If you want to dedicate your days to helping others, serving the community, and making the world an overall better place, consider starting a nonprofit in California. Though nonprofits fall into several different categories, ranging from the religious to the educational to the environmental, they all have one thing in common: They’re focused on the greater good. If you’re genuinely committed to this goal, you’re halfway to making your dreams of owning a nonprofit become a reality. Now it’s just time to formalize everything. Read on to learn how to start a nonprofit in California.
Starting a nonprofit comes with its fair share of pros and cons. Before you jump in with both feet, carefully weigh both.
By far the biggest benefit of operating as a nonprofit in California is the 501(c)(3) exemption. If approved for 501(c) status, your organization will be exempt from state and federal income taxes. This status may also help to boost your donor appeal, as donors are more willing to donate to organizations that can help reduce their tax liability as well. When a person makes a donation or gift to a 501(c) organization, he or she can claim the donation as a tax exemption.
Another benefit of nonprofit status is that individual founders are completely separate from the entity. This automatically removes the liability of founders in the event of lawsuits, fines, debts, and other legal matters. Board members and employees also enjoy limited liability protection.
Finally, nonprofits hold a legal status and identity that surpasses the founders. This aspect makes nonprofit status appealing to those who wish to start a movement rather than a single organization.
Starting a nonprofit in California comes with considerable red tape. To get the charitable organization off the ground, the founders must front substantial funds to consultants, lawyers, and accounts. They must also perform costly administrative tasks, including filing their501(c) tax-exempt application and meeting public reporting requirements. Simply filing for tax-exempt status will cost the aspiring nonprofit $200 to $850 alone.
Nonprofits are subject to a lot of paperwork and strict deadlines even after formation, which they must file and meet if they want to maintain their tax-exempt status. One important set of documents is the organization’s financials, which are subject to intense review from the IRS and the public.
Finally, government and private grants are competitive, which may make it difficult for the organization to get the funding it needs to stay afloat. Unfortunately, this may remain true until the organization becomes more established and develops a more robust reputation.
When forming your nonprofit, there are two main considerations you must make: limiting liability and avoiding taxes. You may form your California nonprofit in one of three ways, each of which offers their own advantages:
Nonprofit Corporation: Through this type of structure, you can both limit your liability and have the greatest likelihood of obtaining both federal and state tax exemptions.
Unincorporated Nonprofit: This type of structure is equivalent to a general partnership. Through this structure, you enjoy the same tax exemptions as a nonprofit, but owners are not protected against liability.
Nonprofit LLC: This structure provides all the protections of an LLC. However, an organization structured in this manner may struggle to obtain tax-exempt status under California law, as there is a lot more red tape for founders to jump through.
Forming a nonprofit in California comes with a myriad of expenses. Those costs are not uniform and vary from organization to organization:
• Incorporation: To incorporate your nonprofit, you will need to pay a $30 filing fee to California’s Secretary of State. A certified copy costs an extra $5.
• Federal Tax-Exempt Status: Depending on the financial information you provide, you can expect to pay anywhere from between $200 and $850 to file the application for exempt status.
• State Tax-Exempt Status: The fee for filing tax-exempt status at the state level is much lower than at the federal level. However, still anticipate paying $30 to $40 to complete this process.
• Other Considerations: To form a nonprofit, you will likely need the guidance of other professionals, including accountants, consultants, and attorneys. The fees for each can soar well above $1,000. You will also need to pay to file an Initial Statement of Information, which costs another $20. If you need to expedite your application, expect to pay a fee of between $350 and $750.
If you pay the standard filing fee, your Articles of Incorporation and Statement of Information can take up to 20 business days for processing. For a small fee, you can speed up the processing time by eight days. For significantly more, you can get 24-hour expedited processing.
To form a nonprofit, you will need to provide the state and federal governments with the most basic information. The requirements for forming a nonprofit in California are as follows:
The name you choose establishes your brand and is necessary to incorporate within the state. Before deciding on a name, do your research and make sure the one you choose does not conflict with the names or brands of other organizations in California.
Per California law, you may incorporate a nonprofit with just a single director. However, the IRS is unlikely to grant exempt status to an organization with just a single director. Ideally, your nonprofit should have between three and 25 directors.
The bylaws of a nonprofit should address, as a minimum, the primary provisions related to the management of the corporation’s affairs and activities. They should also spell out the rights and responsibilities of each member, director, and stakeholder.
Even though your organization is not-for-profit, you still need to obtain a unique nine-digit number from the IRS, which you will use on your 501(c) application, to submit 990 returns and to open a bank account.
To form a legal business entity, you need to file the requisite forms. Those include the initial registration form (Form CT-1), the Statement of Information (Form SI-100), Articles of Incorporation and 501(c)(3) application for exemption.
California requires nonprofits to obtain a business license. However, you should apply at the county or city level, and not at the state level.
Finally, your nonprofit needs a separate bank account. To open an account, you will, at the very least, need a copy of your nonprofit’s Articles of Incorporation, your EIN and a copy of your bylaws.
Yes, your nonprofit needs a registered agent. This is the person who will accept lawsuits on your nonprofit’s behalf. The elected individual must be available every day during normal business hours and at the physical location listed on your Articles of Incorporation.
To obtain tax-exempt status, you must apply at both the state and federal level. Both levels have unique sets of requirements:
To qualify at the federal level, your articles must include certain language. In particular, they must state that your corporation is organized exclusively for religious, charitable, scientific or educational purposes; that no part of your earnings shall benefit the members, officers, trustees or private parties; that no substantial part of your activities may be for propaganda purposes; and that, upon the dissolution of your organization and after paying all liabilities, proceeds must be distributed for one or more exempt purposes.
Even if you receive approval for tax-exempt status at a federal level, there is no guarantee you will qualify at a state level. You must submit an Application for Recognition of Exemption, along with supporting documents, such as your organizational documents, purpose statement and finances.
Starting a nonprofit in California can be a complicated and time-consuming task. However, with the right support and resources, you can form your nonprofit in as little as 10 minutes. Learn more today.
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