How to Start a California Nonprofit Corporation in Ten Simple Steps
You may know that I am a professor of religion and humanities at Grossmont College. You may not know that I am also a core faculty professor for Southern State University, a business University, as well as a faculty member of Coleman University which focuses on training for the computer industry. Over the course of my career, I have started two nonprofits of my own and assisted many other clients with starting their nonprofit and for-profit companies. Presently, I own a for-profit company, Scholte Consulting Services, which specializes in assisting people starting and developing nonprofit and for-profit companies both in business and education.
In this blog, I will share a presentation I gave at Southern States University which contains the basics of what I learned over the years with my own business and assisting others with starting for-profit and nonprofit companies. If you like to learn more, or would like assistance with developing your own company, I would be happy to assist you. I invite you to see my website: www.scholteconsulting.com You are also welcome to contact me at firstname.lastname@example.org
By way of introduction, many people believe that to start a company or nonprofit you have to begin with an attorney. This is a misnomer. You do not need to contact an attorney to start a nonprofit. Later in the process, I would recommend that you have an attorney who can advise you with different business decisions, contract reviews, agreements, business negotiations, etc.; however you don’t need to pay attorney’s fees to start your nonprofit.
Anyone can do the paperwork on their own, however many of my clients don’t have the time so they hire me to assist them with putting it all together. I can assist them with each detail from incorporating, receiving their nonprofit status from the IRS, seeking their nonprofit status from the USPS, getting their EIN number, applying to the California Franchise Tax Board, to writing bylaws, developing a corporate book, creating a board, running a board meeting, and taking board minutes. As much or as little as they need, depending on how much experience they’ve had in running a nonprofit company.
The place to begin is to visit the California Secretary of State’s website. You can find it here: http://www.sos.ca.gov/
When you get on the site select the following Business Programs – Business Entities – Forms, Samples, and Fees. You will find everything you need right on site.
You will find that there are many different types of nonprofit corporation, which come under the basic headings:
Nonprofit Mutual Benefits
Nonprofit Public Benefits
Mutual Benefits – Solely for the benefit of its members (Example: Golf Club –serves the needs of the members only) Not a charity or tax-exemption.
Nonprofit Public Benefits – Exists to benefit the public (Example: Childcare centers, shelters for the homeless, community clinics, hospitals, performing arts groups, conservation groups, museums, schools.) Tax-Exempt.
Nonprofit Religious – Exists for religious purposes. (Example: Churches, Mosque, Temple, Synagogue, School, Foundations)
Step one is to select the type of nonprofit you would like to create. If you’re not sure I’d be happy to assist you with this process, or you can go online and read up on the various definitions that can inform your decision.
Step two is to Prepare Articles of Incorporation. This is not a very hard task because you can simply follow the sample that the Secretary of State has on their website. Basically there are five articles that must be included on your Article of Incorporation statement. The first one is the name of the corporation. So you do need to think up a name for the corporation which is one of the fun things about forming a nonprofit. Second you need to state what type of nonprofit you are starting whether it is a mutual benefits company, nonprofit public benefits company, or a nonprofit religious. You will also need to state in that section the mission or the specific purpose of the corporation. The third area is providing the name and address of the corporation’s initial agent for service of process. An agent for service is basically a company’s representative and public face for the purpose of receiving legal papers. Fourth you need to include the corporate address, and this cannot be a PO Box, which is the company headquarters and where all official documents will be sent or where the service of process can take place. Finally, you make the 501 (c)(3) statement. This includes four things; first that the company is organized exclusively under the IRS code for nonprofits. Second, that the company is not organized for any political reason. Third, that the property of the corporation will not benefit any director, agent or officer of the company or any other private person. And forth, how the company assets will be distributed if the company is dissolved in the future.
Step three File Articles (with fee) to Secretary of State. Send the articles of incorporation to the Secretary of State’s office with a nominal fee. You can find the address and fee on the website. Don’t forget to make a copy of the articles of incorporation and your check to keep in your files just in case they lose them in Sacramento.
Step four Wait for Secretary of State to Stamp Articles. In a few weeks after you send your articles of incorporation to the Secretary of State’s office you should receive the articles back. The exact amount of time it takes for them to send it back to you just depends on how busy the Secretary of State’s office is Sacramento. Before you do anything else wait for the return of the articles of incorporation. They will contact you if they don’t understand something on the form, if everything is correct you should receive them back with a stamp on the front giving the date when they were filed and a corporate number. There should also be a stamp on the back which is a certification from the Secretary of State with the state seal. When you receive them back you are now incorporated in the state of California. However you need to remember you are not a nonprofit as far as being a tax reduction for donors until you receive your designation from the IRS. This is a separate action, which I will discuss later in the blog.
The fifth step is to Apply for a Federal Employer Identification Number (EIN) [Form SS-4]. Employer Identification Numbers are issued for the purpose of tax administration, hiring staff, and communicating with the IRS. The IRS has now made it fairly easy to get an EIN number without even having to fill out Form SS – 4 and sending it in. You simply go online and fill out a few question immediately after which you get the number.
The sixth is to file a Statement of Information [Form SI-100]. California law requires corporations, limited liability companies and common interest development associations to update the records of the California Secretary of State on an annual or biennial basis by filing a statement. For a nonprofit you must file the Statement of Information with the Secretary of State (include fee) within the first 90 days of incorporation and thereafter file every two years.
The seventh step is to Begin the process of getting your 501 (c)(3) status from the Internal Revenue Service (IRS)
This is a tricky step because up to this point the corporation has not been designated by the Internal Revenue Service as a nonprofit, which is the only way the company can receive donations that are tax-deductible, however to get the designation you must act as if you are, so you can prove that you’ve been functioning as a nonprofit which deserves the nonprofit designation. Here’s how to prove that you are a nonprofit.
Buy a Corporate Book – File all corporate papers including:
Articles of Incorporation
(Later also include)
IRS Determination Letter
California Franchise Tax Board Information
Other Corporate Information
-United States Postal Service Tax Exemption
Select Board Members
Draft and Adopt Bylaws
Have Board Meetings
Create Marketing Collateral Materials
Take all of this information make copies and send the copies to the IRS with Form 1023.
Step eight File Form 1023 with required Information (Fee $400.00 if corporate income is less than $10,000, if over $10,000 fee is $800.00) Hopefully, you have included all the information that I stated in step seven. The more things you can show that demonstrate to the IRS that you are a nonprofit corporation the better. If the IRS needs more information they will contact you. Of course, this will take more time toward receiving your designation.
Step nine Wait for IRS Determination Letter.
Step Ten Apply for California Franchise Tax Exemption.
Even with the IRS designation you must apply to the California Franchise Tax Board to be tax exempt in California. It is easier if you have your IRS Determination Letter.
File Form 3500A (no Fee) – If you file before you receive the IRS Determination Letter you must file Form 3500 with a fee of $25.00
Remember the company will need to maintain its tax-exempt status. So each year the company will need to file Form 990/990EZ and Schedule A (Churches File Form 990N if income under $50,000)
Even with the IRS designation and California Franchise Tax Board exemptions you will need to request a USPS Tax Exemption if you want to use the nonprofit status with mailings. This takes time and can be difficult to gain, but it will save the company money if you do any mass mailings.
This covers the basics on how to start a nonprofit company. If you would like more information or if I can assist you with the process, please don’t hesitate to contact me.
John M. Scholte, M.Div.