Not surprisingly, most California-based family foundations establish their charitable corporations in the State of California. And also, not unexpectedly, most board member directors of California-based family foundations consist exclusively (or almost exclusively) of all family members.
[This however may be a mistake if the family foundation employs (or intends on employing) a family member to provide services for its foundation. (This can be a common scenario for private operating foundations which provides services or operates programs)]
Under Section 5227 of the California Corporations Code, no more than 49 percent of your board can be “interested”. In the case of a family member being employed, this would likely classify/re-classify any related family board member as “interested” for purposes of this code section.
That being said, for a typical family foundation, this would likely trigger a violation of the 49 percent rule.
In order to avoid this unfortunate violation, one might simply elect enough additional “disinterested” board members to balance out the “interested” board members such that a violation of the 49 percent rule does not occur.
Regrettably, this may be an untenable solution as the family will lose control of the board.
Another solution might exist which allows family control of the board and employment of family members.
There are several jurisdictions such as Delaware which do not have a 49 percent rule.
If its a new family foundation, we recommend establishing in Delaware and qualifying it in California. If its an existing entity, we recommend establishing it in Delaware as well, then merging the California entity into the new Delaware entity such that the Delaware entity survives. This would avoid a 49 percent rule violation, keep family control of the board and allow family member employment.
If you have any questions on how this process might work in more detail, we are happy to explain.
