Nonprofit organizations can be in the form of a corporation, an unincorporated association, or a trust. While the law enables nonprofit organizations to generate a profit, the law does restrict such an organization from distributing profits to its members, officers or directors. For example, hospitals are a common form of nonprofit organizations that generate substantial profits. At the Law Offices of Salar Atrizadeh, we are skilled in the practice of both litigation and transactional corporate law. We guide our clients throughout the various legal considerations that arise in the formation and operation of a nonprofit organization.
In California, nonprofit organizations are typically organized as public benefit corporations, mutual benefit corporations, or religious corporations. The California Corporations Code §§ 5110 et seq., govern public benefit corporations. This form of nonprofit organization is designed for charitable purposes. The California Corporations Code §§ 7110 et seq., govern mutual benefit corporations. This form of nonprofit organization is similar to public benefit corporations, except that a mutual benefit corporation cannot dedicate all of its assets to a charitable purpose. For instance, pursuant to California Corporations Code § 7411, a mutual benefit corporation may distribute its assets to the corporate members, but only upon dissolution or to retrieve membership. California Corporations Code §§ 9110 et seq., govern religious corporations. This type of nonprofit organization must form and operate entirely for religious purposes. For instance, a religious corporation can form to operate a religious cemetery.
In 1962, the District of Columbia adopted the Model Nonprofit Corporation Act (MNCA), which governs nonprofit organizations in the district today. The MNCA is codified under the District of Columbia Code §§ 29-301.01 to 29-321.01. According to this law, nonprofit corporations registered within that district constitute organizations that do not distribute any part of their income to members, directors, or officers. However, the MNCA also provides that nonprofit organizations may reasonably compensate members, directors, or officers for their services if the compensatory funds are not held for charitable purposes. Pursuant to D.C. Code § 29-327, a nonprofit organization cannot issue stocks, pay dividends, or provide loans to corporate directors or officers.
Similar to for-profit corporations, nonprofit organizations must designate an agent for service of process. A nonprofit organization can sue in its corporate name, but is also liable for suit as a corporation. Nonprofit organizations are subject to tort liability, just as for-profit corporations. Indeed, under the legal doctrine of respondeat superior, employees may implicate employers within nonprofit organizations to legal liability if the employees commit a tort in the course and scope of their employment. In light of the voracity of legal questions that surround nonprofit organizations, such business entities should seek legal counsel in order to gain necessary and pertinent guidance on the legal standards that apply to daily operations and foundational considerations.