Starting a nonprofit in California offers organizations tax benefits that for-profit companies do not enjoy. While every business entity seeks to minimize its tax liability, starting a nonprofit in California requires a little more effort and paperwork.
You will need to petition the federal government under Internal Revenue Code 501(c). This code allows outfits that are not operated for profit to be excused from paying federal taxes. You will also need to file nonprofit Articles of Incorporation with the California Secretary of State.
It’s important to keep in mind that there are pros and cons to obtaining nonprofit status. But knowing how to start a nonprofit in California can prevent costly missteps through this sometimes confusing process.
What is a nonprofit organization in California?
Things like public charities, religious institutions, chambers of commerce, foundations, and mission-oriented organizations are commonly recognized as nonprofits that provide support for community members. By that same token, there’s a broader class of nonprofits known as nongovernmental organizations (NGOs). Household name NGOs include Doctors Without Borders and Save the Children, among others.
While the goals of people who start a nonprofit in California are significantly furthered by not having to turn high profit margins to cover state and federal taxes, there are significant differences. These include the following.
- Nonprofits cannot distribute profits to individuals
- Nonprofits are governed by a board of directors
- Founders relinquish control to board members
- Founders are not responsible for the organization’s debts
- Founders are insulated from civil liability
- May apply for grants or ask for donations
Although foundations are technically nonprofit organizations, they tend to be funded by a single source. Families with considerable wealth often create foundations in order to do good works, without incurring liability or having the IRS take a cut out of charitable giving. A key difference is that a foundation does not necessarily rely on public support to carry out its mission.
Step-by-step: how to start a nonprofit in California
There are more than 100,000 nonprofit organizations in California and nearly 2 million nationwide. The following step-by-step process answers the question: How do you start a nonprofit organization in California? and tells you everything you need to know when getting started.
1. Choose a name and confirm availability
An entity’s name often proves to be one of its most valuable assets. Name recognition and positive branding help bring in donations and open doors. To secure a name, conduct a California business search. It’s prudent to assemble a short list of ranked options. If one is taken, you’ll need to keep searching until you find one that is available.
Review the naming restriction guidelines for California nonprofits. Words such as “bank,” “trust,” and titles that are eerily similar to other businesses, or might be construed as misleading, are generally not allowed. Once you settle on a name, consider filing a Name Reservation Request. The fee is $10 per request and puts the name on hold for 60 days.
2. File Articles of Incorporation (Nonprofit Public Benefit Corporation)
Entities are required to file Nonprofit Public Benefit Corporation Articles of Incorporation with the California Secretary of State. The articles of incorporation must clearly state the organization’s mission or mandate. Otherwise, it could be rejected. For instance, explaining the operation provides free or inexpensive meals, but is actually donating to emerging artists would not necessarily be consistent. While both are worthy causes, your nonprofit must adhere to its mission as outlined in the filing. These are items to include.
- Business address
- California registered agent address
- Statement of purpose
- Signatures of all incorporators
- IRS dissolution clause
3. Appoint a board of directors
California isn’t particularly stringent about how many people sit on the board of directors. The IRS, on the other hand, usually recommends between 3 and 25 for 501(c)(3) status, depending on the operation.
Appoint a number that satisfies the federal government’s typically higher threshold. Make sure board members fully appreciate their legal obligations and nonprofit responsibilities. Considering appointing individuals with the appropriate skill sets to handle financial oversight and legal compliance, among other things. It’s also essential to avoid any conflicts of interest and establish a policy.
Because foundations are more likely to be driven by an individual or family, they enjoy more latitude. The members can sometimes be more close-knit, and they may only require small boards.
4. Draft bylaws
If you’re starting a nonprofit in California for the first time, think of the bylaws as an operating manual. The information in the bylaws governs how daily business is conducted. It also defines rights, responsibilities, and obligations. These are basic items to include in your nonprofit bylaws.
- Organization’s name and purpose
- Board of directors qualifications
- Roles of officers
- Voting and election procedures
- Meeting management & requirements
- Resolving conflicts & controversies
Carefully review a draft of your bylaws to avoid common mistakes. These sometimes include contradictory language and setting unrealistic expectations.
5. Obtain an EIN
Acquiring an Employer Identification Number (EIN) is a relatively straightforward process. Fill out the application on the IRS website. Although some entities do not require an EIN, nonprofit organizations need one to open bank accounts and make IRS filings.
6. Apply for federal tax-exempt status (IRS Form 1023 or 1023-EZ)
Now that you have most of your ducks in a row, it’s time to apply for tax-exempt status. The IRS provides three options that include (501(c)(3), (501(c)(4) and (501(a). Most startups file Form 1023-EZ to obtain tax-exempt status as a charitable, religious, or educational organization. Social welfare entities file Form 8976 and 1024-A. Other nonprofit organizations file Form 1024, except foundations, which use Form 1023. The IRS review process normally takes anywhere from 2 to 12 months.
7. Register with the California Attorney General
The California Attorney General receives a CT-1 Form filing within 30 days of the operation securing funding. This registration includes assets that are to be used to operate the organization. It’s essential to include a copy of the articles of incorporation, bylaws, and other pertinent information. If you are still waiting for the IRS to make a decision, provide the 501(c)(3) tax-exempt status form as well.
Is it better to have an LLC or a nonprofit?
The decision to form a LLC California or start a nonprofit in California requires thoughtful consideration. Each business entity offers significant benefits. It’s crucial to weigh these carefully to ensure you can fulfill your vision. These are things to think about.
LLC pros
- A for-profit operation (LLC) provides individual tax benefits
- Profits can flow through to individual annual tax returns
- Protects personal assets from company debts and liabilities
- Owners do not answer to a board of directors
- Can distribute profits to yourself or others
Nonprofit pros
- Pay no federal or state taxes
- Establish annual salaries & benefits
- Can apply for public funding
- Can solicit donations from private sources
- Can hold fundraisers
- Designed to help others and serve a purpose
One type of entity is not necessarily better than the other. It may be more accurate to say that nonprofit organizations are focused on serving the needs of the community or a specific population. By contrast, LLCs are usually started to generate revenue and accrue personal wealth.
Can I pay myself if I run a nonprofit?
The short answer is: yes. If you are thinking about starting a nonprofit in California and are worried about income, salaries can be complicated. The board of directors decides salary thresholds. The standard most use is whether compensation is reasonable and not excessive. Nonprofits are required to disclose compensation by filing Form 990. That means the public can see the annual salaries of leadership teams.
California nonprofit compliance checklist
Thought leaders usually launch a nonprofit in California to help make the world a better place. Operating the organization and meeting government compliance mandates can sorely detract from the mission. Through incremental organizational steps, such as working with a California compliance checklist, you can minimize the time it takes to fulfill these responsibilities and put more focus on goal achievement. Consider adopting the following checklist.
- Annual IRS Form 990.
- California Attorney General (Annual Renewal Registration) Form RRF-1
- Annual Treasurer’s Report (CT-TR-1 Form) for Nonprofits Under $50,000 in Revenue
- Organization Annual Information Return (FTB Form 199) for Nonprofits Over $50,000 in Revenue
- Secretary of State Statement of Information (every two years).
- California Franchise Tax Board filings.
- Board Meeting Minutes and Governance Records.
- Perform Conflict of Interest Policy Maintenance.
- Foundations Must Distribute 5 Percent of the Previous Year’s Revenue.
The deadlines for various filings are not always due at year’s end or on Tax Day. Leadership teams and boards of directors must meet ongoing compliance requirements. For example, the 990-PF is due on May 15. Organizations face stiff penalties for missing deadlines, including the suspension of nonprofit status.
Common mistakes when starting a nonprofit in California
It’s generally a good idea to seek support when starting a nonprofit in California because the process can feel counterintuitive at times, leading to mistakes. In everyday life, missteps are often rectified with a heartfelt apology and an effort to make amends. But when dealing with both the state and federal governments, an honest oversight can result in the IRS denying tax-exempt status, levying a hefty fine, or sidelining an organization for an extended period. These are common mistakes to keep in mind.
- Incorrect language or clauses in articles of incorporation
- Assuming the organization enjoys tax-exempt status
- Failing to additionally register with the California Attorney General
- Board of Directors not meeting its oversight duties
- Missing annual filing dates
- Confusing the compliance rules between foundations and public charities.
Conclusion
Starting a nonprofit in California is a business idea that can be a powerful way to turn a mission into meaningful, lasting impact, but it requires careful planning, compliance, and a clear understanding of both state and federal requirements. From filing the right documents to maintaining ongoing obligations, each step plays a critical role in securing and preserving your organization’s tax-exempt status. With the right preparation and attention to detail, you can navigate the process confidently and build a California nonprofit that makes a real difference in your community.