How To Incorporate Your Non-Profit in California
A corporation is an old, well-established, and common form of legal business entity created and regulated under state law. A non-profit corporation is created with specific goals in mind - other than simply making profits for its owners or shareholders like a traditional corporation. A non-profit corporation may be tax exempt on any profits that do come in, so long as the profits are related to the charitable activities of the corporation.
The following is a brief overview of the steps that need to be taken to form a non-profit corporation in California.
Be sure to also look at our other articles about incorporating, or picking the best business entity for you. More on that can be found at: http://www.thetafirm.com/articles.
Step 1: Determine the Non-profit Corporations Name
The first step in forming a non-profit corporation is finding the appropriate name. The name you choose for your corporation must be available, cannot be misleading, and may not be too similar to a name that already exists. You can check the California Secretary of State's website for business entity names that are taken by going here: http://kepler.sos.ca.gov/. The corporation's name may include the words Corporation, Incorporated, or Limited (or their abbreviations).
For a non-profit corporation avoid using words that may imply that you are ineligible for tax-exempt status. The corporate name can be reserved for sixty days by filing a Name Reservation Request Form and paying a $10.00 fee. That form can be found here: http://www.sos.ca.gov/business/be/name-availability.htm. You can also search nationwide through the US Patent and Trademark Office in order to avoid any possible trademark issues, which you can do at http://www.uspto.gov/trademarks/index.jsp.
Step 2: Draft and File the Articles of Incorporation
The next step in forming a non-profit corporation is filing the articles of incorporation with the California Secretary of State. The articles of incorporation form must include: (1) the non-profit corporation's name, (2) the non-profit corporation's purpose(s), (3) any limitations on corporate power, (4) the corporation's street address and mailing address, and (5) the name and address of the corporation's registered agent for service of process. The articles can either be signed by an "incorporator" or by the initial board of directors if they are named in the articles.
The articles of incorporation form can be found here: http://www.sos.ca.gov/business/corp/pdf/articles/arts-pb.pdf
Note about a registered agent for service of process: California law requires corporations to designate one agent for service of process in the state. This is the individual or entity that will accept receipt of lawsuits on the corporation's behalf if it is sued. A corporation may not serve as its own agent for service of process in California, but the agent can be affiliated with the corporation. You can have either a corporate agent, or an individual agent. Individual agents must reside in California. A corporate agent may be preferable if an individual agent has privacy concerns because the name and address of the agent will become public record if appointed as the agent for service of process. Corporate agents must file with the California Secretary of State's office a Certificate under California Corporations Code section 1505, which can be found here: http://www.sos.ca.gov/business/corp/pdf/amendments/corp-1505.pdf.
For a list of businesses that serve as registered agents, go here: http://www.sos.ca.gov/business/private-service-companies.htm/.
Step 3: Appoint the Non-Profit Corporation's Board of Directors
The board of directors can be named in the articles of incorporation. Otherwise, the incorporator should appoint the initial corporate board of directors. The incorporator should prepare the Incorporator's Statement form, which shows the names and addresses of the initial directors (the statement does not need to be filed with the Secretary of State).
The directors should know their duties and responsibilities and act with reasonable care and in the best interests of the non-profit corporation. The directors should also be ready to provide oversight over the corporation's activities, officers, and finances with the outlook of striving to accomplish the non-profits purpose(s) as set out in the articles of incorporation.
Under California law, a non-profit corporation can have as few as one director. However, it is recommended that the board consist of at least three directors because the IRS is not likely to grant 501(c)(3) tax-exempt non-profit status to a non-profit corporation with only one director.
Step 4: Prepare Corporate Bylaws
Bylaws set forth the rules of operation for a corporation. They are not required to be filed with the California Secretary of State, but virtually every California corporation has them. The corporate bylaws usually address such issues as:
- The purpose of the non-profit
- How directors are elected
- How the board functions and takes actions
- How board meetings are called and conducted
- What officers there are in the corporation (a president or board chair, secretary, chief financial officer or treasurer are required by California law)
- The responsibilities of all officers in the non-profit
- The reports that directors get to see
- The protection that is accorded to the directors and officers of the corporation
- Level of powers afforded to board and non-board committees
- If there are voting members in the non-profit, specifications regarding these members' rights also need to be included
- What will happen to the assets if the corporation dissolves or breaks up
A non-profit will also need supplemental documentation regarding their conflict of interest policy. Often further documentation will also be warranted concerning the non-profits governance issues.
Step 5: Hold an Initial Board of Directors Meeting
You should hold your first board of directors meeting. At the meeting, the board of directors can adopt bylaws, appoint corporate officers, establish the corporation's fiscal year, approve establishing a bank account, approve applying for federal and state tax-exempt status, approve compensation for a CEO and CFO if there is compensation, and other tasks.
The board of directors' actions must be documented in the corporate minutes. Corporate minute forms usually come with corporate kits that most corporations purchase.
Step 6: Get a Employer ID Number
An officer or approved third party may apply for and get an employer identification number online at: http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/Apply-for-an-Employer-Identification-Number-(EIN)-Online
Step 7: File Form CT-1 with California Attorney General's Registry of Charitable Trusts
All non-profit corporations wishing to do business in California must register with the California Attorney General's Registry of Charitable Trusts by filing Form CT-1 within 30 days of receiving assets (this can include property, funds, or other donations). Form CT-1 can be found online at: http://oag.ca.gov/sites/all/files/agweb/pdfs/charities/charitable/ct1 -form.pdf.
When filing Form CT-1 you will also have to include the following:
A copy of the articles of incorporation and all amendments and current bylaws;
If incorporated outside of California you will have to include a date that the corporation qualified through the California Secretary of State's Office to conduct activities in California;
IRS Form 1023 that is also submitted to the IRS;
The IRS determination letter that will received from the IRS when filing for tax-exempt status; and
A $25 registration fee.
Step 8: File Form SI-100 with the California Secretary of State
Within 90 days of incorporation you will have to file a Statement of Information (SI-100) with the California Secretary of State. The Statement of Information will have to include the non-profit corporation's address, an agent for service of process, and the names of principal officers. A filing fee of $20 will also be assessed. Form SI-100 can be submitted online at: https://businessfilings.sos.ca.gov/.
Step 9: Apply for Federal Tax Exemption with the IRS & Obtain Determination Letter from IRS
This step is the most time consuming and complicated in the non-profit corporation process. However, it is vital in order to obtain federal tax-exempt status and receive the vital benefits that a non-profit corporation deserves. Keeping this in mind the IRS has set up an interactive guide to walk you through the steps of properly obtaining tax-exempt status through filing Form 1023, Application for Recognition of Exemption Under 501(c)(3). This interactive guide can be found here: http://www.stayexempt.irs.gov/StartingOut/InteractiveForm1023Application.aspx.
Before applying for tax-exempt status you will need to have completed the steps illustrated above in this article. You should also speak with an attorney and/or tax professional about other applicable requirements.
A checklist for completing the tax-exemption Form 1023 application process can be found here: http://www.stayexempt.irs.gov/checklist.pdf.
The actual Form 1023, Application for Recognition of Exemption Under 501(c)(3) can be found here: http://www.irs.gov/pub/irs-pdf/f1023.pdf.
Note that the application process is quite lengthy and you will have to include all of the documentation requested as well as to fill out all of the information required on the form including the schedule portion of the form that is relevant to your type of non-profit. This part of the non-profit process is crucial and you should seek the counsel of an attorney. If there are errors or things missing in the application process there could be a lengthy delay or even a negative decision made on your application.
Also of note is the significant filing fee ($850) and a waiting time of at least 3 months while the application is processing.
Step 10: Apply for California Tax Exemption with the California Franchise Tax Board & Obtain Affirmation of Exemption Letter from the California Franchise Tax Board
If you have received federal tax exemption successfully through the IRS by completing the procedures described above in Step 9, then obtaining California tax-exemption is a relatively simple process.
You will have to submit the IRS determination letter granting you federal tax-exempt status along with a filled out and rather brief California Franchise Tax Board Form 3500A. This form can be found at: https://www.ftb.ca.gov/forms/misc/3500a.pdf. There is no filing fee associated with this form and no further documentation necessary.
If you have not received federal tax exemption through the IRS, but you are still seeking to obtain California State tax- exemption the necessary form is much more involved and complex. You will be required to fill out and file California Franchise Tax Board Form 3500.
A guidebook to this form can be found here: https://www.ftb.ca.gov/forms/misc/3500bk.pdf.
The actual 3500 form can be located here: https://www.ftb.ca.gov/forms/misc/3500.pdf.
There is a $25 fee associated with filing Form 3500. You will need to attach documentation that is similar to the documentation you would need if applying for federal tax-exemption. Such documentation includes articles of incorporation with any amendments, bylaws, etc.
Benefits of Incorporating Your Non-Profit
When you incorporate your non-profit, not only are you more easily eligible for tax-exempt status both federally and in California, but you are also able to provide your donors with the ability to use any donations as a tax write-off. You can also more easily apply for and qualify both public and private grants as a non-profit corporation. Additionally, and very importantly, as a non-profit corporation you as an individual are usually protected from liability lawsuits against the corporation. Potentially, you will also be eligible for other tax exemptions as a non-profit corporation such as property taxes.
Keep all of these things in mind when deciding whether or not incorporation of a non-profit is the right step for you. The above information is meant as a general overview. Remember to consult with an attorney for a fact-specific analysis of your particular situation. An attorney can guide you through the process and make sure that your unique situation is taken into account.
You can reach an attorney at Theta Law Firm by calling us or sending us an email at email@example.com. Theta Law Firm can represent clients all across the State of California, including in any of the following counties: Alameda | Alpine | Amador | Butte | Calaveras | Colusa | Contra Costa | Del Norte | El Dorado | Fresno | Glenn | Humboldt | Imperial | Inyo | Kern | Kings | Lake | Lassen | Los Angeles | Madera | Marin | Mariposa | Mendocino | Merced | Modoc | Mono | Monterey | Napa | Nevada | Orange | Placer | Plumas | Riverside | Sacramento | San Benito | San Bernardino | San Diego | San Francisco | San Joaquin | San Luis Obispo | San Mateo | Santa Barbara | Santa Clara | Santa Cruz | Shasta | Sierra | Siskiyou | Solano | Sonoma | Stanislaus | Sutter | Tehama | Trinity | Tulare | Tuolumne | Ventura | Yolo | Yuba