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Step by Step Guide for Starting a California Nonprofit

Emily-Chan

George T

Attorneys Emily Chan and Gene Takagi explain the steps to starting a nonprofit in California.

Congratulations. Y'all've got an idea for making the earth a improve identify, and you lot want to start a nonprofit as the means to do so. The skilful news is that starting a California nonprofit isn't that hard to practice if you have a sound plan, the correct team, and sufficient startup capital.

The bad news is that running a successful nonprofit is non piece of cake. You'll need to think through exactly how you will bring value to the public, obtain funds, attract staff and/or volunteers, build a board of directors, and comply with the laws that regulate nonprofits. Your answers to these questions will determine whether you lot should kickoff a nonprofit or consider alternatives. More on these points later on in this article.

Here are 10 basic steps for starting a California nonprofit public benefit corporation:

i.Determine the name of the corporation. A nonprofit is typically formed as a corporation and its proper name can be a valuable nugget. In California, a corporation name may be adopted if the name is not the same every bit or too similar to an existing proper noun on the records of the California Secretarial assistant of State, or if the proper name is not misleading to the public. You can bank check the electric current database of existing names in the business search page on the Secretary of State website (http://kepler.sos.ca.gov/). Yous tin can also reserve a name for threescore days past mailing in a Name Reservation Request (http://www.sos.ca.gov/business concern/corp/pdf/naavreservform.pdf). You lot must too make sure the name does not infringe on another person'southward trademark rights. This is not e'er piece of cake to make up one's mind, but a good start includes running a trademark search on the U.South. Patent and Trademark Function database and a simple Google search. For some founders, information technology may also be important to confer with intellectual property counsel to help ensure they are not infringing on another's rights and to protect their proper noun from being used past other parties.

two.Draft and file the articles of incorporation. A corporation is legally created with the filing of the manufactures of incorporation. Articles of incorporation typically identify:

(a) The organization's name;

(b) Purpose or purposes of the nonprofit;

(c) Agent for service of procedure -- that is, a person whose proper name and address are identified and who tin receive lawsuits and other official correspondence and other matters; and

(d) Any limitations on corporate powers.

The manufactures of incorporation are typically signed by an "incorporator," which tin can be only 1 person but may also exist signed by the initial board of directors if they are named in the articles.

In that location are sample articles found on the Secretary of Land'southward website (http://www.sos.ca.gov/business/corp/pdf/articles/arts-atomic number 82.pdf). These are a good starting point but are not comprehensive guides on every important consideration. For example, the samples provide little guidance on specific purpose statements.

A word on specific purpose statements: A broad specific purpose argument provides room for the system'southward mission to evolve without requiring an amendment to the manufactures of incorporation. It may too make information technology 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 caused. If, instead, you adopt a narrow purpose statement such as "to restore and maintain Pomponio Land Beach," yous tin't utilise funds to restore any other beaches, but the statement would provide a stronger mission anchor to assist ensure that your organization stays on a specific class after the founders have left.

For additional information on this issue, read Starting a Nonprofit: Manufactures of Incorporation and Specific Purpose Statements (http://world wide web.nonprofitlawblog.com/home/2012/11/starting-a-nonprofit-articles-of-incorporation-and-specific-purpose-statements.html).

More than about the agent for service of procedure: It is as well important to understand that the amanuensis is responsible for receiving lawsuits and peradventure other important legal documents on behalf of the organisation and making sure those documents attain the President or other authorized officer in a timely manner. If the agent fails to do so (e.g., fails to take his or her mail checked regularly while away for an extended menstruum) the organization could face negative consequences such as losing a default judgment for not showing up to defend a lawsuit. An organization tin can identify an individual as agent or may elect to pay for a corporate agent, which may exist preferred if there is no person willing to accept this responsibility or if privacy concerns are an event (the amanuensis's street address volition be a matter of public record).

three. Appoint the board of directors. If the initial directors are not named in the manufactures of incorporation, the incorporator can and should appoint the lath through a written activity.

Nether California police force, a nonprofit board may exist composed of equally few as 1 director, but the IRS is unlikely to grant 501(c)(3) status to a nonprofit with but one managing director and most nonprofits have anywhere betwixt 3 and 25 directors.

These directors should sympathize their duties and responsibilities to human activity with reasonable intendance and in the best interests of the organisation while providing direction and oversight over the organisation'due south activities, finances, officers, and legal compliance. BoardSource offers valuable resources on nonprofit corporate governance, including these Ten Basic Responsibilities of Nonprofit Boards (http://www.boardsource.org/Noesis.asp?ID=3.368).

four. Draft the bylaws and conflict of involvement policy. A corporation's bylaws typically address, at a minimum, primal provisions related to the management of the activities and affairs of the corporation. Bylaws should provide guidance to the board and reassurance of sound governance practices to regime regime, funders, and other interested stakeholders.

Bylaws typically contain specific provisions detailing:

(a) The purpose or mission of the nonprofit;

(b) How directors are elected or otherwise selected (due east.k., past majority vote of directors at the annual board coming together);

(d) How lath meetings are chosen and noticed (e.g., six times per year with fourteen days advance detect by email);

(e) How board meetings are conducted (due east.g., the chair of the board presides);

(f) The officers of the corporation (a president or chair of the board, secretarial assistant, and treasurer or main financial officer are required past California law);

(thousand) The duties and responsibilities of each officer;

(h) The authorization of lath and non-board committees (e.g., committees tasked to human action with the potency of the board versus committees that can only make recommendations);

(i) The level of indemnification provided by the corporation to protect its directors, officers and other agents; and

(j) The reports due to directors (eastward.g., financial reports).

If the nonprofit has voting members, the bylaws will also need to comprise boosted 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 non await their members to actively participate in meetings and regularly exercise their voting rights. Public Counsel provides an Annotated Class of Bylaws for a California Nonprofit Public Benefit Corporation on its website (http://www.publiccounsel.org/publications?id=0060).

Separately articulated policies commonly supplement the bylaws in addressing key governance and management bug. For example, although not required by federal taxation law, information technology is considered to exist a best exercise for any nonprofit to take an adopted conflict of involvement policy. Additionally, a nonprofit must depict its policy regarding conflicts of involvement in the IRS Form 1023. Appropriately, information technology would be advantageous for well-nigh nonprofits to adopt a policy similar to the sample policy provided in Appendix A of the Instructions to Form 1023 (http://world wide web.irs.gov/pub/irs-pdf/i1023.pdf).

5. Have the initial lath actions at a board meeting or by unanimous written consent of the directors. The board should take the post-obit actions:

(a) Adopt the bylaws and conflict of interest policy;

(b) Elect officers;

(d) Approve establishing a bank business relationship;

(eastward) Approve applying for federal and land tax-exempt status;

(f) Approve reimbursement of startup expenses (if applicable); and

(g) Corroborate the compensation of the executive director (CEO) or the treasurer (CFO) (if applicable).

6. Obtain an employer identification number (EIN). An officeholder or authorized third political party designee may apply for and obtain an EIN online (http://world wide web.irs.gov/Businesses/Pocket-sized-Businesses-&;-Self-Employed/Apply-for-an-Employer-Identification-Number-(EIN)-Online).

7. File the initial registration class (Class CT-1) with the California Attorney General's Registry of Charitable Trusts. This annual registration is required for the majority of nonprofit public do good corporations and must be filed within 30 days afterwards receipt of avails. The Form and Instructions are available online (http://oag.ca.gov/charities/forms). The corporation'south articles of incorporation and bylaws should exist included in the initial filing. The Form 1023 application and federal decision letter (Pace 9) should exist submitted upon receipt of the determination letter to complete the filing. Check out this livestream webinar from the Attorney General's function on March 26th at 1pm: https://oag.ca.gov/charities/initialregistration-live.

8. File the Statement of Information (Grade 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'south address, chief officers, and amanuensis for service of process, can be filed online (https://businessfilings.sos.ca.gov/) or by mail.

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) (http://www.irs.gov/pub/irs-pdf/f1023.pdf) may exist the most challenging part of the startup process. It is a legally-driven and comprehensive inquiry covering 11 Parts and eight Schedules. A critical section for conscientious completion is Part IV, Narrative Description of Your Activities, which asks (http://www.irs.gov/pub/irs-pdf/i1023.pdf):

For each past, nowadays, or planned activity, include information that answers the following questions.

- - What is the action?
  - Who conducts the activity?
  - When is the activity conducted?
  - Where is the activity conducted?
  - How does the activity farther your exempt purposes?
  - What pct of your total time is allocated to the activity?
  - How is the activity funded?
  - List any alternate names nether which you operate, including whatever "aka" (also known as) or "dba" (doing business as) names.

Form 1023 as well requires information regarding (a) organizational construction; (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 consummate an additional schedule as a successor organization); (e) specific activities; and (f) bodily and/or projected statement of revenues and expenses (which should be consistent with whatever identified activities).

Function 10 is designed to determine the arrangement's nomenclature as either a private foundation or a public clemency. Public charity status is generally the more than favorable tax status, but requires an organisation to meet certain requirements. For most organizations, this means passing a public back up test over a five-yr measuring period. For organizations that will receive a big bulk of their support from few sources over their first v years, monitoring and managing of the public support ratio may be critically important. Public Clemency Status Simplified (a little) is a helpful online resource from Insight Center for Community Economic Development (http://world wide web.insightcced.org/uploads/publications/legal/public_charity_status_simplified.pdf).

The filing fee for Form 1023 is currently $850 for all but the smallest organizations.

The IRS may typically have three-4 months or longer to procedure a Class 1023 application for exempt status. Yet, the waiting catamenia may be much longer if the application contains errors, omissions, or other information that require additional development by a special IRS section. The IRS application process is further explained on its Where Is My Exemption Awarding website (http://world wide web.irs.gov/Charities-&-Not-Profits/Where-Is-My-Exemption-Application%3F).

x. Use for California tax exemption with the California Franchise Taxation Board (FTB) and receive an affirmation of exemption letter from the FTB. Organizations with a 501(c)(3) federal decision alphabetic character can request California affidavit of tax exemption under California Revenue & Taxation Code section 23701d from the FTB by filing Course 3500A along with a copy of the IRS determination letter. The FTB volition recognize the system's exemption from state income taxes every bit 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 country income taxation exemption. There is no fee for Form 3500A and a $25 fee for Form 3500.

You tin find a downloadable form at

https://www.ftb.ca.gov/forms/misc/3500a.pdf

Practice you lot need to work with an chaser to offset a nonprofit?

Although the majority of nonprofits are gear up without the help of lawyers, it'southward easy to brand mistakes that go plush to right later (such every bit unwisely creating voting membership structures, adding unlawful provisions to template bylaws, violating the commerciality doctrine, etc.). We recommend having experienced professionals involved -- such equally attorneys, board members with nonprofit incorporation experience, and experienced consultants. Don't discount the value of a knowledgeable attorney.

Should You Start a Nonprofit?

Now that you know how to showtime a California nonprofit, you should thoughtfully consider whether this is the correct pick for your ideas and for the public do good. There may be other means to carry out your dreams, including working nether the umbrella of an existing nonprofit, See Alternatives to Forming a Charitable Nonprofit (http://apps.americanbar.org/buslaw/blt/2009-07-08/takagi.shtml). One oftentimes 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 information technology off at a after date. For more information on fiscal sponsorship, see Fiscal Sponsorship Basics from the Bar Association of San Francisco. (http://www.sfbar.org/forms/vlsp/fiscal-sponsor-memo.pdf)

About Emily Chan and Cistron Takagi:

Attorneys Emily Chan and Gene Takagi wrote this guide for the California Clan of Nonprofits as part of their pro bono work.

Emily Chan, an associate with the NEO Police Grouping, was recognized as the 2012 Outstanding Nonprofit Lawyer – Young Attorney by the Nonprofit Organizations Committee of the American Bar Association. Factor Takagi is managing attorney of the NEO Law Group, an adjunct professor at the Academy of San Francisco, and contributing editor of the Nonprofit Law Blog.

You tin achieve them at www.neolawgroup.com or 415-977-0558.