California Nonprofit Benefit Corporation Law 5056: Requirements, Formation & Tax Status

Executive Summary

California Corporations Code Section 5056 defines "Member" as any person who has the right to vote for the election of directors or on major corporate decisions pursuant to a nonprofit corporation's articles or bylaws. This statutory definition distinguishes voting members from non-voting supporters, donors, or honorary members, creating an important governance choice for nonprofit organizations.

Understanding Section 5056 is crucial because it determines whether a nonprofit operates with a membership structure (where voting members elect directors) or as a memberless corporation (where directors are self-perpetuating).

Beyond the membership definition, California law establishes comprehensive formation requirements, governance structures, and tax obligations for nonprofit benefit corporations.

Key requirements include filing articles of incorporation with specific language about membership structure, establishing bylaws, obtaining federal and state tax exemptions, and maintaining ongoing compliance with both California and federal regulations. The formation process typically involves multiple steps including name reservation, document preparation, IRS exemption applications, and state registrations, with the entire process generally taking 3-6 months to complete.

Table of Contents

1. Legal Framework in California
2. Understanding Section 5056: Member vs. Memberless Nonprofits
3. Formation Requirements
4. Articles of Incorporation Requirements
5. Governance and Bylaws
6. Tax Exemption Process
7. Ongoing Compliance Obligations
8. Comparison: Membership vs Memberless Corporations
9. Common Formation Mistakes

Legal Framework in California

California's nonprofit corporation law is contained in the Nonprofit Corporation Law, Part 2 of Division 2 of the California Corporations Code (beginning with Section 5000). This comprehensive framework establishes the legal structure for three distinct types of nonprofit corporations: public benefit corporations, mutual benefit corporations, and religious corporations, each serving different purposes within the nonprofit sector [1].

Within this framework, Section 5056 plays a specific but crucial role by defining "Member" as any person who, pursuant to a specific provision of a corporation's articles or bylaws, has the right to vote for the election of a director or directors, or on a disposition of all or substantially all of the assets of the corporation [1]. This statutory definition creates the legal distinction between voting members (who possess governance rights) and other supporters, donors, or participants who lack formal voting authority.

California's nonprofit corporation law operates within a broader regulatory framework that includes both state and federal requirements. The California Attorney General's Office maintains oversight authority over charitable corporations, while the Internal Revenue Service regulates federal tax exemption status. This dual regulatory structure creates compliance obligations at multiple levels of government, requiring organizations to navigate both state corporate law and federal tax regulations simultaneously.

Understanding Section 5056: Member vs. Memberless Nonprofits

Section 5056 of the California Corporations Code provides the statutory definition of "Member" that governs nonprofit corporate governance structures. The statute defines a member as any person who, pursuant to a specific provision of a corporation's articles or bylaws, has membership rights including the right to vote for the election of directors or on major corporate decisions such as dissolution or asset disposition [1].

The Statutory Member Definition

Under Section 5056, a "Member" must possess specific voting rights granted through the corporation's governing documents. This creates a clear legal distinction between:

Statutory Voting Members:

• Possess rights to elect board of directors
• Vote on amendments to articles or bylaws
• Approve major corporate transactions (mergers, asset sales, dissolution)
• Have inspection rights to corporate records
• Receive notice of and may attend membership meetings

Non-Statutory Participants:

• Donors, supporters, and contributors
• Honorary members without voting rights
• Program participants or beneficiaries
• Volunteers and advisory board members
• Newsletter subscribers or event attendees

Organizations that use terms like "member" for non-voting supporters do not create statutory members under Section 5056 unless their articles or bylaws specifically grant voting rights [2].

Memberless Corporation Structure

Many California nonprofit public benefit corporations choose to operate as memberless corporations, where the board of directors is self-perpetuating rather than elected by members. This structure offers several governance advantages:

Benefits of Memberless Structure:

• Simplified governance without membership meeting requirements
• Faster decision-making without member approval processes
• Reduced administrative burden and meeting costs
• Greater board stability and continuity
• Protection from hostile takeover or mission drift through member voting

Memberless corporations include language in their articles of incorporation stating: "This corporation shall have no members within the meaning of Section 5056 of the California Corporations Code" [3]. This provision explicitly invokes Section 5056 to clarify the governance structure.

Membership Corporation Structure

Alternatively, organizations may choose to establish a formal membership structure where statutory members elect directors and vote on major decisions. This structure can serve important organizational purposes:

Benefits of Membership Structure:

• Democratic governance reflecting stakeholder interests
• Community engagement and organizational accountability
• Broader base of organizational support and legitimacy
• Alignment with organizational mission emphasizing participation
• Required structure for certain types of organizations (trade associations, homeowners associations)

Membership corporations must establish clear procedures in their bylaws for member elections, meetings, voting, and membership termination. The California Attorney General's Office requires membership corporations to maintain accurate membership records and follow proper notice procedures for member meetings [2].

Articles of Incorporation Provisions

The choice between membership and memberless structure must be explicitly addressed in the articles of incorporation. Common provisions include:

For Memberless Corporations: "This corporation shall have no members within the meaning of Section 5056 of the California Corporations Code. Any action which would otherwise require approval by a majority of all members or approval by the members shall require only approval of the board of directors."

For Membership Corporations: "This corporation shall have one or more classes of members. The designation of such class or classes, the manner of election or appointment, the duration of membership, and the qualification and rights of the members of such class or classes shall be as specified in the bylaws."

The articles provision creates the foundation for governance structure, while bylaws provide detailed operational procedures for member elections, meetings, and voting rights [4].

Impact on Board Selection and Governance

Section 5056's membership definition directly affects how boards of directors are selected and how they exercise governance authority:

Memberless Corporations:

• Directors elect their own successors (self-perpetuating board)
• Board fills vacancies by majority vote
• No membership meetings required
• Board exercises all corporate powers subject only to statutory limits

Membership Corporations:

• Members elect directors at annual membership meetings
• Members may remove directors by vote
• Membership approval required for major corporate decisions
• Board acts subject to member oversight and approval rights

This governance distinction represents one of the most significant structural decisions in nonprofit formation, affecting organizational operations for the corporation's entire existence [3].

Formation Requirements

The formation of a California nonprofit benefit corporation requires completion of several sequential steps, each with specific documentation and filing requirements. The process begins with name selection and reservation, where organizations must choose a name that is distinguishable from existing California corporations and includes appropriate corporate designations [4].

The formation process involves the following key steps:

1. Name Reservation: File a Name Reservation Request with the California Secretary of State to secure the desired corporate name for 60 days
2. Articles of Incorporation: Prepare and file articles containing required statutory language and specific provisions for tax exemption eligibility
3. Statement of Information: File initial statement providing corporate details within 90 days of incorporation
4. Employer Identification Number: Obtain federal EIN from the IRS for tax and banking purposes
5. Bylaws Adoption: Create internal governance documents outlining operational procedures
6. Board Organization: Hold initial board meeting to ratify bylaws and appoint officers
7. Tax Exemption Applications: File for federal and state tax exemption status

The California Secretary of State charges filing fees for nonprofit incorporation, with the current fee for articles of incorporation set at $30 for public benefit corporations [4]. Additional fees apply for name reservation, certified copies, and other optional services. The standard processing time for articles of incorporation typically ranges from 5-15 business days, though expedited processing is available for additional fees.

Articles of Incorporation Requirements

The articles of incorporation serve as the foundational document for California nonprofit corporations and must include specific language to qualify for tax exemption status. California law requires nonprofit articles to contain provisions that permanently dedicate the corporation's assets to charitable purposes and prohibit private inurement to individuals associated with the organization [2].

Essential elements that must be included in nonprofit articles of incorporation:

• Corporate Name: Must include "corporation," "incorporated," or "company" and be distinguishable from existing entities
• Corporate Purpose: Must state specific charitable, educational, religious, or public benefit purposes
• Asset Distribution Provisions: Language prohibiting distribution of assets to members, directors, or officers
• Dissolution Clause: Provision for distribution of remaining assets to qualified charitable organizations upon dissolution
• Registered Agent: Name and address of agent for service of process in California
• Initial Board: Names and addresses of initial directors

For organizations seeking 501(c)(3) federal tax exemption, the articles must include specific "magic language" required by the IRS. This language must explicitly state that the organization is organized exclusively for charitable purposes and that no part of its net earnings may inure to the benefit of private individuals [2]. The dissolution clause must specify that assets will be distributed to another qualified 501(c)(3) organization or to the federal, state, or local government for public purposes.

Property tax exemption planning requires specialized language under California Revenue and Taxation Code Section 214. Organizations planning to own real property must include language stating that property will be used exclusively for exempt purposes, as failure to include this language at formation may prevent property tax exemption eligibility later [2].

Governance and Bylaws

Bylaws function as the internal operating manual for California nonprofit corporations, establishing procedures for governance, decision-making, and operational management. While bylaws are not filed with the state, they represent a critical governance document that must comply with California nonprofit corporation law and any specific requirements for tax-exempt organizations [3].

Key provisions that nonprofit bylaws typically address include:

• Board Structure: Number of directors, qualifications, terms of office, and removal procedures
• Meeting Procedures: Frequency of meetings, notice requirements, quorum standards, and voting procedures
• Officer Positions: Titles, duties, election procedures, and terms of office
• Committee Structure: Standing and special committees, their authority, and appointment processes
• Conflict of Interest: Policies for managing conflicts and ensuring fiduciary duty compliance
• Amendment Procedures: Process for modifying bylaws and required approval thresholds
• Record Keeping: Requirements for maintaining corporate records and member communications

The initial board of directors holds an organizational meeting following incorporation to ratify the bylaws, appoint officers, and establish basic corporate policies. This meeting represents the formal beginning of the corporation's operational existence and creates the foundational governance structure that will guide the organization going forward [3].

California law requires nonprofit corporations to maintain certain records, including articles of incorporation, bylaws, meeting minutes, and financial statements. These records must be made available for inspection by members and, in some cases, the public, reflecting the transparency obligations that accompany tax-exempt status.

Tax Exemption Process

Obtaining tax exemption represents a crucial step for most California nonprofit corporations, as federal and state tax exemption provides significant financial benefits and enhances donor confidence. The process involves separate applications to the Internal Revenue Service for federal exemption and to the California Franchise Tax Board for state exemption.

Federal tax exemption under IRC Section 501(c)(3) requires filing IRS Form 1023, Application for Recognition of Exemption. The form requires detailed information about the organization's structure, governance, finances, and proposed activities. Organizations with annual gross receipts normally under $50,000 may qualify for the simplified Form 1023-EZ application process [3].

The IRS exemption application process typically involves:

• Form 1023 Submission: Complete application with required attachments and user fee
• Supporting Documentation: Articles of incorporation, bylaws, financial projections, and narrative descriptions
• IRS Review: Examination of application materials and potential requests for additional information
• Determination Letter: Issuance of formal recognition of tax-exempt status

Processing times for IRS exemption applications vary based on application complexity and IRS workload, but typically range from 3-12 months for standard applications. The IRS user fee for Form 1023 currently ranges from $275-$600 depending on the organization's size and the form used.

California state tax exemption requires separate applications to the Franchise Tax Board for corporate income tax exemption and to the State Board of Equalization for sales tax exemption. Organizations must provide copies of their federal determination letter and demonstrate compliance with California tax exemption requirements.

Ongoing Compliance Obligations

California nonprofit corporations must maintain ongoing compliance with various state and federal requirements to preserve their corporate status and tax exemptions. These obligations include annual reporting, financial disclosures, and operational compliance with charitable trust oversight.

Key ongoing compliance requirements include:

• Annual Reports: File Statement of Information with California Secretary of State every two years
• Corporate Records: Maintain current articles, bylaws, meeting minutes, and financial records
• Tax Filings: Submit annual federal Form 990 and California Form 199 information returns
• Charitable Registration: Register with California Attorney General's Registry of Charitable Trusts
• Fundraising Compliance: Obtain required permits for charitable solicitations
• Board Governance: Hold regular meetings, maintain director elections, and update policies

The California Attorney General's Office exercises oversight authority over charitable corporations to ensure compliance with charitable trust laws. This includes reviewing annual filings, investigating complaints, and taking enforcement action when organizations violate their charitable obligations [2].

Failure to maintain compliance can result in penalties, loss of tax exemption, or even corporate dissolution. Organizations must carefully track filing deadlines, maintain accurate records, and ensure that their operations continue to serve their stated charitable purposes.

Comparison: Membership vs Memberless Corporations

The choice between these structures under Section 5056 represents a fundamental governance decision that shapes organizational operations, decision-making processes, and stakeholder relationships throughout the corporation's existence [1].

Common Formation Mistakes

Several common mistakes can delay or complicate nonprofit formation in California, many of which relate to inadequate preparation or misunderstanding of legal requirements. Organizations that anticipate these issues can avoid costly delays and compliance problems.

Frequently encountered formation errors include:

• Inadequate Articles Language: Failure to include required tax exemption language or property tax provisions
• Name Conflicts: Selecting names too similar to existing corporations without proper clearance
• Board Composition Issues: Insufficient number of directors or conflicts of interest among initial board members
• Bylaws Deficiencies: Creating bylaws that conflict with statutory requirements or tax exemption conditions
• Tax Application Errors: Providing inconsistent information between state and federal tax exemption applications
• Record Keeping Lapses: Failing to establish proper documentation systems from inception
• Fundraising Prematurity: Beginning solicitation activities before completing required registrations

Professional guidance during formation can help organizations avoid these pitfalls and establish proper foundations for long-term compliance. Many organizations benefit from consulting with attorneys or accountants experienced in nonprofit law to ensure that all requirements are properly addressed from the beginning.

Conclusion

California Nonprofit Benefit Corporation Law 5056 establishes a comprehensive framework for creating and operating nonprofit organizations dedicated to public benefit purposes. The law's requirements for formation, governance, and tax compliance create significant obligations but also provide important protections for both the organization and the public. Success in the nonprofit sector requires careful attention to both the technical requirements of corporate formation and the ongoing compliance obligations that maintain tax-exempt status.

Organizations considering nonprofit formation must understand that the process extends well beyond simple incorporation to encompass federal tax exemption, state compliance, and ongoing regulatory obligations. The investment in proper formation and compliance systems pays dividends through enhanced credibility, financial benefits, and the ability to focus resources on mission-related activities rather than regulatory problems.

Sources

[1] California Code, Corporations Code - CORP § 5056 - Primary statutory definition of nonprofit corporation requirements and prohibitions

[2] Guide for Charities - California Department of Justice - Official state guidance on charitable corporation oversight, compliance requirements, and formation provisions

[3] Nonprofit Formation Guide (Public Counsel) - Comprehensive formation guide covering bylaws, governance, and tax exemption application procedures

[4] California Nonprofit Quick Start (California Secretary of State) - Official government guide on formation procedures, filing fees, and state registration requirements