Forming a nonprofit organization in California is a complex process. Be sure you know the procedures for forming a nonprofit and securing tax-exempt status.
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by Edward A. Haman, Esq.
Edward A. Haman is a freelance writer, who is the author of numerous self-help legal books. He has practiced law in H...
Updated on: January 31, 2023 · 4 min read
If you plan to start a nonprofit organization in California, you need to know both the federal and state procedures regarding how to start a nonprofit in California. Forming a nonprofit to secure federal and state tax-exempt status is a complicated and time-consuming matter. For this reason, it is advisable to consult with an attorney and an accountant with expertise in nonprofits.
By the time you are ready to begin the process, you should have already:
In most cases, the use of the term "nonprofit" refers to a nonprofit corporation. There are other organizational structures that may be used; however, a nonprofit corporation usually offers the most advantages and will be the primary focus here.
The two main considerations in determining how to structure a nonprofit are limiting liability for the organizers and avoiding taxes. A California nonprofit may be organized in one of the following manners:
Unincorporated nonprofit association. This is the nonprofit version of a general partnership. While it may qualify to avoid taxation, it does not protect the organizers from personal liability. Registering this type of organization with the California Secretary of State requires the filing of a Registration of Unincorporated Nonprofit Association (Form LP-UNA-128).
Nonprofit corporation. This structure provides both limited liability for organizers and the greatest likelihood of obtaining both state and federal tax exemptions. You may reserve the name of your corporation for 60 days by filing a Name Reservation Request Form with the California Secretary of State.
Nonprofit LLC. While a nonprofit LLC is allowed under California law and provides the organizers with limited liability, it poses significant problems obtaining federal tax-exempt status. The position of the Internal Revenue Service (IRS) is that an LLC may only be granted tax-exempt status if all of the members of the LLC are exempt organizations.
You will need to file articles of incorporation with the California Secretary of State. Articles of incorporation for a California nonprofit corporation are available in four different forms, depending upon the nature of your nonprofit organization:
The filing fee for nonprofit articles of incorporation is $30. All of these forms contain instructions.
You will also need to file a Statement of Information (Form SI-100 or Form SI-CID) within 90 days of filing the Articles of Incorporation.
Regardless of whether your nonprofit will have employees, you will need to obtain an employer identification number, which is also referred to as a tax identification number. This is done by filing an Application for Employer Identification Number (Form SS-4) with the IRS. This may be done online, by fax, or by mail.
To avoid paying federal taxes, you will need to apply to the IRS for an exemption under either Section 501(c)(3) or other appropriate part of Section 501(c) of the Internal Revenue Code. This is done by filing an Application for Recognition of Exemption (Form 1023) with the IRS, and paying a $600 "user fee."
This is a complicated and detailed form, and it is very important to fill it out correctly in order to obtain a tax exemption. If your nonprofit meets certain requirements, you can use Form 1023-EZ, and pay a user fee of only $275. It can take several months for the IRS to process the application. The IRS says it will take several hours to learn how to complete Form 1023, and several more hours to complete the form.
Corporations are required to pay an annual California Franchise Tax. The minimum tax is $800. To avoid paying this tax, you need to request an exemption from the California Franchise Tax Board. If you have already obtained a federal tax exemption, you will file a Submission of Exemption Request (Form FTB 3500A), along with a copy of the IRS exemption notice. If you have not yet secured a federal exemption, you will file the more complicated Exemption Application (Form FTB 3500).
The California Nonprofit Integrity Act requires charitable nonprofits to register with the Registry of Charitable Trusts, which is operated by the California Attorney General. This is done by filing an Initial Registration Form (Form CT-1). More information is available from the State of California Attorney General.
The success of your California nonprofit depends, in large part, on how carefully you follow the guidelines for establishing your nonprofit in the beginning. Take the time to understand both the federal and California-specific requirements before your launch your charitable endeavor.
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