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:
- Determined the name your organization will use and assure it is available and doesn't infringe on any trademark,
- Developed a clear purpose for your organization that meets the requirements for a nonprofit,
- Created California nonprofit bylaws that will support your tax-exempt status, and
- Selected your board of directors.
Types of Nonprofit Organizations
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 in 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.
Filing Articles of Incorporation
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:
- A nonprofit organized for charitable, civic league or social welfare purposes is considered a public benefit corporation and will file Articles of Incorporation of a Nonprofit Public Benefit Corporation (Form ARTS-PB-501(c)(3)).
- A nonprofit organized to operate a church or for some other religious purpose will file Articles of Incorporation of a Nonprofit Religious Corporation (Form ARTS-RE).
- If organized to develop certain types of community housing projects or a stock cooperative, the nonprofit will file Articles of Incorporation of a Common Interest Development Association (Form ARTS-CID).
- A California mutual benefit corporation is a nonprofit that is organized for other than charitable, religious, civic league, or social welfare purposes. This basically includes all qualified nonprofits that do not fall under one of the other three categories. These nonprofits will file Articles of Incorporation of a Nonprofit Mutual Benefit Corporation (Form ARTS-MU).
The filing fee for nonprofit articles of incorporation is $30. All of these forms contain instructions.
Applying for a Federal Employer Identification Number (EIN)
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.
Applying for Federal Tax-Exempt Status
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.
Applying for California Tax-Exempt Status
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).
Registering with the California Attorney General
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.