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TO: HONORABLE MAYOR AND CITY COUNCIL
FROM: CITY ATTORNEY
DATE: AUGUST 3, 2004
SUBJECT: FORMATION OF NONPROFIT CORPORATION FOR MUNICIPAL FUNDRAISING PURPOSES
The California Corporations Code provides for the formation of nonprofit public benefit corporations for charitable or public purposes. State law does not attempt to define "charitable" or "public." Accordingly, what corporations may fall within these categories is left largely to the desires of those wishing to form the corporation and the strictures found elsewhere in the law.
The City previously formed a nonprofit corporation known as "Community Forum, Inc." on November 24, 1978. Community Forum, Inc. was formed for the following purposes:
(1) To provide education, instruction, and information in connection with public discussion groups, forums, panels, lectures, community and civic affairs and activities and other similar matters in and around the City of Rancho Palos Verdes;
(2) To provide instructional and informative materials to the public relating to educational, personal, training, recreational, social, health, safety, welfare, and vocational development programs and activities in and around the City of Rancho Palos Verdes;
(3) To promote social welfare by establishing and maintaining an adequate line of communication between the City of Rancho Palos Verdes and its resident citizens, so that said residents will be aware of the activities, programs, facilities, and problems in and around the City.
Community Forum, Inc. remains in good standing with the Secretary of State, and is used by the City to distribute the City’s Official Newsletter.
The Council recently requested that staff look into setting up a separate nonprofit corporation as a City foundation to conduct fundraising for public projects that have not yet been identified.
Two alternative approaches are available to accomplish the Council’s goal of setting up a nonprofit corporation to handle the City’s fundraising activities. First, the City could form a new nonprofit public benefit corporation for the purpose of conducting fundraising for City projects. Alternatively, the City could amend the articles of incorporation of its existing nonprofit corporation (Community Forum, Inc.) to expand the purpose statement to encompass the desired fundraising activities. This latter alternative would also necessitate changing the name of the existing corporation to something more general.
The procedures for, and relative merits of, each alternative are outlined below.
A. Formation of a New Nonprofit Corporation
As previously noted, California law provides for the formation of nonprofit public benefit corporations for charitable or public purposes. The City’s intended purpose for the corporation, to raise funds for public projects, falls within the category of "public" purposes.
In order to form a new nonprofit corporation, the City must take the following steps:
1. Selection and Reservation of Corporate Name. First, the City must select a name for the new corporation. Generally, the City is free to select any name it desires. However, some limitations on corporate names are set forth in the Corporations Code, and the City must adhere to these provisions. Before the City may register the name for the proposed corporation it must first research the name with the Secretary of State to ensure that the proposed name is available. A name search generally costs between $100 and $200. Once a name is selected, the City must reserve the name with the Secretary of State. The certificate of reservation for the corporate name costs $10.
2. Articles of Incorporation. After selecting the corporate name, the next step in the process is to draft Articles of Incorporation. The Articles must set forth the corporate name, the name and address in California of the corporation’s initial agent for service of process, and a statement regarding the corporation’s status as a nonprofit public benefit corporation and its purpose. In addition, the Articles may include the principal place of business of the corporation, the names and addresses of the incorporators, the names and addresses of the initial directors, and a statement limiting corporate purposes or powers. After the Articles are drafted they must be filed with the Secretary of State. The filing fee for Articles of Incorporation ranges from $30 to $100.
3. Bylaws. In addition to its Articles of Incorporation, the corporation must also adopt Bylaws. The Bylaws govern the conduct of the corporation. The Bylaws must set forth (1) the number of directors and (2) the method of selecting directors. In addition, the Bylaws may contain any other provisions not in conflict with state law or the Articles of Incorporation for management of the activities and for the conduct of the affairs of the corporation. The corporation must maintain the original and a copy of its Articles and Bylaws at its principal office in California. These documents must be open to inspection by members at all reasonable times during normal office hours.
4. Taxpayer ID number. The new corporation must also apply to the Internal Revenue Service to obtain a new taxpayer ID number. There is no charge to apply for a taxpayer ID number, and in many instances taxpayer ID numbers may be obtained over the phone.
5. Tax-Exempt Status. The new corporation must also apply to the Internal Revenue Service for tax-exempt status under Internal Revenue Code Section 501(c)(3) in order to be exempt from taxation. This cost of filing this application is $150 to 500 depending on the estimated gross receipts of the proposed corporation. Obtaining a tax-exempt status is not guaranteed, and the IRS has denied applications by municipal foundations in the past. Thus, there is some risk involved in forming a new corporation.
6. Staff Time. In addition to filing fees, the formation will also involve staff time. Depending on the questions raised by the Internal Revenue Service, formation will require approximately 10 to 15 hours of attorney time as well as substantial staff time (particularly on the part of the Finance Director/City Treasurer) preparing the necessary applications and documentation.
The total cost of formation will entail approximately $290 to $810 dollars in filing fees and associated staff costs. Once the corporation has been formed, it must file a biennial statement of information with the Secretary of State. The cost of filing the biennial statement is $20. In addition, if the IRS denies the application for tax-exempt status, the corporation would incur annual licensing fees based on its annual gross receipts and be subject to taxation, which would substantially increase the ongoing operating costs for the corporation. The corporation will also be required to hold regular meetings of its members Board of Directors. The frequency of these meetings is usually established in the Bylaws.
A separate corporation for fundraising may be a cleaner approach than combining the fundraising with the educational and informational functions currently performed by Community Forum, Inc. However, forming a separate corporation would cause the City to incur additional costs for incorporation, would add another process for the City to follow, and would require the City to file a second biennial statement. Additionally, the uncertainty in obtaining tax-exempt status from the IRS may formation of a separate corporation a less desirable approach.
B. Amendment of the Articles of Incorporation for Community Forum, Inc.
As an alternative to forming a separate nonprofit corporation, the City could merely amend the Articles of Incorporation for Community Forum, Inc. to allow the fundraising activities being proposed. However, in order to avoid any concerns that the name of the corporation may not be conducive to conducting fund raising activities, the City may wish to change the name of the corporation. The name change can be accomplished through the amendment or restatement of the Articles of Incorporation.
In order to amend the Articles of Incorporation, the City must take the following steps:
1. Selection and Reservation of Corporate Name. First, the City must select a new name for the corporation following the guidelines outlined above. The name search and reservation of the name with the Secretary of State will costs between $110 and $210.
2. Articles of Incorporation. After selecting the new corporate name, the next step in the process is to amend the Articles of Incorporation to reflect the new name and expand the purpose and powers of the corporation to encompass the proposed fundraising. State law provides public benefit corporations with broad authority to amend their articles of incorporation, providing that a public benefit corporation may amend its articles from time to time in any and as many respects as may be desired, provided its articles, as amended, contain only provisions that would be lawful to insert in original articles filed at the time the amendment is filed. The filing fee to file the amended Articles of Incorporation with the Secretary of State will range from $30 to $100.
3. Bylaws. In addition to amending its Articles of Incorporation, the corporation must also need to adopt amended Bylaws.
4. Staff Time. In addition to filing fees, the amendment of the Articles of Incorporation will also involve staff time. However, the amendment of the Articles and the preparation of the necessary applications and supporting documentation should require less attorney and staff time than the formation of a separate corporation.
The total cost of formation will entail approximately $140 to $310 dollars in filing fees and associated staff costs. The biggest advantages of amending the Articles of Incorporation for Community Forum, Inc. to expand the purpose and powers to encompass the proposed fundraising is: (1) Community Forum, Inc. has already been granted tax-exempt status and (2) the City would only need to operate a single nonprofit corporation to perform both the fundraising proposed and the educational and informational functions currently performed by Community Forum, Inc. This approach would eliminate the need to notice and hold separate member/director meetings for Community Forum, Inc. and an independent fundraising corporation. However, by combining these functions, the City should consider changing the name of Community Forum, Inc. to avoid any claims that the name is not conducive to fund raising activities or is misleading to the public. The name change can be achieved through the amendment of the Articles of Incorporation. Overall, amending the Articles of Incorporation for Community Forum, Inc. to changing the name of the corporation is more costs effective and avoids the need for staff to conduct duplicate administrative functions.
The City Attorney’s office recommends that the City Council amend the Articles of Incorporation for Community Forum, Inc. to expand the purpose statement to encompass the desired fundraising activities and to change the name of the corporation. Alternatively, the City Council could form a separate nonprofit public benefit corporation to raise funds for City projects.
Assistant City Attorney