California Governor Signs Administrative Dissolution Bill Into Law

Close up view - The end - written on an old typewriter


On September 30, 2015, Governor Brown signed into law Assembly Bill No. 557, making amendments to the laws governing dissolution of California nonprofits. The amendments, which will become effective on January 1, 2016, essentially create two new sets of dissolution procedures for California nonprofits: an automatic dissolution process and a streamlined dissolution process.

Automatic Dissolution Procedures

Under the automatic dissolution procedures of AB 557, provisions are to be added to the California Corporations Code sections applicable to nonprofit public benefit, mutual benefit, and religious corporations, as well as to foreign nonprofit corporations qualified to do business in California, providing for the automatic dissolution or surrender of such corporations under certain circumstances. The bill provides that a nonprofit corporation whose powers have been suspended or forfeited by the Franchise Tax Board for 48 consecutive months or more shall be subject to administrative dissolution or surrender.

Prior to such automatic dissolution, the Franchise Tax Board will mail a notice of the impending dissolution to the nonprofit’s last known address and will also send the name of any nonprofit subject to such dissolution to the Secretary of State and the Attorney General’s Registry of Charitable Trusts. The Secretary of State is then required to provide notice of the planned dissolution of such entities on its website for at least 60 days, as well as instructions for how a nonprofit may submit a written objection to the dissolution. If no written objection is received by the Franchise Tax Board within the 60-day notice period, the nonprofit will be dissolved. If a written objection is received, the nonprofit will have an additional 90 days from the date of the objection to cure any outstanding defects with the Franchise Tax Board. The Franchise Tax Board has the authority to extend this cure period for one additional 90-day period, but no longer.

If a nonprofit is automatically dissolved pursuant to these procedures, the liabilities owed to any creditors of the nonprofit and any liabilities of its Directors will remain in place, and the dissolution will not impact the ability of the Attorney General to enforce any liabilities with respect to the corporation or its Directors as provided by law (e.g., for the diversion or misuse of charitable assets). However, the law does provide a process by which a nonprofit’s liabilities for qualified taxes, interest, and penalties owed to the Franchise Tax Board may be abated upon its automatic dissolution.

The automatic dissolution procedures are intended to assist the Franchise Tax Board in clearing its records of nonprofits that are no longer operating, but have not gone through the formal legal process of dissolving. There is some minimal risk that nonprofits not intending to dissolve may be caught up in these automatic dissolution procedures. However, given that a nonprofit must have been suspended by the Franchise Tax Board for at least 4 consecutive years for the procedures to apply, this risk is likely very low. And it is likely even lower since a California nonprofit that failed to file a required return with the Franchise Tax Board for three consecutive years will have had its California tax-exempt status automatically revoked on the date that its third missed return was due (similar to the procedures for automatic revocation of federal tax exemption).

Streamlined Dissolution Procedures

Given the complexity and expense that can be associated with the current process for dissolving a California nonprofit corporation, a streamlined dissolution process is certainly a welcome development. Unfortunately, however, the procedures set forth in AB 557 are available to only a narrow class of nonprofits and are unlikely to change the dissolution process for the vast majority of California nonprofits seeking to legally dissolve.

The streamlined dissolution procedures set forth in AB 557 provide that a nonprofit corporation that has not issued any memberships may dissolve by having a majority of its Directors sign and verify a certificate of dissolution. Once the certificate of dissolution is filed with the Secretary of State, the corporation is dissolved and it is the responsibility of the Secretary of State to notify the Attorney General’s Registry of Charitable Trusts and the Franchise Tax Board of the corporation’s dissolution.

This is certainly a much simpler dissolution process than is currently available to nonprofits. However, this streamlined process may only be used if the Directors are able to state and verify all of the following:

  • The certificate of dissolution is being filed within 24 months after the corporation’s articles of incorporation were filed;
  • The corporation does not have any outstanding debts or other liabilities, other than tax liabilities, and all existing tax liabilities will be satisfied or be assumed by another individual or entity;
  • A final franchise tax return has been or will be filed with the Franchise Tax Board;
  • The known assets of the corporation remaining after paying any known debts or liabilities have been distributed as required by law; and
  • The corporation was created in error.

These limitations on which corporations may use the streamlined dissolution procedures raise a few questions. For example, what does it mean to certify that a corporation was “created in error”? Is it sufficient that, in retrospect, the Directors feel that incorporating was a mistake, or is this requirement intended to apply only to corporations that were truly mistakenly formed (assuming it is even possible to mistakenly file articles of incorporation)? Also, if a nonprofit corporation is required to distribute all of its assets prior to taking advantage of the streamlined dissolution process, is it required to provide notice to the Attorney General in advance of such distribution of all or substantially all of its assets? If so, this largely defeats any procedural benefits of a streamlined dissolution process and, if not, will there be any oversight to ensure that any assets held by such nonprofits are appropriately distributed to be used in furtherance of permissible exempt purposes? The fact that the streamlined dissolution process is only available to corporations that were formed within the two years prior to their planned dissolution will also make it unavailable to the great majority of California nonprofits seeking to dissolve.

In short, while the automatic and streamlined dissolution procedures set forth in AB 557 are a step in the right direction in terms of dissolving inactive nonprofit corporations and easing the procedural burdens of dissolution, they unfortunately will have little impact on the voluntary dissolution procedures applicable to most California nonprofit corporations.

See the FTB Notice regarding AB 557 here.


California Social Purpose Corporation: An Overview

The social purpose corporation is one of two “hybrid” corporate forms in California that provide alternative business entity options to entrepreneurs who want to combine profitability with broader social and environmental objectives (the other is the benefit corporation). Formerly known as the flexible purpose corporation, the social purpose corporation requires directors to consider socially responsible purposes, in addition to shareholder interests, when making business decisions.

Special Purposes

In addition to engaging in any lawful business purpose, the social purpose corporation must set out one of the following special purposes in its articles of incorporation:

  • One or more charitable or public purpose activities that a nonprofit public benefit corporation is authorized to carry out.
  • The purpose of promoting positive effects of, or minimizing adverse effects of, the social purpose corporation’s activities upon any of the following, provided that the corporation consider the purpose in addition to or together with the financial interests of the shareholders and compliance with legal obligations, and take action consistent with that purpose:
    • The social purpose corporation’s employees, suppliers, customers, and creditors.
    • The community and society.
    • The environment.

Fiduciary Duties

While directors of any corporation must fulfill their fiduciary duties of care and loyalty to the corporation, directors of the social purpose corporation must also consider and give weight to additional factors, as they deem relevant, including the overall prospects of the corporation, the best interests of the corporation and its shareholders, and the purposes of the corporation, as set forth in its articles of incorporation.


Annual Report – The board must produce and send to its shareholders an annual report, containing a management discussion and analysis (the “special purpose MD&A”), along with standard corporate financial statements. The special purpose MD&A must, among other things, identify and discuss (1) material actions taken to achieve the corporation’s special purpose throughout the fiscal year, (2) the impact of such actions, including the causal relationships between the actions and the reported outcomes, and (3) the extent to which those actions achieved the special purpose objectives for the fiscal year. It must be made publicly available on the corporation’s website.

Current Report – In addition to the annual report with the special purpose MD&A, shareholders of a social purpose corporation must receive a special purpose current report within 45 days of any (1) significant expenditure in furtherance of the corporation’s special purposes, (2) withholding of expenditures in furtherance of the corporation’s special purposes, or (3) a determination that a special purpose has been satisfied or should no longer be pursued. Such reports must also be made publicly available on the corporation’s website.

Major Changes

Amendment to Articles– Any amendment that changes the special purposes of the corporation can only be approved with an affirmative vote of at least two-thirds of the outstanding shares of each class, or a greater vote if required by the articles.

Conversion/Merger– Similar to the requirements for an amendment, any reorganization that materially alters or eliminates the corporation’s special purposes requires the vote of at least two thirds of each class of outstanding shares, or more if required by the articles. These supermajority voting rights function as substantial control for even minority shareholder groups.

Derivative Actions – Any shareholders of the social purpose corporation may maintain a derivative lawsuit to enforce the duties required of the directors of the corporation.

Why Would You Form a Social Purpose Corporation?

Instead of a Nonprofit Corporation – If you are seeking investors and equity capital and/or have a plan that is inconsistent with tax exemption under IRC Section 501(c)(3).  In order to establish and maintain tax exemption under 501(c)(3), a nonprofit corporation must be primarily operated for a  charitable or other exempt purpose. If an organization plans to engage in activities that are in direct competition with for-profits, or operate in a manner that is too commercial with respect to pricing, marketing methods, sources of revenue, staffing, and use of surpluses, then a social purpose corporation may be a better choice of form. Additionally, in contrast to a nonprofit corporation, a social purpose corporation is not subject to prohibitions on private inurement or private benefit; self-dealing rules; restrictions on lobbying or political campaign activities; or 501(c)(3)-like public disclosure requirements.

Instead of a Regular (For-profit) Corporation – If you want to market the corporation’s goods and services as a social business, attract capital from social investors (including foundations), and anchor your social mission even after you exit from the ownership. For-profit corporations traditionally are organized to pursue the interests of their shareholders above all other interests. While the business judgment rule may provide broad flexibility for board members to consider other interests, this may not be true in the event of a sale of the corporation. In such event, the Revlon Rule generally provides that the board must approve a sale to the highest bidder without consideration of other factors.

Instead of a Benefit Corporation – If you want more flexibility than is provided by a California benefit corporation. A benefit corporation’s directors must advance a “general public benefit,” and must also consider a number of stakeholders, including shareholders, employees, subsidiaries, suppliers, customers, and the community, as well as the local and global environment. A social purpose corporation must only take into account its shareholders and its special purposes, as stated in its articles of incorporation. Accordingly, board members of a social purpose corporation may have fewer considerations when making decisions and less risk of liability for failure to consider required factors.

Concluding Thoughts

Although the social purpose corporation may be an attractive option for entrepreneurs who want to emphasize social impact as one of the core missions of their business, the adoption rate of the social purpose corporation has been slow. According to the California Secretary of State’s Office, since its introduction in 2012, there have been only 68 flexible purpose corporations and 9 social purpose corporations formed (as of 10/16/15).



Executive Compensation – The Legal Issues

Determining the appropriate amount of compensation to pay an executive is one of the most important decisions a board is asked to make. Board members must balance budgetary concerns with the need to find a qualified candidate. Traditionally, it was not uncommon for nonprofits to expect executives to work for significantly less than they might earn elsewhere because of their passion for the organization’s mission. However, that’s a poor business strategy to rely on for recruiting or retaining the right person for the most pivotal position to the organization’s success.

While, ideally, nonprofit executives should be sufficiently compensated for their valuable work, many nonprofits still tend to be very conservative with paying reasonable compensation to their executives. This may be due in part to limited funds. But for some organizations, lower compensation rates may also be linked to board members’ concerns about staying compliant with tax and charitable trust laws that can impose penalties for approving excessive compensation. In extreme cases, excessive compensation can be held to be a form of private inurement, which can result in revocation of the organization’s tax-exempt status. In other cases, it can be a form of private benefit or excess benefit transaction, which may result in the required return of the excessive amount and penalty taxes imposed on the executive as well as the board members who approved the transaction knowing the compensation to be excessive. Moreover, if the organization is a private foundation, it can be an act of self-dealing, which can also subject the organization to penalty taxes.

Both federal and California law have aimed to regulate nonprofit executive compensation. Under the California Nonprofit Integrity Act of 2004, charitable corporations and unincorporated associations with gross revenues of $2 million or more must have their governing board of directors or authorized board committee review and approve the compensation, including any bonuses, of the (1) CEO or President, and (2) the CFO or Treasurer, to ensure that the payment is “just and reasonable.”

Under federal law, the overall compensation to any employee “may not exceed what is reasonable under all the circumstances.” Treas. Reg. 1.162-7(b)(3). Note that compensation includes salary and benefits, such as insurance, a car, housing allowance, or other fringe benefits that should be included in the calculation of total annual compensation. The following steps should be considered when approving executive compensation:

Create an Independent Committee

An independent body charged with approving compensation may be made up of the full board of directors or a smaller authorized board committee, so long as all members of the body do not have a conflict of interest with respect to the compensation arrangement. This means that no person voting on the compensation may be:

  • a member of the director or employee’s family,
  • in a position to benefit financially if the transaction is approved or disapproved,
  • an employee of the nonprofit who works under the executive’s direction,
  • an employee of the nonprofit whose compensation is subject to approval by the executive, or
  • involved in any financial transaction with the nonprofit that has been, or will be, subject to the executive’s approval.

If the independent body is a board committee, such committee should be delegated with appropriate authority by the board and operate in accordance with the corporation’s bylaws.

Approve Compensation Arrangements as Required

The California Nonprofit Integrity Act requires that the board or an authorized board committee review and approve the compensation arrangement (1) initially upon the hiring of the position; (2) whenever the term of employment, if any, of the officer is renewed or extended; and (3) whenever the officer’s compensation is modified (unless the same modification applies to substantially all employees as may be the case with a cost-of-living increase). California nonprofits should be careful to approve the executive’s compensation as required, including generally whenever a bonus may be awarded.

Use Appropriate Comparability Data

The recommended process for determining the appropriate compensation package for an executive is to conduct a review of what similarly-sized organizations, in the same geographic area, offer their executives (of comparable level). Such comparability data may include, but is not limited to:

  • compensation levels paid by similarly organizations, both taxable and tax-exempt, for equivalent positions in the same community or geographic area;
  • the availability of similar services in the geographic area of the applicable tax-exempt organization;
  • current compensation surveys compiled by independent firms; and
  • actual written offers from similar institutions competing for the services of the executive.

Organizations should make sure that the data they rely on is detailed enough to be an adequate comparison. For example, a national survey of compensation for university presidents that does not delineate criteria such as the number of students served, academic ranking, geographic location, or annual revenues, would not be sufficient data as to the comparability of what a local university should pay its president. However, specific information obtained from a customized compensation survey commissioned from an independent firm, or even a written summary of a telephone survey of three or more unrelated local universities of similar size and ranking, are both appropriate examples of data to rely on as to comparability.

Keep Adequate Documentation

Simply stating that your organization approved a compensation arrangement is not the same as being able to prove it.  The documentation should be in writing and include the following information:

  • the terms of the transaction and the date it was approved;
  • the members of the independent committee who were present when the transaction was debated;
  • the comparability data obtained and relied on by the independent committee and how the data was obtained; and
  • any actions taken by a regular member of the independent committee who had a conflict of interest with respect to the transaction (e.g., abstention).

The documentation should also be timely and accurate. For a decision to be documented properly, records must be prepared before the board or committee’s next meeting or 60 days after the board or committee’s final actions are taken, whichever is later. Records must be reviewed and approved by the independent body as reasonable, accurate, and complete within a reasonable time period. Additionally, nonprofits filing IRS Form 990 must be able to describe the process they use to approve executive compensation arrangements.

Understand the Rebuttable Presumption of Reasonableness Procedures

Generally, if the IRS penalizes a disqualified person (DQP) under the excess benefit transaction rules, such individual bears the burden to prove that the compensation arrangement was reasonable. A DQP may be a director, officer, substantial contributor, family members, or a 35% controlled entity. However, if the organization follows the Rebuttable Presumption of Reasonableness procedures described below with respect to the compensation package, the burden of proof shifts to the IRS to show that the compensation arrangement was excessive. Using the rebuttable presumption of reasonableness procedures to approve compensation arrangements can help a nonprofit ensure that it is paying appropriate compensation to its key employees and mitigate the risks of an IRS charge of excessive compensation and the associated penalty taxes.

The Rebuttable Presumption of Reasonableness procedures consist of three steps:

  1. The compensation arrangements are approved in advance by an authorized body of the organization composed entirely of individuals who do not have a conflict of interest with respect to the compensation arrangement (Treas. Reg. 53.4958-6(a)(1));
  2. The authorized body obtained and relied upon appropriate comparability data prior to making its determination (Treas. Reg. 53.4958-6(a)(2)); and
  3. The authorized body adequately documented the basis for its determination concurrently with making that determination (Treas. Reg. 53.4958-6(a)(3)).

Adopt a Robust Conflict of Interest Policy

Adopting and following the procedures of a conflict of interest policy can also help eliminate improper private benefits (e.g., excessive compensation) flowing to interested individuals before they occur. A good policy can help ensure that when actual or potential conflicts of interest arise, the organization has a procedure in place under which the interested individual can advise the board about all the relevant facts concerning the conflict, and the board can appropriately act and determine whether it is necessary to excuse such interested individual from voting. A good policy will also describe the process of recording such discussions in the board or committee minutes so that there is accurate documentation of the proceedings. Note that the IRS Form 990 asks whether the organization has a conflict of interest policy, and also about the procedures used by the organization to handle conflicts.


Overall, nonprofit organizations should not be deterred from considering paying their highly skilled and highly valued executives on the higher end of the salary range for similar positions in similar organizations. However, an organization should be able to justify that the compensation is fair and reasonable under the circumstances, and that the organization adequately documented the approval of such compensation package.


Proposed Regulations Threaten California Nonprofits – Comments due July 13


Your Comment Counts words on a red suggestion box to illustrate the value and importance of feedback, opinions, suggestions and brainstorming ideas


In a previous post, we warned our readers about the initial draft of these proposed regulations from the Office of the Attorney General of the State of California:

The proposed regulations, if adopted, will mean such charities will need to suspend activities and fundraising if they are delinquent in their registration, and if suspended or revoked, their board members will be subject to personal liability and their assets subject to forced divestiture.

A revised version of the proposed regulations dated June 25, 2015 failed to adequately address the three provision we believe threaten California’s nonprofit sector and all individuals served by California nonprofits. You have until 5 p.m. on Monday, July 13, to send your comments to Joseph N. Zimring, Deputy Attorney General at

According to this article by Jeffrey Davine of Mitchell Silberberg & Knupp LLP:

The California Department of Justice, however, estimates that there are 52,000 charities within California that have not complied with these requirements. Moreover, it is estimated that there are at least 130,000 additional non-California charities operating in the State that have not complied with these requirements.

Assuming such statistics are accurate, if the proposed regulations are promulgated, over 180,000 charities in California will be required to stop operation until they have fixed their registration issues (which may take several months). 180,000! What would be the impact on the people relying on the services those charities are providing? What is the likelihood that this rule will most impact those most in need, particularly in rural and poor areas? And what message is the Attorney General sending by stating that if those 180,000 charities don’t stop operating, the Attorney General can hold the board members personally liable and take away all of the charity’s assets?

§ 999.9.3. Disclosure and Restrictions on Use of Charitable Assets After Suspension or Revocation of Registration.

(b) A registrant that has been suspended or revoked may not distribute or expend any charitable assets or assets subject to a charitable trust without the written approval of the Attorney General. Members of the board of directors or any person directly involved in distributing or expending charitable assets may be held personally liable in a civil action brought by the Attorney General for any charitable assets or assets subject to a charitable trust that are distributed or expended in violation of this regulation.

Why It’s a Problem:  A charitable nonprofit that is late filing a single form with a California agency may be suspended. If a nonprofit is suspended (whether it is aware of the suspension or not) but still operates (which generally means it’s expending charitable assets), the Attorney General has the power to sue the board members. This is the true even if the nonprofit is expending funds to pay its employees, live up to its contractual operations, or deliver urgent services to its beneficiaries. This will have a chilling effect on board recruitment and on the desire for nonprofits to operate in California.

(c) The Attorney General may direct a registrant whose registration has been suspended or revoked to distribute some or all of its charitable assets or assets subject to a charitable trust to another charitable organization or into a blocked bank account.

Why It’s a Problem:  If a charitable nonprofit has been suspended (e.g., for one late filing), that fact alone gives the Attorney General power to force the nonprofit to give all of its assets to another nonprofit.

§ 999.9.1. Automatic Suspension.

(d) A registration that has been continuously suspended for one year pursuant to this regulation shall be automatically revoked.

Why It’s a Problem:  A charitable nonprofit that is unaware of its suspended status (possible due to a change in mailing address, a common scenario for all-volunteer organizations) may have its registration revoked. While the revised version of the proposed regulations included a 30-day notice period to allow a noncompliant charity to cure the violation causing an automatic suspension, this notice will not be helpful if the organization’s leaders do not receive it.

Why the AG Wants These Regulations

I get why the Attorney General wants to propose regulations with teeth that forces the tens of thousands of noncompliant charities operating in California to comply with the registration requirements. I agree this is a major problem that needs to be addressed. But the draft regulations provide an inelegant solution, leaving it up to the Office of the Attorney General to pick and choose which charities and board members will be the examples facing the stiff consequences with little guidance. Why not limit the draconian consequences to more specific situations and eliminate the possibility of imposing such consequences upon an organization that missed a single filing resulting in suspension.

You can read more about the proposed regulations on the Wexler Law Group post, Second Bite at the Apple. We encourage you to also check out his very detailed comments.

Endorse Our Letter of Concerns

Please consider adding your endorsements to the Letter to Attorney General detailing our concerns with the proposed regulations. Joining us as signatories to the letter are  Barbara Rosen of Evans Rosen LLP; the California Association of Nonprofits; the National Council of Nonprofits, the Nonprofits Insurance Alliance of California (NIAC) and NIAC’s Founder/President/CEO Pamela E. Davis, and Independent Sector. The letter has also been endorsed by the United Ways of California; the Alliance for Justice; and Anne Wallestad, President & CEO, BoardSource. Even thought the comment period has passed, your endorsements will add weight to our efforts to protect charities operating in California and the millions of people they serve. Please contact us or leave your endorsement in the comments section below. Thank you for your advocacy!



California Charity Registration: Form 990 Schedule B Disclosure

Compliance mind map, business concept

California requires a charity subject to its registration requirements to submit its IRS Form 990 including Schedule B (Schedule of Contributors) with its annual registrations to the Registry of Charitable Trusts. The list of major contributors, which remains confidential pursuant to current policy and proposed regulations*, may not be redacted from the filing.

While the right of the California Attorney General to require the unredacted Schedule of Contributors has been challenged by organizations, last month, the U.S. Court of Appeals for the Ninth Circuit affirmed a lower court’s decision to deny a preliminary injunction against the Attorney General. Notwithstanding this decision, the Ninth Circuit has yet to issue an order to compel the appellate, the Center for Competitive Politics (CCP), to file the unredacted Schedule with the Registry of Charitable Trusts. On May 15, 2015, CCP filed an emergency appeal with the U.S. Supreme Court, but it was denied by Justice Anthony Kennedy. CCP intends to file a full appeal this summer.

* Proposed Regulation 301.1


Donor information treated as confidential by the Internal Revenue Service pursuant to Internal Revenue Code section 6104(d)(3)(A) shall be treated as confidential by the Attorney General and shall not be disclosed except as follows:
1.  In a court or administrative proceeding brought pursuant to the Attorney General’s charitable trust enforcement responsibilities; or
2.  In response to a court order, search warrant, or administrative subpoena.

Read more …

California Attorney General Can Demand Full IRS Forms From Charity – Forbes

Court Affirms California Attorney General’s Demand for Confidential Donor List – Seyfarth Shaw LLP

No protection — yet — for group’s donor privacy – SCOTUSblog


Nonprofit Law: Hot Topics – CEB / CLE

CEB Hot TopicsOn February 26, 2015, Erin and I recorded a webinar for Continuing Education of the Bar – California on Nonprofit Law: Hot Topics. It’s an intermediate-level one-hour CLE program available here.

Providing counsel to nonprofits requires knowledge and understanding of corporate and tax laws that are often not intuitive or easy to research, and that often differ from the laws applicable to for-profits. In this program, we’ll explore considerations in the nonprofit formation process, potential alternatives to formation of a new nonprofit entity, the legal implications of nonprofits engaging in commercial activities and for-profit social enterprises pursuing charitable goals, common governance mistakes, and recent changes in the laws impacting nonprofits. We will use relevant examples to illustrate how these concepts might apply to your clients.

Program Highlights:

  • New Form 1023-EZ, the short-form federal exemption application
  • Fiscal sponsorship, an often appropriate alternative to a startup
  • Recent changes to the Nonprofit Corporations Law affecting governance and bylaws
  • Earned revenues and application of the unrelated business income tax
  • Prohibited private benefits and application to nonprofits affiliated with businesses
  • Introduction to alternative entities, including the benefit corporation and social purpose corporation

CEB: Nonprofit Law: Hot Topics – Livecast on Thu, 2/26, at noon

Hot Topics Letterpress

Erin and I will be presenting a program on Nonprofit Law: Hot Topics for Continuing Education of the Bar (CEB) – State Bar of California livecast on Thursday, February 26 from noon to 1 p.m. The following description of our program is on the CEB website.

Providing counsel to nonprofits requires knowledge and understanding of corporate and tax laws that are often not intuitive or easy to research, and that often differ from the laws applicable to for-profits. In this program, we’ll explore considerations in the nonprofit formation process, potential alternatives to formation of a new nonprofit entity, the legal implications of nonprofits engaging in commercial activities and for-profit social enterprises pursuing charitable goals, common governance mistakes, and recent changes in the laws impacting nonprofits. We will use relevant examples to illustrate how these concepts might apply to your clients.

Program Highlights:

  • New Form 1023-EZ, the short-form federal exemption application
  • Fiscal sponsorship, an often appropriate alternative to a startup
  • Recent changes to the Nonprofit Corporations Law affecting governance and bylaws
  • Earned revenues and application of the unrelated business income tax
  • Prohibited private benefits and application to nonprofits affiliated with businesses
  • Introduction to alternative entities, including the benefit corporation and social purpose corporation

Emergency Powers for California Nonprofit Corporations

Emergency pointer icon on white backgroundUnder California law, specifically after the approval of Assembly Bill 491 in 2013, corporations including nonprofit public benefit, mutual benefit, and religious corporations are permitted to conduct certain corporate activities during an emergency. Types of emergencies include a natural catastrophe, an enemy attack, an act of terrorism, or a state of emergency declared by the Governor. Previously, a nonprofit board might be unable to act, or might risk a challenge if it took action during an emergency without the approval of the minimum number of required directors.

Corporations may now conduct ordinary business operations and affairs in anticipation of or during an emergency, and may even adopt bylaws to manage and conduct such affairs, only effective in such an emergency. Furthermore, any action taken in good faith by a corporate director, officer, employee, or agent during that time may not be used to impose liability on that individual or the board.

The law also permits the directors to:

  • Relax notice requirements for directors to “any practicable manner under the circumstances”;
  • Modify lines of succession to accommodate the incapacity of any director, officer, employee, or agent resulting from the emergency;
  • Relocate the principal office, designate alternative principal offices or regional offices, or authorize the officers to do so; and
  • Deem that one or more officers of the corporation present at a board meeting is a director, in order of rank and within the same rank in order of seniority, as necessary to achieve a quorum for that meeting.

Note, though, that the board may not take any action that requires the vote of members or is not in the corporation’s ordinary course of business, unless the required vote of the members was obtained before the emergency.


Simplified California Exemption Process for Non-Charitable Nonprofits

Simplicity concept.

Effective January 1, 2014, Assembly Bill 1173 simplified the process for applying for California tax exemption by certain organizations that have a federal exemption determination letter. Non-charitable nonprofits, specifically those recognized by the IRS as exempt under Internal Revenue Code (IRC) Section 501(c)(4), (5), (6), and (7), are now permitted to file the short Form 3500A, previously used only by 501(c)(3) organizations. Form 3500A is an abbreviated two-pages, in comparison to the rather lengthy Form 3500 previously required.

Note that while it’s possible for 501(c)(4), (5), (6), or (7) organizations – social welfare organizations, labor organizations, business leagues (including trade and professional associations), and social clubs – to self-declare themselves as tax-exempt for federal income tax purposes without filing an application with the IRS, such organizations will remain taxable for California income/franchise tax purposes unless they obtain recognition of exemption from the Franchise Tax Board.

Read more about the Form 3500A here, and on the Franchise Tax Board website, here.


Best of the Nonprofit Law Blog 2014

Best of 2014 - The year in reviewHere are some selected highlights from NEO Law Group over the past year that we hope you’ll find helpful. 2014 was also highlighted by an addition to Erin’s family and Michele’s graduation and passage of the bar exam! Amazing year for all of us.

Blog Posts


What Issues Should a Nonprofit Board Consider Annually?

Executive Succession: 10 Tips for Boards

Executive Committees: Why You Should Limit Their Authority


Nonprofit Advocacy is More Than Lobbying

Charities and Issue Advocacy: Doing it Right – Part One

5 Things Nonprofits Should Know About Ballot Measure Advocacy in California

Fiscal Sponsorship

Fiscal Sponsor Due Diligence

Fiscal Sponsorship: A Valuable Option for Grantmakers and Grantees

Arts Projects: Charitable or Not?

Proposed Laws

12 Things Nonprofits Should Know About Proposed Tax Reform

California Bill to Strengthen Enforcement of Charity Registration and Reporting

Proposed Rules Affecting California Charities – Comment Period Ends Today!

UBIT / Social Enterprises

UBIT: Advertisements vs. Qualified Sponsorship Payments

Nonprofit Limited Liability Company

Nonprofit Crowdfunding Risks


Nonprofit Laws for Human Resources Managers to Be Aware Of

Retroactive Reinstatement Procedures: Simplified

Dissolution and Transfer of Remaining Assets: An Alternative to Merger


Fair or Foul: A Review of Federal Tax Laws Governing Unfair Competition, The Nonprofit Quarterly (2014)

12 Reasons Why You Should Gracefully Resign from a Nonprofit Board, The Nonprofit Quarterly (2014)

10 Issues To Address In Your Nonprofit’s Social Media Policy, The Nonprofit Times (2014)


Tips on Starting a Nonprofit: Initial Board of Directors

Tips on Starting a Nonprofit: Fundraising Before Exemption

Tips on Starting a Nonprofit: Initial Bylaws

Nonprofit Radio

Advocacy, Net Neutrality, & The Bright Lines Project

Your Board’s Role in Executive Hiring


Speaking Engagements


Profit for Good: How Social Enterprise Policy Affects You, Independent Sector Public Policy Action Institute

Hot Topics in Nonprofit Law, CalNonprofits Policy Convention

Small Charities – Problems and Solutions, American Bar Association, Tax Section Mid-Year Meeting


Earned Income 101 for Nonprofits, Lawline

Understanding UBIT: What Does It Mean for Your Shared Space? Nonprofit Centers Network

Navigating Legal and Ethical Issues, New Grantmakers Institute, Northern California Grantmakers