Legal Question in Business Law in California

Dear Lawguru,

I am representative of a registered non profit organization under 501(c)(3) in California.

We are trying to build a community center under this organization collecting donation through this organization and would like to run it forever under this exist organization.

Our legal questions are:

Do we have to register or get another 501(c)(3) organization on the name of proposed community center? or we can build under the existed 501(c)(3) organization? we want to build under this existed an organization; is there any problem?

Please, help us with based on California law.

Thank you.

Tej Rai

San Francisco, CA

Asked on 9/22/13, 1:38 pm

2 Answers from Attorneys

Bryan Whipple Bryan R. R. Whipple, Attorney at Law

There's probably no problem. The only possible problem that I can foresee is that the corporate charter or other organizational documents of the 501(c)(3) might not be written broadly enough (in terms of the corporation's purposes, powers, etc.), but this seems unlikely if running a community center was part of the plan when the corporation was formed and qualified as a 501(c)(3). The name of the community center doesn't seem to present a problem so long as its contracts, etc. clearly identify its owner and operator as your nonprofit corporation. However, on a more cautious note, I would suggest that before beginning to collect donations, the non-profit should form an association with a San Francisco attorney who has nonprofit experience, just to make sure that everything you do in raising funds and presenting yourself to the public is 100% legal.

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Answered on 9/22/13, 8:21 pm

Timothy McCormick Libris Solutions - Dispute Resolution Services

Mr. Whipple is wrong. First off, unless you had a complete idiot draft your organizational papers for your existing 501(c)(3), your articles and bylaws allow for any lawful activities to be within the scope of the organization, and even if they do not, the articles and bylaws will have amendment clauses that allow you to do pretty much whatever you want. So ignore all the gibberish about purposes, powers, naming or anything else.

HOWEVER, you do have a potentially serious problem with what you plan to do. Operating community facilities is NOT a charitable purpose under the Internal Revenue Code and related federal regulations. There are many activities that are non-profit but are not charitable. When a 501(c)(3) runs a community center and if too much of their revenue and disbursements relate to that activity, they can lose their (c)(3) charitable organization status and be re-designated by the IRS as a non-charitable not for profit. The difference to the organization's taxes is not very significant if at all, as long as they do not operate in a way that profits anyone, but they lose the right to collect tax deductible donations. They can still take donations, but the donors cannot deduct the donation.

Therefore you MUST make sure that either the community center activities remains a small enough part of the operating finances of the organization that it allows you to stay within the (c)(3) status, OR you must form a separate non-charitable not for profit organization to own and operate the center and keep the two organizations finances separate (for example don't try to play tricks like collecting donations for the 501(c)(3) and then having it donate all the money to the other not for profit).

The one thing Mr. Whipple is correct about is that you need to have a relationship with an attorney with non-profit experience like myself, and equally or even more important, have a relationship with a good non-profit tax accountant.

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Answered on 9/23/13, 10:38 am

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