WHAT IS THE PROCESS TO FORM A NONPROFIT ORGANIZATION?
There are many steps involved to form a nonprofit organization. In California, a Nonprofit Public Benefit Corporation may be formed by completing certain steps. These include:
- Name Availability ($10.00 Fee): It is best to check the availability of a particular name for the nonprofit corporation and reserve the name with the Secretary of State.
- Articles of Incorporation ($30.00 Fee): The Articles of Incorporation is the formal document that legally creates the corporation and must be filed with the Secretary of State. The Articles must specify the charitable purpose of the organization, the name of the organization, the principal place of business, its officers, and any limits on its operation. The Articles must include language ensuring that is not organized for private gain of any individual, that it will comply with the requirements for nonprofit status, and comply with the requirements for tax exemption. The specific clauses that should be in the Articles include:
- Clause stating the corporation is organized and operated exclusively for charitable purposes and shall not engage in any activities or exercise any powers that are not in furtherance of its primary charitable purpose, except to an insubstantial degree;
- Clause stating that no substantial activities should consist of propaganda, influence legislation, and the corporation shall not participate in any political campaign in support or in opposition of any candidate for public office;
- Clause dedicating income and assets to charitable purposes, and no part of net income or assets shall inure to the benefit of any director, officer, member, or private individual; and
- Clause stating that upon dissolution, the remaining assets shall be distributed to another corporation exclusively for charitable purposes with 501(c)(3) tax exempt status.
- Bylaws: The incorporator or the initial board of directors should prepare and adopt the Bylaws immediately after filing the Articles of Incorporation. A copy of the Bylaws, signed by an officer or certified by the Secretary, must be submitted with the application for Federal and State tax exemption. The Bylaws set out the structure and rules of operation for the Public Benefit Corporation. The Bylaws should include the method for electing directors and officers, the procedures for how the board of directors shall operate, and the procedures for amending Bylaws.
- Incorporator’s Initial Action: If the Articles were only signed by an incorporator and not the initial board of directors, the incorporator will need to appoint the first board of directors as an initial action. At this time, the incorporator may also adopt the Bylaws, appoint officers, and authorize a bank account to be opened in the name of the Public Benefit Corporation. The corporate minutes should reflect these actions.
- Employer Identification Number (EIN) (No Filing Fee): An Employer Identification Number (EIN) must be obtained from the Internal Revenue Service (IRS) by filing an IRS Form SS-4. The EIN will be the identification number on all Federal tax returns and reports for the nonprofit.
- Statement of Domestic Nonprofit Corporation ($20.00 Fee; also referred to as Statement of Information; Form SI-100): Within ninety (90) days of filing the Articles of Incorporation, a Statement of Information by Domestic Nonprofit Corporation must completed and submitted to the Secretary of State. The Statement must be submitted every second year during the existence of the Public Benefit Corporation.
- Register with Attorney General (Up to $300.00 Annual Fee based on gross annual income sliding scale; $25.00 Initial Fee per Form CT-1, Renewal Fee based on sliding scale per Form RFF-1): Pursuant to California Government Code section 12585, all charities must register with the Attorney General within thirty (30) days after receiving their first assets. The Articles of Incorporation and the Bylaws must be filed with the Attorney General’s Registry of Charitable Trusts. The registration must be renewed every year. In addition, the Public Benefit Corporation must file financial information reports every year with the Attorney General. These include Form RRF-1 and Form 990, 990-EZ, or 990-PF. Corporations organized primarily as a hospital, school, or religious organization are exempt and must provide substantiating evidence to the Attorney General.
- Board Meeting: The first board of directors meeting should involve adopting the Bylaws, electing officers, setting possible compensation amounts of wages or salaries for officers, establishing a bank account, authorizing the officers to apply for tax exemption, declaring the accounting year and the accounting procedures to be applied, setting a budget, clarifying operation procedures such as maintaining the minutes, Bylaws, and corporate records. These actions may be conducted through unanimous written consent signed by the directors, rather than in-person, so long as it is permitted by the Bylaws. The corporate secretary must record and maintain all signed meeting minutes and unanimous written consents.
- Tax Exemption ($400.00 or $850.00 Fee for IRS Form 1023 depending on Annual Gross Receipts; $25.00 Fee for California FTB Form 3500): The Public Benefit Corporation must file IRS Form 1023 as the application with the IRS for exemption from Federal income tax pursuant to sections 501(c)(3) or 501(c)(4) of the Internal Revenue Code. In addition, FTB Form 3500 must be filed with the California Franchise Tax Board as the application for exemption from State income tax.