required depends on when the charitable interest
in the trust becomes a present interest. If the trust is a charitable lead
trust, it would need to register right away. If it is a charitable remainder
trust, it would register once the charitable interest becomes a present
interest (i.e., when the charity begins receiving payments from the trust).
To request the confidentiality of the non-charitable interests, follow the
procedures indicated above for a charitable remainder trust that contains
private information.
For annual reporting, file the Registry’s Form RRF-1, and Form CT-TR-1
if applicable. As split-interests trusts are not tax-exempt, the filing
requirement for an IRS annual informational return (Form 990, Form 990-
27
(E.g., In re Loring’s Estate (1946) 29 Cal.2d 423, 436; In re Veterans’
Industries, Inc. (1970) 8 Cal.App.3d 902, 918-919; Estate of Zahn (1971)
Cal.App.3d 106, 114-115.)
Attorney General’s Guide for Charities | Charitable Trusts, Religious, & Foreign Entities | 105
EZ, or Form 990-PF) does not apply. However, one can submit IRS Form
1041 or Form 5227 instead.
“I am a member of a church and am concerned about fiscal
mismanagement of church funds. Will the Attorney General
investigate this?”
When religious corporations are involved, the Attorney General does not
have the legal authority to correct and recover damages for self-dealing
transactions, improper distributions, loans, or claims of
mismanagement.
28
Statutory or voting members of a church, or members
of the church with a reversionary, contractual, or property interest, may
wish to contact a private attorney about possible civil action to correct
such mismanagement.
If there is evidence of serious fraud, diversion of charitable assets, or
concern a crime has been committed, such as theft or embezzlement,
contact the local police department and IRS. A complaint can also be
submitted to the Attorney General on Form CT-9
. Furthermore, the
Attorney General may also investigate complaints involving false
reporting, false or misleading solicitation practices, and diversion of
donations.
29
“We are a foreign nonprofit corporation. We do not operate any
programs directed to California, we have no board meetings in
California, and we own no property in California. Do we need to
register and file annual reports if all we do is solicit donations on
our website without actively seeking out donors who reside in
California?”
If the charity is not actively soliciting California donors and otherwise does
not do business or hold property in California, then registration and
reporting may not be required. By actively soliciting California donors, this
means the charity is targeting or focusing on Californians for solicitations,
as opposed to donors nationwide. For example, actively soliciting
California donors includes a charity having a fundraising campaign
purposefully directed at Californians, sending fundraising e-mails to those
the charity knows or reasonably should know are California residents, or
having website content that targets donations from California and other
particular states. Yet simply having a “donate button” on one of the
foreign charity’s fundraising websites, without more, would not be enough
to trigger charitable registration and reporting in California.
28
(Corp. Code, §§ 9142, 9230, 9243, subd. (c), 9610.)
29
(Corp Code, §§ 9230, subd. (d), 9660, subd. (b); Gov. Code, §
12599.6.)
Attorney General’s Guide for Charities | Charitable Trusts, Religious, & Foreign Entities | 106
Some foreign charities do not initially realize the magnitude of their online
solicitations; yet upon further review, they realize they solicit much more
than through a donate button on their website. For instance, many foreign
charities e-mail prospective donors, have a robust social media presence,
fundraise through online giving portals, and authorize crowdfunding
campaigns, among other solicitation methods. Carefully review in detail
all solicitation activity to assess whether Californians are actively solicited
or not.
Another factor to consider is whether a foreign charity regularly receives
substantial donations, even when the charity does not actively solicit
California donors and otherwise does not do business or hold property in
California. Should this be the case, registration and reporting in California
would be required. For example, if a foreign charity receives about 200
donations annually from Californians, this clearly would trigger registration
and reporting. Yet, this number can be much smaller depending on the
total donation amounts, among other factors.
If there is any question about whether a foreign entity must register,
contact the Registry of Charitable Trusts through its Contacts website
.
| 107
APPENDICES
Resources
Acknowledgements
Attorney General’s Guide for Charities | Resources | 108
RESOURCES
This directory provides contact information for the government agencies a
charity and other nonprofit sector participants in California may frequently
interface with. Links to these agencies’ various forms and publications are
also reflected throughout this guide. Visit the Attorney General’s
Charities
Resources website for additional links and information.
CALIFORNIA ATTORNEY GENERAL
Charitable Trusts Section, 300 South Spring St., Room 1702, Los
Angeles, CA 90013-1230
Charitable Trusts Section, 455 Golden Gate Ave., Suite 11000,
San Francisco, CA 94102-7004
Registry of Charitable Trusts, P.O. Box 903447, Sacramento, CA
94203-4470
Telephone for Registry of Charitable Trusts: (916) 210-6400
Contacts website
for Registry of Charitable Trusts
oag.ca.gov website
Charities website, which contains additional materials for charities
including webinars on registration, renewals, delinquency, and
dissolution
Charities Forms website
Charities Laws and Regulations website
Charities Publications website
Nonprofit Hospital Transaction Notices website
Registry database
Registry online renewal system
CALIFORNIA BOARD OF EQUALIZATION (regarding property taxes)
Telephone for general questions: (800) 400-7115
boe.ca.gov website
Welfare Exemption website
CALIFORNIA DEPARTMENT OF TAX AND FEE ADMINISTRATION
(regarding sales taxes)
Telephone for general questions: (800) 400-7115
cdtfa.ca.gov website
Sales and Use Tax in California website
CALIFORNIA EMPLOYMENT DEVELOPMENT DEPARTMENT
(regarding state payroll taxes)
Telephone for payroll tax assistance: (888) 745-3886
edd.ca.gov website
Payroll Taxes – Forms and Publications website
Attorney General’s Guide for Charities | Resources | 109
CALIFORNIA FRANCHISE TAX BOARD (regarding state income tax
exemption)
Telephone for the agency’s Exempt Organizations Unit: (916) 845-
4171
Charities and Nonprofits website
Forms and Publications Search website
CALIFORNIA SECRETARY OF STATE (regarding legal formation)
Telephone for public contact information: (916) 653-6814
Telephone for Business Entities: (916) 657-5448
Business Programs website
Business Entities website
Name Availability website
IRS (regarding federal income tax exemption)
Telephone for federal tax-exempt organizations: (877) 829-5500
Charities and Nonprofits website
Life Cycle of an Exempt Organization website
Employer ID Numbers website
Forms, Instructions and Publications website
Attorney General’s Guide for Charities | Acknowledgements | 110
ACKNOWLEDGEMENTS
The Attorney General’s Guide for Charities was accomplished with the
help of present and past members of the Charitable Trusts Section: Brian
Armstrong, Steve Bauman, Sonja Berndt, Ed Gerkey, Wendi Horwitz,
Tania Ibanez, Elizabeth Kim, Jonathan Miles, Elyse Rendon, James
Toma, and Joseph Zimring.
The California Department of Justice also wishes to thank the following
law firms and private attorneys for their past assistance in reviewing and
suggesting revisions to portions of this Guide: NEO Law Group, Adler &
Colvin, Law Offices of Louis E. Michelson, professor JoAnne Speers, and
Alyssa Snyder. This acknowledgement does not constitute an
endorsement or approval by the California Department of Justice.
