How to Form a Mutual Benefit Corporation in California

By Jeffry Olson, J.D.

How to Form a Mutual Benefit Corporation in California

By Jeffry Olson, J.D.

A mutual benefit corporation is a type of nonprofit corporation that forms for the benefit of its members and does not make a profit. The organization can form for any nonprofit purpose other than a charity. Trade associations, business associations, condominium associations, and homeowners associations often form as mutual benefit corporations.

Casually dressed people with varying expressions sitting around wooden conference table with laptops and papers on it

Members of a mutual benefit corporation usually want to advance a common goal, such as improving a business community or establishing a farmers market. A mutual benefit corporation sometimes applies for exemption from federal and state income or franchise taxes. Although the organization does not have a charitable purpose, it benefits from being a nonprofit.

1. File the articles of incorporation.

In California, a mutual benefit corporation must file articles of incorporation with the Secretary of State. The document must include the corporation's name and the name and address of the corporation's resident agent for service of legal process. If the organization intends to apply for tax exempt status, the articles of incorporation must contain a statement specifying the corporation's specific purpose. The incorporator must sign and date the articles of incorporation as well.

Be advised that, because a mutual benefit corporation cannot be a charity, it cannot obtain IRS 501(c)(3) exemption as a charitable organization. However, the organization can seek tax exempt status under other IRS provisions.

2. Establish a board of directors.

After filing articles of incorporation, the mutual benefit corporation must establish a board of directors to govern the organization. The entity must draft bylaws to govern the management of the mutual benefit corporation that contain provisions for decision-making and voting.

3. Draft the bylaws.

At the first meeting of the board of directors, the board adopts the bylaws, elects officers, establishes the accounting year, and takes other action as appropriate. Minutes of this meeting are recorded and maintained.

4. Obtain an employer identification number.

Next, you'll need to obtain an employee identification number, or EIN, for your nonprofit. There is no fee associated with this request, which can be done on the IRS website in just a matter of minutes. If you prefer, you could also request an EIN by mail, fax, or telephone.

5. Open a business bank account.

The nonprofit will need to maintain a business bank account that will house all of the company's funds. You'll want to ensure that you don't commingle any business assets with your own personal funds. When opening your account, you'll likely be asked for corresponding documentation such as company records proving its existence as a nonprofit, as well as the company's EIN.

6. File other required documentation.

The mutual benefit corporation must file all appropriate documentation and can seek tax exempt status, if desired. The business establishes procedures to make all required periodic filings with the Internal Revenue Service and the State of California.

Mutual benefit corporations form for the benefit of their members, who typically have a common purpose or interest. This type of nonprofit corporation is created by filing articles of incorporation with the Secretary of State. After creation, the mutual benefit corporation is governed by its board of directors.

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