It might surprise you to learn that there are over 100,000 charitable organizations registered in the state of California. As you might imagine, these types of nonprofits further a charitable purpose, including one of the following:
- Relief of poverty
- Advancement of education or religion
- Promotion of health
- Government or municipal purposes
- Other purposes beneficial to the community
Note that what these types of organizations share in common is that they benefit a segment of the community as opposed to specific private individuals. For that reason, and to encourage the mission of the organization, the government declares charitable nonprofits as tax-exempt. This means that the charities do not pay most taxes, and donors can tax a tax deduction when making gifts to the organization.
But, keep in mind that in order to take full advantage of the tax exemption, the charity must be registered at both the state and federal levels.
Are you starting a nonprofit in California? Contact us today.
Types of California Nonprofits
Now, you may be wondering what type of nonprofit you can form in California. Generally, there are three main types to choose from:
Mutual benefit corporations: these nonprofits are organized mostly for the benefit of their own members. Examples would be homeowner’s associations and professional organizations. Mutual benefits corporations do not further a charitable purpose and qualify for different tax benefits than public benefit corporations.
Nonprofit religious corporations: these nonprofits are organized for religious purposes. The corporation is usually considered tax-exempt and, unlike other charities, is not required to register or file annual financial reports with the state.
Public benefit corporations: these nonprofits are formed for a public or charitable purpose rather than for individual gain or profit. The majority of nonprofits fall under this category and our firm works with these organizations the most.
California Nonprofit Formation
With that in mind, there are several steps to forming a nonprofit in California. Further, there may be additional requirements that may apply to you, depending on the specific type of organization you are interested in starting.
Now, as a preliminary matter, you want to make sure that a nonprofit is an appropriate organizational structure for your business. This is important because there are restrictions on company profits and requirements for financial reporting that will make certain documents part of the public record. For these reasons, it’s helpful to consult with an attorney to determine whether this business type would be a good fit for you.
That said, the first step to forming a nonprofit is to check to see if the name you desire for your organization is available. Note that there cannot be two businesses with the same name operating within the state.
Next, you will need to file what is known as the Articles of Incorporation with the Secretary of State. This document effectively forms the organization. You will also want to draft bylaws for your nonprofit. The bylaws are internal rules for how the organization will operate, including establishing the Board of Directors and indicating how they will run the corporation.
Once you have completed these steps, you will need to do the following:
- File an application for an Employer Identification Number (EIN) with the IRS
- Hold the first meeting of the Directors
- File a Statement of Information with the Secretary of State – must be done within 90 days of filing the Articles of Incorporation
- Determine if there are any other local or state licenses or permits required for your business
How to Get 501(c)(3) and State Tax-Exempt Status
It’s important to note that a nonprofit is not granted tax-exempt status automatically. Instead, your organization must apply for this designation, and you are responsible for all federal and state taxes until you receive approval from the IRS. Further, prior to tax-exempt status, any donations made to your charity will not be tax-deductible to the donor.
To apply, file either Form 1023 or Form 1023-EZ with the IRS. The form you select will depend on the size of your budget. In the form, you will be asked to provide detailed information about your organization and its purpose.
Next, you will need to file Form 3500 with the state. Until you complete this step, you will be responsible for the minimum franchise tax. This is $800 regardless of your budget and it applies to most state corporations.
Ongoing Nonprofit Legal Issues
Once your nonprofit is formed, there are a few additional things to consider. First, you might choose to draft governance policies. These put procedures in place for things like document retention, gifts acceptance, and handling conflicts of interest.
You might also look into professional contract drafting and review. It’s always a good idea to reach out to an attorney for advice on all legal agreements, including leases. Note that there may be trademarks to apply for and/or fiscal sponsorship arrangements to explore.
You will also likely have ongoing tax preparation and tax planning needs. These would include keeping up with annual filings with state and federal agencies, as well as determining how to handle unrelated business income taxes and excise taxes.
We Understand Nonprofits and Are Here to Help
Here at the Law Office of Christine Mathias, we understand how challenging starting a nonprofit can be. In order to put your best foot forward, you will want to make sure that you are in compliance with all of the state and federal laws and regulations.
We can help you navigate the formation and exemption process so that you can focus on doing what you do best – pursuing your important charitable mission.