How to Start a California Nonprofit - CalNonprofits
A Step-by-Step Guide & Additional Resources --->
Congratulations.
You've got an idea for making the world a better place, and you want to
start a nonprofit as the means to do so. The good news is that starting
a California nonprofit isn't that hard to do if you have a sound plan,
the right team, and sufficient startup funds.
The bad news is that running a successful nonprofit is not easy. You'll need to think through how you will bring value to the public, obtain funds, attract staff and/or volunteers, build a board of directors, and comply with the various laws that regulate nonprofits. Your answers to these questions will determine whether you should start a nonprofit or consider alternatives. More on these points later in this article.
Check out the recorded webinar from January 28, 2021 with CEO Jan Masaoka, where she walks through the major steps and gives advice about boards, finding your first funding, and more. FREE for Members / $10 for not-yet-members.
Questions to consider:
- Do you need to work with an attorney to start a nonprofit?
- Should you start a nonprofit? What are the alternatives?
10 basic steps for starting a California nonprofit public benefit corporation:
1. Determine the name of the corporation
2. Draft and file the articles of incorporation
3. Appoint the board of directors
4. Draft the bylaws and conflict of interest policy
5. Take the initial board actions
6. Obtain an employer identification number (EIN)
7. File the initial registration form with the California Attorney General’s Registry of Charitable Trusts
8. File the Statement of Information with the California Secretary of State
9. Apply for federal tax exemption with the Internal Revenue Service (IRS)
10. Apply for California tax exemption with the California Franchise Tax Board (FTB)
Bonus: Additional Resources
1. Determine the name of the corporation.
A nonprofit is typically formed as a corporation and its name can be a valuable asset. A corporation’s legal name must be registered with the state where the corporation is formed. In California, a corporation name may be accepted by the California Secretary of State if the name is not the same as or too similar to an existing name on the agency’s records and if it’s not misleading to the public.
You can check the current database of existing names in the business search page on the Secretary of State website. You can also reserve a name for 60 days by mailing in a Name Reservation Request, which prevents another person from registering that corporation name with the California Secretary of State while it is reserved. You must also make sure the name does not infringe on another person’s trademark rights. This is not always easy to determine, but a good start includes running a trademark search on the U.S. Patent and Trademark Office database and a simple Google search. For some founders, it may also be important to confer with an intellectual property attorney to help ensure they are not infringing on another’s rights and to protect their name from being used by other parties.
Also, if you plan to operate the nonprofit in other states in
addition to California, some founders may want to check that the
corporation’s name is similarly available in those other states where
the nonprofit plans to have operations and therefore may need to
register as a foreign corporation with the required state agencies in
order to conduct business there.
[Back to Top]
2. Draft and file the articles of incorporation.
A corporation is legally created with the filing of the articles of incorporation. Articles of incorporation typically identify:
(a) The organization’s name;
(b) Its purpose or purposes of the nonprofit;
(c) The agent for service of process -- that is, a person who can receive lawsuits and other official correspondence and other matters, which can be an individual whose name and address are identified or a corporate agent registered with the California Secretary of State for such purpose;
(d) Limitations on the corporation’s operations, consistent with its tax-exempt status;
(e) The corporation’s street address and mailing address, if different; and
(f) Appropriate dedication and dissolution clauses.
For California, the articles will also identify the type of nonprofit corporation being formed. There are three types of nonprofit corporations in California: public benefit, mutual benefit, and religious. A nonprofit public benefit corporation (the focus of this step-by-step guide) is the appropriate choice for a nonprofit formed for charitable or public purposes. The articles of incorporation are typically signed by an "incorporator," which can be just one person but may also be signed by the initial board of directors if they are named in the Articles.
There is a template you can fill in and print on the Secretary of State’s website. This is a good starting point but does not provide guidelines or advice on every important consideration. For example, there is no guidance on specific purpose statements (you’ll want to be careful about restricting the corporation’s activities in the future by a very limiting specific purpose statement) and no option to select any 501(c)(3) purposes other than charitable, educational, and religious [in the dissolution clause. It also does not address other language that may be required in the articles if the nonprofit also intends to seek exemption from property taxes in California.
A word on specific purpose statements: A broad specific purpose statement provides room for the organization’s mission to evolve without requiring an amendment to the articles of incorporation. It and may also make it easier to comply with charitable trust laws that require charitable funds be used consistent with the specific purpose of the organization at the time such funds were originally acquired. If, instead, you adopt a narrow purpose statement such as "to restore and maintain Pomponio State Beach," you would not be able to use funds acquired while the articles of incorporation contained this purpose statement to restore any other beaches, but the statement would provide a stronger mission anchor to help ensure that your organization stays on a specific course after the founders have left. In this example, the organization could amend its articles with the Secretary of State to broaden its purposes to include other beaches, though only the funds acquired after that change is in effect could be used for those broader activities. A better choice might be for the nonprofit to adopt a purpose statement "to restore and maintain California beaches and adjoining habitats."
For additional information on this issue, read Starting a Nonprofit: Articles of Incorporation and Specific Purpose Statements.
More about the agent for service of process:
It is also important to understand that the agent is responsible for
receiving lawsuits and possibly other important legal documents on
behalf of the organization and making sure those documents reach the
President or other authorized officer or director in a timely manner. If
the agent fails to do so (e.g., fails to have his or her mail checked
regularly while away for an extended period), the organization could
face negative consequences such as losing a default judgment for not
showing up to defend a lawsuit. An organization can identify an
individual who resides in California who is willing to serve as agent or
may elect to pay for a registered corporate agent, which may be
preferred if there is no person willing to accept this responsibility or
if privacy concerns are an issue (an individual agent’s name and street
address will be a matter of public record).
[Back to Top]
3. Appoint the board of directors.
If the initial directors are not named in the articles of incorporation, the incorporator can and should appoint the board through a written action.
Under California law, a nonprofit board may be composed of as few as one director, but the IRS may take issue with granting recognition of 501(c)(3) status to a nonprofit with only one director. It is commonly recommended that nonprofits have between three and 25 directors.
These directors – board members – should understand their legal
duties and responsibilities to act with reasonable care and in the best
interests of the organization while providing direction and oversight
over the organization’s activities, finances, officers, and legal
compliance. Bridgespan offers valuable resources on nonprofit corporate governance, including BoardSource's Ten Basic Responsibilities of Nonprofit Boards ($29). We recommend also looking at the Board Source website and for more information and resources about boards, many of which are free.
[Back to Top]
4. Draft the bylaws and conflict of interest policy.
A corporation’s bylaws provide the fundamental provisions for governance of the corporation’s activities and affairs. Bylaws should provide guidance to the board and reassurance of sound governance practices to government authorities, funders, and other interested stakeholders.
Bylaws typically contain specific provisions detailing:
(a) The powers of the board and duties of the directors;
(b) How directors are elected or otherwise selected (e.g., by majority vote of directors at the annual board meeting);
(c) How the board may take an action (e.g., by majority vote of directors at a board meeting or by unanimous written consent);
(d) How board meetings are called, noticed, and held (e.g., four times per year with 14 days advance notice by email);
(e) How board meetings are conducted (e.g., the chair of the board presides or pursuant to Robert’s Rules, which we generally discourage for most nonprofits);
(f) The officers of the corporation (California law requires three officers: a president or chair of the board, secretary, and treasurer or chief financial officer);
(g) The duties and responsibilities of each officer;
(h) Whether the corporation has voting members or is a non-membership corporation, either of which should be clearly stated in the bylaws;
(i) The authorization of board and non-board committees (e.g., committees tasked to act with the authority of the board versus advisory committees that can only make recommendations);
(j) The level of indemnification provided by the corporation to protect its directors, officers, employees, and other agents; and
(k) The reports due to directors and members, if any (e.g., financial reports).
Bylaws may also include the corporation’s specific purpose or mission statement (which might replicate or make more specific the purpose statement in the articles of incorporation) and the corporation’s core values if they would be viewed as helpful in guiding the board on its leadership and decision-making – though the corporation should also be mindful to avoid inconsistencies between the articles and bylaws if mentioning the purposes or mission statement in both places (for which the articles will control).
If the nonprofit has voting members, the bylaws will also need to contain additional provisions regarding member rights and processes. Nonprofits considering a voting membership structure may want to first discuss such structure with a lawyer, particularly if they do not expect their members to actively participate in meetings and regularly exercise their rights to vote for members of the board of directors.
Public Counsel provides an Annotated Form of Bylaws for a California Nonprofit Public Benefit Corporation.
Separately articulated policies commonly supplement the bylaws in
addressing key governance and management issues. For example, although
not required by federal tax law, it is considered by many to be a best
practice for any nonprofit to have an adopted conflict of interest policy.
Additionally, if a nonprofit does not have a conflict of interest
policy, it must describe its policy regarding conflicts of interest in
the IRS Form 1023. Accordingly, it would be advantageous for most
nonprofits to adopt a policy. The IRS provides a sample policy in
Appendix A of the Instructions to Form 1023,
which can be a helpful starting point though note that this sample
policy does not necessarily account for state law requirements such as
the procedural requirements under California law for approving certain
self-dealing transactions involving directors.
[Back to Top]
5. Take the initial board actions at a board meeting or by unanimous written consent of the directors.
The board should take the following actions:
(a) Adopt the bylaws and conflict of interest policy;
(b) Set the exact authorized number of directors if the bylaws provide for a range for the size of the board;
(c) Adopt a fiscal year (such as a year ending December 31 or June 30);
(d) Approve establishing a bank account;
(e) Approve applying for federal and state tax-exempt status;
(f) Approve reimbursement of startup expenses (if applicable); and
(g) Approve the compensation of the president (CEO) or the treasurer (CFO) and anyone performing the functions of such officers, like an executive director (if applicable).
The incorporator may have already taken some of these actions at the time that he or she appointed the initial board, in which case the board can review and confirm those prior actions if desired.
At this step, the directors may also complete some initial forms for
the organization’s records (which may also be required of the
corporation’s officers) such as their completed annual disclosure of any
potential or actual conflicts of interests, which is usually required
by any well-drafted conflict of interest policy, and also providing a
signed written consent to receiving electronic transmissions from the
corporation as required by California law in order to conduct official
business electronically (e.g., receiving meeting notices by e-mail).
[Back to Top]
6. Obtain an employer identification number (EIN).
An officer or authorized third party designee may apply for and obtain an EIN online.
[Back to Top]
7. File the initial registration form (Form CT-1) with the California Attorney General’s Registry of Charitable Trusts.
The initial registration must be renewed annually,
is required for the majority of nonprofit public benefit corporations,
and must be filed within 30 days after receipt of assets. The CT-1 Form and Instructions
are available online. The corporation’s articles of incorporation and
bylaws should be included in the initial filing. For corporations that
are in the process of applying for 501(c)(3) tax-exempt status, you can
submit copies of the Form 1023 application and federal determination
letter (Step 9) after receiving the determination letter to complete
your filing with the Registry.
[Back to Top]
8. File the Statement of Information (Form SI-100) with the Secretary of State.
The Statement must initially be filed within 90 days of the date of
incorporation. This biennial filing requirement, which identifies the
organization’s address, principal officers, and agent for service of
process, can be filed online or by mail. (You can find information and instructions on completing the Statement of Information here.)
[Back to Top]
9. Apply for federal tax exemption with the Internal Revenue Service (IRS) and receive a determination letter from the IRS.
Completing the Form 1023 application for exempt status under Internal Revenue Code (IRC) Section 501(c)(3) may be the most challenging part of the startup process. It is a legally-driven and comprehensive inquiry covering 10 Parts and 8 Schedules.
As of January 31, 2020, the IRS revised Form 1023 to be an online fill-in form that must be filed electronically at Pay.gov. While substantively the new electronic Form 1023 is mostly similar to its paper version predecessor, there are some new changes with the electronic form and e-filing process and some wrinkles that may be addressed in the future. Luckily, the IRS has added new tools and instructional videos to their website to help you understand the e-filing process. You will be required to create an account at Pay.gov in which you will be able to preview and download the form, save your progress, and return to the form at a later time. Please note that although you will be able to save your progress, the application will not allow you to advance to the next page until you have completed all of the questions on the current page, including entering required descriptions or explanations or completing required schedules.
A critical section for careful completion is Part IV, Narrative Description of Your Activities, which asks: for each past, present, or planned activity, include information that answers the following questions.
- What is the activity?
- Who conducts the activity?
- Where is the activity conducted?
- What percentage of your total time is allocated to the activity? (Combined time percentages should add up to 100%.)
- How is the activity funded and what percentage of your overall expenses is allocable to this activity?
- How does the activity further your exempt purposes?
Form 1023 also requires information regarding (a) organizational structure; (b) compensation and other financial arrangements with officers and directors, and certain highly paid employees and independent contractors; (c) members and other individuals and organizations that receive benefits from the organization; (d) organizational history (e.g., an organization that was spun off or previously fiscally sponsored by another organization may need to complete an additional schedule as a successor organization); (e) specific activities; and (f) actual and/or projected statement of revenues and expenses (which should be consistent with any identified activities).
Part VIII is designed to determine the organization’s classification as either a private foundation or a public charity. Public charity status is generally the more favorable tax status, but requires an organization to meet certain requirements. For most organizations, this means passing a public support test over an ongoing five-year measuring period. For organizations that will receive a large bulk of their support from few sources over their first five years, monitoring and managing of the public support ratio may be critically important. Public Charity Status Simplified (a little) is a helpful online resource from Insight Center for Community Economic Development.
If you think that your nonprofit will not bring in gross receipts of more than $50,000 per year during the next three years, and has not had gross receipts of more than $50,000 in any of the past three years, you may be eligible to file Form 1023-EZ. The full criteria are explained here. Like Form 1023, the 1023-EZ must be filed electronically. You can find instructions at this site.
The filing fee for Form 1023 is currently $600. The filing fee for Form 1023-EZ is $275. Fees are paid online here.
[Back to Top]
10. Apply for California tax exemption with the California Franchise Tax Board (FTB) and receive an affirmation of exemption letter from the FTB.
Organizations with a 501(c)(3) federal determination letter can
request California recognition of tax exemption under California Revenue
& Taxation Code section 23701d from the FTB by filing Form 3500A along with a copy of the IRS determination letter. You can find instructions here.The
FTB will generally recognize the organization’s exemption from state
income taxes as of the federal effective date. An organization that does
not have a 501(c)(3) federal determination letter is otherwise required
to file the more complicated Form 3500 for state income tax exemption. There is no fee for Form 3500A and a $25 application fee for Form 3500.
[Back to Top]
- IRS "StayExempt.org" especially for 501(c)3s
- Nolo Press: How to Form a Nonprofit Corporation in California
- California Attorney General’s "Guide for Charities"
- Nonprofit Kit for Dummies
- Why Join the California Association of Nonprofits
Do you need to work with an attorney to start a nonprofit?
Although the majority of nonprofits are set up without the help of
lawyers, it's easy to make mistakes that become costly to correct later
(such as unwisely creating voting membership structures, adding unlawful
provisions to template bylaws, violating the commerciality doctrine,
etc.). We recommend having experienced professionals involved -- such as
attorneys, board members with nonprofit incorporation experience, and
experienced consultants. Don't discount the value of a knowledgeable
attorney. You can find a list of firms and consultants who are
CalNonprofits members in the Professional Directory online. (Search for "Starting a Nonprofit and Staying Compliant.")
[Back to Top]
What are some alternatives to starting a nonprofit?
Now that you know how to start a California nonprofit, you should thoughtfully consider whether this is the right choice for your ideas and for the public benefit. There may be other ways to carry out your dreams, including working under the umbrella of an existing nonprofit. One often-overlooked alternative is fiscal sponsorship, a relationship that may allow a group to house a charitable project within an existing nonprofit with the ability to spin it off at a later date. For more information on fiscal sponsorship, see Fiscal Sponsorship Basics from the Bar Association of San Francisco. Very small operations may consider forming themselves as an unincorporated association. You may also find that starting a for-profit company will serve your purposes better than a nonprofit structure.
Once you have started your nonprofit, be sure to look at CalNonprofits' Nonprofit Compliance Checklist, a regularly updated listing of all the federal and state forms required from nonprofits, including links to all the forms.
[Back to Top]
ABOUT THE AUTHORS: Emily Chan and Gene Takagi
Attorneys Emily Chan and Gene Takagi wrote this guide for the California Association of Nonprofits as part of their commitment to pro bono work and community service.
Emily Chan is of counsel with Adler & Colvin and a former recipient of the Outstanding Nonprofit Lawyer – Young Attorney award recognized by the Nonprofit Organizations Committee of the American Bar Association. Gene Takagi is a principal attorney of NEO Law Group, a part-time lecturer at Columbia University, and a contributing editor of the Nonprofit Law Blog.
You can reach Emily at www.adlercolvin.com or 415-421-7555
You can reach Gene at www.neolawgroup.com or 415-977-0558
[Back to Top]
No comments:
Post a Comment