How To Start a Nonprofit in California in 7 Steps
Founding a California nonprofit corporation can be an excellent way to help your community. It may seem unnecessary to go through the effort of organizing your nonprofit as a corporation, but it will protect you from being held personally liable for its unpaid bills or in the unlikely event it is sued.
Most nonprofits that are 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 must still register with the state and are required to file reports with the California Attorney General's Registry of Charitable Trusts in the same manner as public benefit corporations. Additionally, those involved with unincorporated associations risk being held personally liable if the association is sued.
The following steps explain how to form a nonprofit corporation in California that will provide its members, directors, and officers with protection from liability for the organization's debts.
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Step 1: Name Your Nonprofit
If you are incorporating your nonprofit, you will need to come up with a name to register with the state. When you pick a name, it should be unique and give people some sense of what the nonprofit does. Additionally, the California Secretary of State will not allow you to incorporate a business name that is too similar to that of an organization that has already been registered or is misleading.
Fortunately, the Secretary of State maintains a database on its website that will allow you to check to see if your name has already been taken. If you have already picked out a name but aren't ready to file the rest of the registration paperwork, you can file a name reservation request to reserve your name for up to 60 days through the Secretary of State's office.
When picking a name, you should also ensure that it does not infringe on federal or state-registered trademarks. Using a trademarked name may open you up to the possibility of future litigation if the trademark holder wants you to stop using it. The U.S. Patent and Trademark Office (USPTO) and the California Secretary of State maintain searchable databases of trademarked terms.
Step 2: Draft and File Your Articles of Incorporation
A California nonprofit public benefit corporation is created when its creators—known as "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 a form that can be used to file a public benefit corporation's articles of incorporation on the Secretary of State's website.
The articles of incorporation for a public benefit corporation must include the following:
- The corporation's name
- The corporation's mailing address
- A statement the corporation was not formed to generate a profit benefitting one person
- The corporation's public or charitable purpose
- The name and address of the registered agent for service of process
The California Corporations Code includes some additional provisions that may be included in the nonprofit articles of incorporation. Additionally, if an unincorporated association is incorporating to form a public benefit corporation, it will need to meet additional requirements.
Corporations that plan to apply to the Internal Revenue Service (IRS) for tax-exempt status under section 501(c)(3) of the Internal Revenue Code must include additional statements regarding their purpose and how their assets will be distributed when they are dissolved.
After your corporation has registered, the Secretary of State will issue it a seven-digit California corporation number that will serve as its unique identifier for state purposes.
Step 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 is to be governed and managed. The bylaws do not need to be filed with the state, but they are essential for sound corporate governance.
The bylaws usually contain provisions addressing:
- 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
- Resolving disputes among the directors
- How, where, and when board meetings are conducted
In addition to drafting corporate bylaws, it is usually recommended that your public benefit corporation have a written conflict of interest policy. Most conflict of interest policies require directors to disclose any potential conflicts and bar interested directors from voting on any matter where they may have one. Failure to disclose a conflict of interest could lead to the IRS finding the person who benefitted is liable for the excise tax on excess benefit transactions.
Step 4: Hold the First Board of Directors Meeting
During its first meeting, the board should:
- Adopt the corporate bylaws
- Elect corporate officers not named in the bylaws and appoint officers
- Approve the corporation's application to the IRS for nonprofit status
- Approve opening a bank account for the corporation and the reimbursement of expenses
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 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.
Step 5: 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 a form SI-100, Statement of Information. The information that must be included is similar to the information you provided in the articles of incorporation. Your corporation will need to complete and file the form every two years while it is operating.
Your nonprofit will also need to file a Form CT-1, Initial Registration Form and Instructions, with the California Attorney General's Office within 30 days of receiving any assets. The form must be refiled annually.
Step 6: Apply for Exempt Status With the IRS and California
Even though you have followed all of the steps necessary to form a legally valid public benefit corporation in California, you still need to apply for your state and federal tax exemptions.
To receive a federal tax exemption, you will need to complete IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, and submit it to the IRS. Filling out the form will require you to provide a great deal of information on your corporation, including its history, organizational structure, governance, finances, and charitable activities. To file a Form 1023, you will need to pay a $600 filing fee.
Nonprofits with gross receipts under $50,000 and total assets under $250,000 are eligible to file a streamlined application using Form 1023-EZ, Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code. You will need to pay a $275 filing fee to file a Form 1023-EZ.
Your public benefit corporation can apply for a state tax exemption using a form FTB 3500A, Submission of Exemption Request, that can be found on the California Franchise Tax Board website. If approved, your organization will be exempt from state taxes, including sales, income, and property taxes.
Step 7: Apply to the IRS for an Employer Identification Number
An Employer Identification Number (EIN) is a unique nine-digit identifier issued by the IRS to identify businesses, including nonprofits. While your corporation may not have any plans to hire staff, every nonprofit is required to obtain an EIN before it applies to the IRS for a tax exemption. An EIN is also used on the information returns charitable nonprofits must submit to the IRS each year.
The IRS issues EINs for free, and your corporation can apply for one on the IRS website. When applying online, be sure you are on the IRS website because several 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.
If pursuing all of the steps necessary to comply with state and federal law while organizing your California public benefit corporation seems like an overwhelming task, consider using a DIY nonprofit formation tool that will walk you through the process.
You may also want to consult with a local attorney. A skilled attorney can help guide you through the formation process and ensure that your corporation complies with all of the necessary state and federal laws, rules, and regulations that govern the operations of nonprofit corporations.
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