The Golden State is home to some of the country’s most innovative and impactful nonprofits. Over 200,000 nonprofits operate in California and help to support the state’s economy. If you’re ready to join their ranks, we’ll guide you through the step-by-step process for starting a nonprofit in California and obtaining your 501(c)(3) status.
Select a Name
Choosing a name for your nonprofit is a significant decision. It’s not just a label, but a representation of your organization’s purpose and a key to attracting potential donors and constituents. This decision is one of the most challenging in starting your nonprofit. Remember, the name must meet the specific requirements set by California and include a corporate suffix such as Corporation, Corp., Incorporated, Inc., Company, or Co. These suffixes indicate the legal structure of your organization and can influence how the public and potential donors perceive your nonprofit.
You cannot use a name currently registered in the state, so you should also check the availability of your chosen name (https://bizfileonline.sos.ca.gov/search/business). If your preferred name is unavailable, consider alternative name variations, such as adding a location or a descriptive word to your original name.
A corporation’s name must not be “likely to mislead the public.” It must be distinguishable in the records of the Secretary of State from the name of an existing corporation or a corporation name that another party has reserved. Note: A name must meet the definition of distinguishable. For example, ABC Inc. and ABC Corporation would not be deemed distinguishable, as the only difference in Inc. vs. Corporation. The root name is still ABC. The name reservation requirement is under California Corporations Code section 201(c).
Establish a Board of Directors
The Board of Directors is the backbone of your nonprofit, assuming the crucial responsibility of guiding and making decisions on behalf of the organization. It’s not just a group of people but a team of leaders who play a vital role in the effective governance of your organization. Their leadership will provide a strong foundation for your nonprofit’s operations. Typically, a board comprises critical positions such as a president, treasurer, secretary, and other roles necessary for effective organizational governance.
Think of the Board as the people who run and manage the nonprofit organization. They are responsible for setting the organization’s strategic direction, ensuring financial stability, and overseeing its operations. They may hire staff members to conduct business but are always responsible for the organization.
Per federal regulations, a minimum of three directors who are not related to one another must be appointed (unless the organization is a Private Foundation, where related board members are ok). The organization’s Bylaws typically outline the specific board positions, ensuring compliance with internal guidelines and state requirements.
Incorporate your Nonprofit
This step is a big one! Think of incorporation as the company equivalent of a birth certificate for your new nonprofit. Incorporation establishes your organization legally in California, making everything official. The Articles of Incorporation are legal documents that include essential information about the nonprofit, such as its name, address, incorporator, registered agent, and more.
California charges a $5.00 filing fee and typically processes applications in 5 to 7 business days.
Clauses
When the IRS establishes federal tax-exempt status (which we’ll discuss later in this guide), specific clauses must appear in your Articles of Incorporation.
The IRS requires specific clauses addressing the organization’s purpose and dissolution (what happens if the nonprofit closes or stops operating). For instance, the purpose clause should state that the organization is organized exclusively for charitable, religious, educational, or scientific purposes. The dissolution clause should outline that the organization’s assets will be distributed for a tax-exempt purpose if it dissolves. Here, the purpose is specific to all tax-exempt nonprofit organizations and is different from the primary purpose the organization is trying to fulfill. Sometimes, the IRS uses the same word to define multiple things.
The IRS requires this language to appear on every nonprofit organization’s Articles of Incorporation. While a few states include this language by default, most do not. Filing for tax-exempt status, which we’ll address later in the guide, requires directing the IRS to this language. If it does not appear in the original Articles of Incorporation, an amendment to the language is necessary and may delay your 501(c)(3) status.
Create Organizational Bylaws
Bylaws are a comprehensive set of rules dictating the nonprofit’s operations and governance. They provide a clear framework for how the organization will function and ensure transparency and accountability.
Conflict of Interest Policy
A Conflict of Interest or COI Policy establishes rules to prevent and or to disclose potential profitability conflicts. 501(c)(3) organizations are frequently subject to intense public scrutiny, especially where they appear to have inappropriately benefited their officers, directors, or trustees. The IRS also has an oversight role concerning charitable organizations. A well-written conflict of interest policy is a strategy we encourage organizations to adopt to establish procedures that will offer protection against charges of impropriety involving officers, directors, or trustees, ensuring the highest ethical standards.
Establish a Federal EIN (Employee Identification Number):
Once you have obtained your Articles of Incorporation for your nonprofit organization, the next step is to apply for a Federal Employer Identification Number (EIN). You can do this online through the IRS website or by submitting Form SS-4. This unique number serves as an identifier for your organization and is issued directly by the Internal Revenue Service (IRS). An EIN enables your nonprofit to conduct various business activities, such as opening bank accounts, filing state and federal taxes, and hiring employees.
Apply for 501(c)(3) Federal Tax Exemption
Tax-exempt status means that an organization is exempt from paying federal corporate income tax on income generated from activities substantially related to the purposes for which the entity was organized (i.e., to the purposes for which the organization received tax-exempt status).
Did you know there are over two dozen types of 501(c) tax-exempt organizations? 501(c)(3) is by far the most common and well-known, but it may not be the one that fits your organization. Determine which type of 501(c) tax-exempt nonprofit your organization is and prepare the appropriate application. It will likely be the IRS 1023, 1023 EZ, or 1024.
The IRS charges a filing fee of $275 to $600 and typically processes applications in a few months.
Learn standard requirements to apply for 501(c)(3) Exemption.
File Additional State Paperwork
In most states, generating income through fundraising activities to help fund your programs and invest in your organization requires additional registrations upon receipt of 501(c)(3) approval. To learn about the ongoing California state compliance requirements, please visit the California Nonprofit Requirements page here!
