Choosing the right type of entity for your non-profit organization is often an overlooked first step that plays a crucial part in the future of your charitable endeavors. Choosing to be either a corporation or a trust can substantially impact your operations and governance.
Choosing the right type of entity for your non-profit organization is often an overlooked first step that plays a crucial part in the future of your charitable endeavors. Choosing to be either a corporation or a trust can substantially impact your operations and governance. Corporations tend to be the default choice of entity likely because of their relative familiarity but it is important to weigh your options before making a decision. The following is a list of factors to consider:
Trustees of a trust generally have more personal liability exposure than directors of a corporation. Trustee liability can be limited by a trust agreement, but corporate board member liability is specifically constrained by law.
A large deciding factor for some revolves around California’s 49% rule. This rule prohibits more than 49% of the board from being compensated, or related to individuals compensated by the organization. This rule only applies to non-profit organizations incorporated in California, so if your plan involves compensating most board members, then you would either choose to form a trust or to incorporate in a state other than California.
For some undertakings, such as loans, it may be more flexible to be a trust rather than a corporation. Trust agreements can be drafted to permit loans to trustees, whereas most loans to corporate board members are generally prohibited.
A corporation gives its directors the ability to be malleable. Directors can change a corporation’s goals and approach over time if the proper steps are followed. A trust agreement is binding which makes it almost impossible to change course if trustees decide that they want to go a different direction.
While they may be more flexible in purpose, corporations are more rigid in compliance. When an audit is required, corporations must form an audit committee. Trusts are not required to form an audit committee. In order to dissolve or merge, a public benefit corporation registered in California is required to obtain a waiver of objection from the Attorney General in order to proceed while trusts are not required to take this step.
It is extremely important to be informed when choosing an entity type for your non-profit organization. Considering these factors is a good start toward making that choice. If you have any questions regarding this, or any other tax matters, please do not hesitate to contact your L&B professional at (858) 558-9200.