Legal Question in Business Law in California

Re: Form of Neighborhood Association incorporation

A neighborhood association does not qualify for 501(c)(3) status.

You should use an attorney familiar with the applicable laws governing homeowner�s associations to handle this. Why would a neighborhood association attempt this without qualified legal counsel. The potential liability issues for those �activists� pursuing this without legal counsel alone should give pause.

Feel free to contact us if you want to consider using legal counsel to handle this for your association.

Re: Form of Neighborhood Association incorporation

Well, technically speaking, you don't incorporate as either of these. You incorporate as a California non-profit corporation, then apply to the IRS for recognition as a tax-exempt entity under one or another of the many sub-subsections of IRC 501(c).

California non-profit corporations are of several types, the more common being public benefit corporations, religious corporations, and mutual benefit corporations. The first conclusion you have to reach is which of these is the correct choice. My guess is that your organization is devoted to mutual benefit rather than public purpose, although by careful writing of its Articles of Incorporation and bylaws it might qualify as public benefit. The requirements are technical and the names do not necessarily fully reflect the requirements and limitations of each. Also, there is some overlap in what type of non-profit corporation can be selected for a particular role or function, but you don't have complete latitude.

Once the non-profit corporation exists, it may then take the next step of seeking tax-exempt status from the IRS. "Nonprofit" and "tax-exempt" are TWO DIFFERENT CONCEPTS and being one does not necessarily imply the other!

As mentioned, IRC 501(c) tax-exempt organizations fall into numerous sub-categories. Most books on federal income taxation list and define them. A 501(c)(3) organization is one organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes, or to foster national or international amateur sports. Most neighborhood organizations would not fit the IRS requirements, which are tough, but some probably do. If one of the main purposes is lobbying the city council for zoning changes, for example, you may not qualify. 501(c)(4) sounds more your category, as it includes a 'civic league'. Still, it is tough to meet the requirements, and a 501(c)(4) does not have quite the range of exemptions as a 501(c)(3), and it should also be a 'public benefit' corporation under California law.

The bottom line seems to be that you need a lawyer with significant nonprofit and tax exempt experience; then you review the rules of the agencies from whom you want to receive grants, then form your organization and apply for tax-exempt status accordingly. All these steps and concepts are interrelated. One mistake can botch the whole process, and the IRS does not issue tax exemptions readily--everything must be in order and the lengthy application accurately completed.