How Mutual Benefit Corporations Are Taxed in California
If you are planning to open a cannabis business in California, you may have considered a mutual benefit corporation for your business. Mutual benefit corporations are quite popular among California cannabis businesses and may be the best option for a business entity for your business if your plan includes the sale of cannabis.
However, you should also understand the taxation rules that apply to mutual benefit corporations and how they differ from non-profit organizations. Here is how mutual benefits corporations are taxed in California so that you can familiarize yourself with the tax rules that apply to mutual benefit corporations at the state level.
What Is a Mutual Benefit Corporation?
A non-profit mutual benefit corporation in California is is a type of corporation that is a non-profit per California Corporations Code Section 7110. The purpose of a non-profit mutual benefit corporation is to provide only for the benefit of its members, and not to make a profit.
Non-profit mutual benefit corporations are commonly established for cannabis businesses in order to circumvent the provisions of S.B. 420, which specifically disallows “any individual or group to cultivate or distribute marijuana for profit.”
However, they are still required to file and pay income tax like regular C corporations because they are not formed to benefit the general public, unlike non-profit organizations. In addition, they can also be established for any lawful purpose, not limited to charity, unlike non-profit organizations.
How Do They Differ From Non-profit Organizations?
There are some significant differences between non-profit organizations and mutual benefit corporations. First, mutual benefit corporations are not eligible to be formed exclusively for charitable purposes under California law. If the corporation does have some charitable assets, it must register and report the charitable assets to the Attorney General of the State of California. As a result, it can receive tax exempt status for some of its assets but not all.
Second, mutual benefit corporations are not permitted to apply under Section 501(c)(3) of the Internal Revenue Code to receive tax-deductible donations. However, the IRS does allow tax exemptions for certain types of non-profit mutual benefit corporations under IRS 501(c)(6).
Finally, the management and shareholders of a California non-profit mutual benefit corporation are not permitted to take distributions of the assets of the corporation until the corporation is dissolved. As a result, they are required to take payments from the corporation either as a repayment of debt or as a salary. This is important because this rule affects gross income that is be reported on income tax filing for the corporation.
Which Tax Forms Do Mutual Benefit Corporations File?
Mutual benefit corporations are generally required to file the filing forms in California for federal and state taxes:
These forms may vary depending on whether or not your mutual benefit corporation has tax-exempt status. However, mutual benefit corporations generally follow the same rules as C corporations when it comes to taxation.