Setting up a nonprofit corporation in California is a complex process that involves the intersection of federal and state laws. If you want to set up a nonprofit, it’s important to familiarize yourself with the process and to work with your business attorney to ensure that no detail slips through the cracks.
The specific type of nonprofit that most people think of when they hear the word “nonprofit” is called a “public benefit nonprofit corporation,” formed under the IRS’s 501(c)(3) tax exemption. To take advantage of this exemption, you first need to form an entity in California. After successfully completing this process, you can then apply for your tax exemptions.
When deciding whether setting up a nonprofit makes sense for you, keep in mind that 501(c)(3) public benefit nonprofits need to be advantageous to the public at large, rather than for the benefit of one particular group. (For the latter—such as forming a homeowners association, a sports club, or a chamber of commerce—work with your attorney to look into other types of nonprofits, such as “mutual benefit nonprofits,” and see if there is an alternate classification makes sense for you instead.) There are also certain restrictions on the types of activities that public benefit nonprofits can engage in. For instance, public benefit nonprofits cannot participate in or donate to political campaigns.
Forming a Nonprofit in California
Incorporating a nonprofit corporation in California is much the same as forming any standard, for-profit entity. You will want to make sure you’ve made the important decisions regarding your entity before starting the process, to ensure that you’re not spending time and money having to re-do any filings.
This means that before you even think about working with your attorney to file your Articles of Incorporation, you will want to at the very least know: 1) your entity’s name, “cleared” by your attorney as a name that is not already in use, and 2) who will be on your entity’s Board of Directors. Each initial board member will need to sign off on these articles, either on the document itself or retrospectively.
Next, after you receive word from the Secretary of State that your Articles have been accepted and filed, you will want to put in place your initial corporate documentation. Even internal documentation is particularly important for nonprofits, as failing to operate the corporation “by-the-book” can lead to a loss of your tax-exempt status. Your initial documentation will include bylaws that set forth guidelines for the operation of your nonprofit and a “Statement of Information” filed by your attorney with the Secretary of State. It is also common to have a separate set of policies that discuss common issues in nonprofits, such as a conflict of interest policy.
At this stage, you will also want to have your initial Board meeting, and make sure you understand the process for having future annual Board meetings. The Board must make certain very important decisions each year, such as adopting internal corporate documents, electing officers, approving the compensation of corporate executives, and more.
You also want to work closely with your advisors to make sure you take certain necessary steps like obtaining your “employer identification number” (or EIN) and register with the California Attorney General’s Registry of Charitable Trusts. After all that, it is finally time to complete the most difficult part of this process: applying for your tax-exempt status.
Filing for Your Tax-Exempt Status
Now that your entity has been formed, it’s time to look into obtaining your tax-exempt status from both the state and federal government. Filing for your California income tax exemption can be handled two ways. Either you can wait for the determination letter from the IRS and then file Form 3500A with the Franchise Tax Board or you can go ahead and submit FTB Form 3500 along with copies of your organizations bylaws, articles of incorporation, detailed financial statements, anticipated funding activities, and more.
Most non-profits also need to register with the Office of the Attorney General by submitting form CT-1, their articles of incorporation, and their IRS determination letter. In some cases, you may also be eligible for a sales and use tax exemption, which requires submitting a number of documents to the Board of Equalization. Organizations with employees will also need to register with the Employment Development Department and comply with all appropriate employment laws and regulations.
Another step in this process will be to file with the IRS for your 501(c)(3) tax exempt status. Depending on the size of your organization, you might file Form 1023 or Form 1023-EZ, which is a streamlined process for organizations whose gross income is below $50,000 annually. While this streamlined process is fairly simple, larger organizations are required to file the more complex Form 1024.
Your tax advisor can guide you through which types of filings make sense for you and your organization. Keep in mind that dissolving a California nonprofit is also a complex process, which will generally require some documented proof of annual expenditures, so you should also make sure you and your tax advisor are on the same page with maintaining your corporate financial records
Once you’ve completed all your initial paperwork, you’ll then have to file annual reports to ensure you remain a nonprofit in good standing. The California Attorney General, IRS, California Franchise Tax Board, and Secretary of State all have annual filing requirements.
Even a small nonprofit must be set up correctly to ensure the protection of your tax-exempt status, and using an attorney familiar with nonprofits can greatly streamline this process. The team at Chase Law Group, P.C., has experience setting up and working with nonprofits of all sizes, and we can help make sure you get the right paperwork completed and submitted to the right entities in a timely fashion. Call (310) 545-7700 to schedule an appointment with one of our attorneys today.