So you want to form a nonprofit organization to benefit the community in some way, shape or form. Fortunately, in exchange for your admirable pursuit, the government provides you with some benefits of its own. Specifically, the Internal Revenue Service (“IRS”) will provide your nonprofit with tax-exempt status and, further, the ability to incentivize third parties to donate by providing these donors with a charitable deduction on their taxes. At the end of the day, the government provides these benefits because it wants to do its best to help your cause succeed. In light of this, let’s discuss how to form a nonprofit.

This section addresses both the formation and organization of a 501(c)(3) nonprofit corporation. Generally, the nonprofit religious and nonprofit public benefit are the type of organizations that people are referring to when discussing nonprofits. It should be noted that at times there are differences in the specific terminology; for instance, where California would refer to a youth educational organization as a nonprofit public benefit corporation, the Internal Revenue Code may classify it as a private foundation. Don’t let this confuse you.

To begin, the typical process for nonprofits is to form as corporations within their state and then apply to qualify for nonexempt status as a 501(c)(3) organization with the IRS. Although most for-profit entities elect to incorporate in Delaware because of the well developed body of law, the same considerations typically do not apply to nonprofits.

If you decide to form in California, keep in mind that there are state specific laws in place with respect to name requirements. Specifically, California allows nonprofits to use “foundation” or “nonprofit” in their name, however, the terms “bank” or “trust” are prohibited. Additionally, because many nonprofits aim to develop goodwill and reputation with respect to their organization and purpose, obtaining a trademark or service mark may be a good idea.

In theory, forming a nonprofit does not require legal assistance; however, due to the moderately complex two-stage filing process, having an attorney form the nonprofit is highly recommended. Nevertheless, I have provided detailed steps for those who want to understand the formation process in California.

Step 1: Designate an incorporator. The incorporator will be the person that takes the initial steps to organize the nonprofit. Specifically, they will be the person who will either complete all the filings individually or be the person with whom counsel corresponds.

Step 2: Prepare the nonprofit’s initial business plan to include the primary purpose of the organization; the manner in which it intends to achieve its goals; fundraising methods; plans on building community support; and recruitment of directors, employees, and volunteers.

Step 3: Determine the initial directors and the registered agent for service of process.

Step 4: File the articles of incorporation with the California secretary of state. For example, the California secretary of state website provides form ARTS-PB-501(c)(3) which an incorporator can file with a $30 fee.

Step 5: Determine the initial directors and the registered agent for service of process.

Step 6: Apply for an Employer Identification Number with the IRS. The EIN is required before the nonprofit can filed its tax-exemption application for 501(c)(3) recognition.

Step 7: After receiving verification that the nonprofit has been incorporated by the secretary of state, apply for federal tax-exempt status using IRS Form 1023 ($400-$800). Notably, certain small organizations may be able to use Form 1023-EZ ($275). Upon IRS approval, a letter of determination will be mailed out.

Step 8: Create a corporation binder or order one online to include a corporate seal, minute entry, and other internal operating documents. Keep the IRS determination letter in this corporate binder.

Step 9: Within 90 days you should file the updated statement of information (SI-100: $20) form with the secretary of state.

Step 10: Draft Bylaws to set forth the internal governance rules of the organization.

Step 11: Hold an organizational meeting where the board adopts the bylaws, elects officers, and approves initial transactions for the organization. (i.e., open bank accounts, obtain liability insurance for directors and volunteers, create donor thank you letters which references the exact donation amounts and the fact that the donations are tax deductible).

Step 12: Apply for tax-exempt status with the California Franchise Tax Board by filing Form 3500A; otherwise, the organization will be subject to the state’s $800 minimum franchise tax.

Step 13: The Corporation must register with the Registry of Charitable Trusts of the California Attorney General’s office within 30 days of the organization’s initial receipt of assets. The Corporation should register before engaging in charitable solicitations in California. The registration form (Form CT-1) is available on the Attorney General’s website at http://ag.ca.gov/charities/forms/charitable/ct1-form.pdf.

Step 14: The Corporation also must file annually Form RRF-1, a disclosure reporting form available on the Attorney General’s website, with the Registry of Charitable Trusts. This report must be filed within four months and fifteen days after the end of the Corporation’s fiscal year unless the Corporation has received an extension of time to file its federal income tax return, in which case the Form RRF-1 (together with copies of any extension from the IRS) should be filed at the same time as the federal tax return. The report provides accountability to the public and to the Attorney General in its role as legal representative of the public interest. Form RRF-1 and instructions can be found on the Attorney General’s website at http://ag.ca.gov/charities/forms.php. Failure to file in a timely fashion could result in revocation of the Corporation’s state tax exemption for the year in question and substantial penalties.

Step 15: The nonprofit must comply with all solicitation laws regarding charitable donations. Typically, the nonprofit must register with the state authorities stating its proposal and purpose.

Step 16: If applicable, the nonprofit may apply for mailing permits with the United States Postal Service which provide for discounted postal fees.

Step 17: The nonprofit should designate a director or officer to be in charge of putting a labor and employment handbook together addressing labor/employment laws with respect to employees and volunteers.

Step 18: Identify competent personal to be in charge of annual compliance. The nonprofit is required to file IRS Form 990, the annual information return for 501(c)(3) organizations. Additionally, the nonprofit is required to file Form 199, the annual information return required by the California Franchise Tax Board. (See https://www.ftb.ca.gov/businesses/Exempt_organizations/Filing_Requirements_Form_199.shtml).

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