Legal Question in Business Law in California

Re: California Non Profit Mutual Benefit group

You should consult an attorney experienced in law of nonprofit organizations.

In very brief, you are by default a 501(c)(4) organization, under the Internal Revenue Code. That means that contributions to your group are not deductible but that you do not have to pay income taxes, except on "unrelated trade or business" income.

To insulate your members from personal liability, it is a good idea to incorporate your group with the Corporations Division in California (probably part of the office of Secretary of State). You will still be, by default, a federal 501(c)(4). You mention that you are a "mutual benefit" group. That sort of implies that you have registered as such with the State of California. Such groups are definitely of the 501(c)(4) variety.

If your purpose is charitable (education, helping the poor, etc.), you can apply to IRS for 501(c)(3) status. Then donations to your group will be deductible for the donors as charitable contribuitons.

This is not a simple area of the law, so get legal advice.

Re: California Non Profit Mutual Benefit group

Michele, I'm not even so sure that you are an IRC 501(c)(4); the "mutual benefit" rather than "public benefit" aspect is troublesome and a quick look at the 501(c)(4) rules suggests that being one "by default" probably doesn't happen; as with other tax exemptions under IRC 501(c), the organization must apply and be recognized. If the group is indeed primarily operated for mutual benefit (of its members) rather than public benefit (for the community), the IRS would probably deny a 501(c)(4) application. The application process is somewhat complex and time-consuming as well.

Your question suggests that your group is an unincorporated association. If so, you might want to consider incorporating as a California nonprofit mutual benefit corporation.

Being a nonprofit (association or corporation) under state law is not the same as having IRS recognition as one or another kind of tax-exempt entity. The former is much easier to achieve, and does confer exemption from the state franchise tax. IRS exemption is more difficult to obtain. Being a nonprofit and being a tax-exempt organization (from Federal taxes) are two different concepts.

If you neither have taxable income nor solicit donations that the donors will attempt to write off, you probably have little to gain from any federal 501(c) application or status.

This is an area where you need a specialist if you're planning to make a move - general corporate and business attorneys such as I don't have the close familiarity with the rules that's needed.