How To Start a California Nonprofit Corporation in 9 Steps
It may seem unnecessary to go through the effort of organizing your California nonprofit as a corporation. However, incorporating will protect you from personal liability if a party sues your nonprofit corporation.
Most nonprofits registered with the state of California are "public benefit corporations" organized under state law. The state allows unincorporated associations to solicit charitable donations. However, they still must register with the state and file reports with the California Attorney General's Registry of Charitable Trusts in the same manner as public benefit corporations.
The step-by-step guide below will teach you how to form a new nonprofit corporation in California. It will also show you how incorporation can protect its members, directors, and officers from liability for the organization's debts.
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1. Name Your Nonprofit
The California Secretary of State also will not allow you to incorporate a misleading business name or one that's too similar to an already registered organization.
The Secretary of State maintains an online database that allows you to check to see if your name is already in use. You can file a name reservation request if you've picked out a name but aren't ready to file the rest of your registration paperwork. You can reserve your name for up to 60 days.
When picking a name, ensure it does not infringe on federal or state-registered trademarks. Using a trademarked name may open you up to future litigation if the trademark holder wants you to stop using it. Use the U.S. Patent and Trademark Office (USPTO) and the California Secretary of State searchable databases to check for federal and state trademarked terms.
2. Draft and File Your Articles of Incorporation
A California nonprofit corporation is created when its creators—or "incorporators"—file articles of incorporation with the Secretary of State. The initial board of directors may also file the articles of incorporation.
You can download the correct ARTS form from the Secretary of State website to file your articles of incorporation. There are four form templates, depending on the work of your nonprofit. The fee to file is $30.
The articles of incorporation for a public benefit corporation must include the following:
- Corporation's name
- Corporation's mailing address
- Statement that the corporation was not formed to generate a profit benefitting one person
- Corporation's public or charitable purpose
- Name and address of the registered agent for service of process
The California Corporations Code includes some additional provisions you need to include in your nonprofit articles of incorporation. Additionally, if an unincorporated association is incorporated to form a nonprofit corporation, it must meet additional requirements.
Further information is necessary for corporations planning to apply to the Internal Revenue Service (IRS) for federal tax-exempt status under section 501(c)(3) of the Internal Revenue Code. These articles of incorporation must include additional statements regarding the organization's purpose and how it will distribute its assets upon dissolution. Dissolution is when an organization terminates its operations.
After registering your corporation, the Secretary of State will issue a seven-digit California corporation number that will serve as its unique identifier for state purposes.
3. Draft the Corporate Bylaws for Your Nonprofit
Like the bylaws of a for-profit corporation, the bylaws of a public benefit corporation should contain instructions on how it will be governed and managed. You don't need to file bylaws with the state, but they're essential for sound corporate governance.
The bylaws usually contain provisions addressing the following:
- The nonprofit's mission or purpose
- The number of directors serving on the board of directors
- The duties of the board and the power of the directors
- The corporate officers
- How directors are elected or removed
- How to resolve disputes among the directors
- How, where, and when the organization conducts board meetings
In addition to drafting corporate bylaws, your nonprofit should create a written conflict of interest policy. Most conflict of interest policies require directors to disclose any potential conflicts. It would prohibit any interested directors from voting on any matter where they may have an interest.
Failure to disclose a conflict of interest has consequences under California law. It can lead to the IRS finding the person who benefitted liable for the excise tax on excess benefit transactions. “Excess benefit transactions" refers to when someone in a nonprofit (usually a board member) receives excessive benefits not aligned with the nonprofit's mission. The IRS can impose additional taxes to penalize in these situations.
4. Hold the First Board of Directors Meeting
This first organizational meeting of your board of directors should accomplish:
- Voting to adopt the corporate bylaws
- Electing corporate officers not named in the bylaws
- Appointing officers
- Approving the corporation's application to the IRS for nonprofit status
- Approving opening a bank account for the corporation and the reimbursement of expenses, if applicable
- California requires that every corporation have at least three board officers:
- President or chief executive officer
- Treasurer or chief financial officer
The same person can serve in more than one capacity, but the IRS requires tax-exempt organizations to have at least three board members.
Finally, if you have taken any of these actions before the board's first meeting, they can review and vote to confirm them.
5. Secure the Necessary Licenses and Permits
Business licensing requirements vary depending on the state, city, and county your nonprofit operates. In California, local governments manage business licensing and permits. Check with your city or county to see what specific licenses or permits your nonprofit needs.
You can also use the CalGold tool through the California Office of the Small Business Advocate website. This tool allows you to enter your county and type of business to find licensing requirements and issuing agencies.
6. File Initial Reports With the State
Once you have filed your articles of incorporation, California gives you 90 days to file an initial report with the Secretary of State using form SI-100, Statement of Information.
The information you must include is similar to what you provided in the articles of incorporation. Your corporation must complete and file the form every two years while it's operating.
Your nonprofit must also file a Form CT-1, Initial Registration Form and Instructions, with the California Attorney General's Office within 30 days of receiving any assets. Assets include money and property. You must refile this $50 form annually.
7. Apply for Federal Tax Exemption With the IRS
Even though you have completed the steps to form a legally valid nonprofit corporation in California, you still need to apply for federal tax exemption through the Internal Revenue Service (IRS).
To receive a federal tax exemption, you must complete and file Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. This form requires much information about your corporation, including:
- Organizational structure
- Charitable activities
Form 1023 comes with a $600 filing fee.
Nonprofits with gross receipts under $50,000 and total assets under $250,000 can file a streamlined application using IRS Form 1023-EZ, Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code. Form 1023-EZ has a lower filing fee of $275.
After your application, you will receive a determination letter from the IRS. This letter will indicate whether they have granted 501(c)(3) status to your organization or if they need more information.
8. Apply for California State Tax Exemption
After you have applied for federal tax exemption, you will want to apply for California tax exemption.
The California Franchise Tax Board will notify you with a grant letter upon approval. It can take several months to process your application. Approval grants exemption from state taxes, including sales, property, and income taxes.
9. Apply to the IRS for an Employer Identification Number
An Employer Identification Number (EIN) is a unique nine-digit identifier the IRS uses to identify businesses, including charitable nonprofits. Even if your corporation doesn't plan to hire staff, you must obtain an EIN from the IRS before you can apply for a tax exemption.
An EIN is also used on the information returns you must submit to the IRS each year.
The IRS issues EINs for free. Your corporation can apply for one on the IRS website. When applying online, be sure you are on the official IRS website. Several commercial sites have web addresses similar to the IRS's but charge a fee to apply for an EIN.
You can also apply using a Form SS-4, Application for Employer Identification Number.
Resources for California Nonprofit Business Owners
Business owners can visit one of the many Small Business Development Center (SBDC) locations throughout the state for free help with business advising, funding assistance, and more.
Find a small business mentor in your area through SCORE, a network of volunteer mentors. SCORE mentors can help with targeted aspects of your business, like financing or business planning.
The California Association of Nonprofits (CalNonprofits) is a membership organization providing resources and advocacy for California nonprofit organizations.
Community Vision provides California nonprofits with strategic business guidance to help scale community impact.
Get Legal Advice for Starting Your Nonprofit
Complying with California state and federal laws while organizing your nonprofit can be overwhelming. Navigating tax exemptions, incorporation, and business licenses is complicated. You'll want to get it right the first time.
Many nonprofit owners benefit from working with a business organization attorney. An attorney with expertise in your area's business laws can guide you through the formation process, leaving you with more time and energy to deepen your nonprofit's work. Talk to a California attorney today for help.
You can also consider using FindLaw's DIY nonprofit formation tool. This option simplifies the process of launching your nonprofit public benefit corporation.
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