California allows a for-profit corporation to convert into a nonprofit public benefit corporation and vice versa provided that certain steps are followed for each respective process.
For-profit corporation to Nonprofit corporation
Generally, a for-profit corporation can convert to a nonprofit public benefit corporation by amending of its articles of incorporation. See Calif. Corp. Code § 911(a). If no shares have been issued, Section 911(b) requires that the amendment of the articles shall:
- Revise the statement of purpose
- Delete the authorization for shares and any other provisions relating to authorized or issued shares, and
- Make such other changes as may be necessary or desired.
The California Corporations Code imposes additional requirements on a corporation that has any shares issued. For example:
- The amendment shall also “provide either for the cancellation of those shares or for the conversion of those shares to memberships of the nonprofit corporation.” Calif. Corp. Code § 911(b)
- The amendment must “be approved by all of the outstanding shares of all classes regardless of limitations or restrictions on the voting rights thereof and an amendment to convert to a cooperative corporation shall be approved by the outstanding shares  of each class regardless of limitations or restrictions on the voting rights thereof.” Calif. Corp. Code § 911(c).
A key element to remember is that a nonprofit public benefit corporation holds its assets in a charitable trust. Therefore, upon this conversion, the assets will be “locked in” for the nonprofit’s charitable purposes only.
Nonprofit corporation to For-profit corporation
Generally, a nonprofit public benefit corporation without assets can convert to a for-profit corporation by amending its articles of incorporation and providing a copy of the amendment to the Attorney General at least 20 days prior to its filing. See Calif. Corp. Code § 5813.5(a), (b). However, a nonprofit public benefit corporation with any assets cannot convert into a for-profit corporation through an amendment to its articles unless the amendment has received prior written consent of the Attorney General. Calif. Corp. Code § 5813.5(b). According to the California Attorney General’s publication, “Nonprofit Transactions Requiring Notice or Attorney General Approval,” certification that all charitable assets of the nonprofit will be transferred to another charity is required for consent. Furthermore, the publication states that applications should include:
- A letter signed by an attorney or a director of the corporation setting forth a description of the proposed action and the material facts concerning the proposed action; authorizing the proposed action, and board meeting minutes reflecting discussion of the proposed action;
- A copy of the corporation’s current financial statement;
- A copy of the corporation’s articles of incorporation (if not already on file with the Registry of Charitable Trusts) and the articles of incorporation of any other corporation that is a party to the proposed action;
- Any independent appraisals of the value of the public benefit corporation that are available. (In complex transactions involving conversion of a large public benefit corporation, the Attorney General usually requires independent valuation appraisals or other evidence that the transaction is fair and reasonable to the public benefit corporation.);
- A statement of the plan for distribution of the assets of the public benefit corporation to a qualified charitable organization, or for payment by the directors or purchasers of the public benefit corporation of the fair market value of the corporation to a qualified charitable organization.
While the Attorney General’s approval is not expressly required before a nonprofit public benefit corporation without assets converts to a for-profit corporation, it is possible for the Attorney General to hold up the conversion by asking for information to verify the nonprofit public benefit corporation does not have assets. Accordingly, to help avoid this delay, it may be beneficial to include a letter from the CEO stating the nonprofit public benefit corporation has no assets in the notice to the Attorney General.
The California Corporations Code is available here.
The California Attorney General’s publication, “Nonprofit Transactions Requiring Notice or Attorney General Approval,” is available here.
Forms and instructions for amending articles of incorporation for both for-profit corporations and nonprofit public benefit corporations are available on the California Secretary of State website.
For more information on charitable trusts, please view a prior post, “Charitable Trust Doctrine.”
– Emily Chan