How to Start and Form a Nonprofit Organization
By Jeremy Chen
The following is a basic guide outlining the steps to start a public benefit nonprofit organization in California.
1. Select a Name
Founders can check with the California Secretary of State to see if a name is available, which may be reserved for up to 60 days. The founders may also want to consider registering the name (i.e. mark) for a state trademark with the Secretary of State and for a federal trademark with the U.S. Patent and Trademark Office.
2. Draft and File Articles of Incorporation
The articles of incorporation constitute the founding document that creates the legal corporate entity of the organization. The articles should include all of the necessary provisions required by California law and the IRS, and are filed with the Secretary of State.
3. Draft Bylaws and Conflict of Interest Policy
The bylaws include the operational and procedural governance rules of the organization. Bylaws address the procedures for calling board meetings, the rules for board voting, the duties of officers and directors, and the other guidelines regarding the functioning of the organization.
The conflict of interest policy is not required, but is recommended to supplement the bylaws to make sure proper ethics are followed. The IRS looks favorably on the presence of a conflict of interest policy, as it is specifically addressed, though not required, in the application for tax-exemption.
4. Prepare and Execute an Action of Incorporator
An action of the incorporator is used to appoint the initial board of directors, and adopt the bylaws and the conflict of interest policy of the organization.
5. Obtain a Federal Employer Identification Number
An employer identification number (EIN) is the taxpayer identification number for the organization, which is used to identify the organization on IRS filings and used to open bank accounts for the organization. It can be obtained online from the IRS website.
6. Hold a First Meeting of the Board of Directors
At this first meeting, the board adopts resolutions to select a bank and open an operating bank account. Other resolutions regarding other tasks related to the start-up of the organization may also be adopted.
7. Complete and File a Statement of Information (Form SI-100)
Within 90 days of incorporation, the organization must file a statement of information (Form SI-100) with the Secretary of State; and filed biennially thereafter.
8. Register with the Registry of Charitable Trusts of the California Attorney General (Form CT-1)
Within 30 days of first receiving any assets, the organization must file form CT-1 with the California Attorney General to register with the Registry of Charitable Trusts.
9. Apply for Federal Tax-Exemption (IRS Form 1023)
The application for tax-exemption is the most time-intensive step of the formation process, as the IRS requests in-depth information about the organization’s activities, governance, and finances. Before the organization starts this step of the process, it will want to determine whether it qualifies to file the 3-page IRS Form 1023-EZ online, instead of the standard 26-page Form 1023. Smaller organization will typically qualify for the EZ version and a lower application fee.
TIP: In deciding whether to form a nonprofit, it is recommended that founders first review IRS Form 1023. The application can serve as a “preview” of what to expect when operating a nonprofit organization, as it addresses issues regarding finances, proposed charitable activities, internal governance, fundraising and revenue-generating activities, and who will serve as board members and officers.
10. Apply for California Tax-Exemption (Form 3500A)
The organization files for tax-exemption in California after it receives its determination letter from the IRS. To do so, the organization files Form 3500A with the Franchise Tax Board.
11. Register with California Employment Development Department
The organization must register with the California Employment Development Department for tax withholding if it has employees.
12. Register with State Board of Equalization
The organization must register with the State Board of Equalization if it sells tangible goods.
13. Register with the County Assessor’s Office
The organization may consider registering for a property tax exemption if it owns real property.
14. Registration in Other States
Each state has different rules regarding registration of nonprofit organizations, where some states require it and some do not at all. If conducting fundraising or business in other states, the organization will want determine whether it has to register in those particular states.
15. Local Registration
Some cities also require registration of the nonprofit. The organization should determine whether the city where it is located requires registration.
This basic guide lays out the initial set of steps to get started, and is intended to help in your decision of whether a nonprofit is the right vehicle for your idea or project. In making that decision, a fiscal sponsorship relationship may be worth considering. Fiscal sponsorships, where the project operates under the guidance of an existing nonprofit, are often considered the “incubators” of the nonprofit world. Such relationships can provide valuable experience regarding the unique aspects of nonprofit governance, ethics, and tax-exempt status maintenance.
Disclaimer. The information in this article is not legal advice, and is provided only for informational purposes. This article is only a general discussion, and does not include all relevant information regarding the topics and issues addressed within it.
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