How to Start a Nonprofit in California: Everything You Need to Know

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What Is a Nonprofit in California?

A nonprofit in California is a company, usually a corporation, that operates with the intention of helping the community instead of turning a profit. Usually, there is more than one member of the company, and they form a group of like-minded individuals who want to serve the community.

Instead of giving profits to owners and shareholders, the profits have to go back into the business to expand their operation and to help the business continue helping people. For this reason, nonprofit companies often have a tax exemption status and will use fundraising events to generate revenue.

It’s also important to note that nonprofits have to make their financial information public. This means that anyone can look into the company to see how it operates and what it does with its money. Additionally, operating information is made public to donors to ensure that the money is being put to good use.

Typically, nonprofits are under more scrutiny than other business entities due to their tax-exempt status. Therefore, it’s important to ensure that everything is compliant to avoid fines, penalties, lawsuits, and even jail time.

What Are Some Examples of Nonprofits?

There are likely more nonprofits out there than you think. While you might think of the typical nonprofit being a small company that does community outreach, they can be large companies or businesses like a hospital. For this reason, it’s important to understand the types of businesses that you’ll find as nonprofits in California.

Some common examples of nonprofits include:

• Universities
• Charity organizations
• Social services for children
• Animal rescue organizations
• Organizations that protect the environment

There are also some famous nonprofits that you might know of including the Red Cross, Feeding America, and Best Friends Animal Society. These nonprofits are famous on a national level for the help that they offer to people and animals.

What Qualifies as a Nonprofit in California?

To qualify as a nonprofit entity in California the company has to meet the criteria to be a nonprofit. Companies will also have to meet the federal criteria as well to ensure that they maintain compliance with the IRS. Some of the criteria needed to qualify as a nonprofit in California include:

• Serving the public, achieving religious missions, or helping the community
• Form an established 501(c)(3)
• Avoid conflicts of interest and have a method to deal with them
• Using revenue to grow the business instead of paying out shareholders
• File form 990 with the IRS
• Report all revenues and expenses
• Startup funds, loans, or lines of credit

The requirements necessary to form a nonprofit in California vary based on the type of company that you’re forming. For example, religious companies may have different obligations with the IRS to maintain their tax exemption status.

Do Nonprofits Pay Tax in California?

Yes and no. Nonprofits are tax-exempt in certain situations but not in others. For example, nonprofits don’t have to pay income tax in California thanks to their tax exemption status, but they might have other tax obligations. On the other hand, nonprofits don’t have to pay the usual California business tax.

One example of a tax obligation that a nonprofit might have is employment taxes. Employers are responsible for paying Social Security taxes and Medicare taxes at the state and federal levels. For this reason, your nonprofit may have to spend money in taxes each year if you have a handful of employees on your payroll.

Another example of taxes that a nonprofit has to pay might include sales and use taxes. This is often passed off to customers of the nonprofit, but the nonprofit still has to pay these taxes one way or another.

The last thing to note is that some nonprofits in California may have additional business activities that they participate in. When this happens, any activities listed outside the scope of what the nonprofit handles are taxed.

Overall, a nonprofit does have to pay some taxes in California, so tax exemption might not mean what you think it does. Keep this in mind during tax season.

How Much Does It Cost to Start a Non Profit in California?

The goal of a nonprofit is often a noble one. However, that doesn’t mean you can go out there and start one for free. The cost to start a nonprofit in California can be broken down by a few filing requirements you have to meet. For example, you have to spend at least $30 to file your nonprofit articles of incorporation.

Some additional costs you have to deal with include $10 to reserve the name in California and any other state you plan on establishing your nonprofit in.

Another cost you may also need to focus on includes submitting the 501(c)(3) form to the IRS. This can cost a minimum of $275 and more than $600 depending on how much revenue your company is projected to generate.

It’s also possible to spend more money starting a nonprofit in California. This is due to the need for business licenses or permits in the areas that you plan on operating in. So, make sure you focus on verifying how much a business license may cost in some California counties.

13 Steps to Start a Nonprofit in California

Starting a nonprofit in California can be a long and tedious process, so it’s important to have all of the information you need ready to go in one simple place. Plus, you want to go through each step slowly and make sure you don’t miss anything to remain compliant with the state laws in California.

The good news is that you can start a nonprofit in California in 13 easy steps. While time-consuming, you’ll find that these steps are comprehensive enough for you to not miss anything when forming a nonprofit in California.

Step 1: Have a Plan

One of the most important steps you need to follow when forming a nonprofit is creating a plan. Your business plan will include the name of your nonprofit, how you plan on generating revenue, and your company’s mission.

Having a plan in place will help you create a nonprofit because it will outline the entire process of forming the business. Your plan should also include the filing requirements you’ll meet, people who will be involved in the business, and an executive summary.

The plan should also be as detailed as possible. In fact, nonprofits should always have a solid plan, because government agencies may look into them with more scrutiny than for-profit companies in California. Some other details to include in a business plan include:

• The name of the owners
• The type of legal entity the nonprofit will be
• The business that you plan on doing
• A target demographic you’ll be working with
• What you’ll be doing with the money
• How long do you plan on being in business
• Other members of the nonprofit

These are only a few bits of information you can use to get started. However, we recommend including everything you can think of to prevent problems in the future.

Step 2: Name Your Nonprofit

The second step is to come up with a good name for your nonprofit. Naming a nonprofit is important because it’s the first thing that people will see when they get involved with your company. Therefore, a good name can go a long way in helping a nonprofit be successful.

Choosing a name may seem as simple as coming up with something that relates to your cause but it’s not always that easy, especially if it’s already taken. You should also check with the United States Trademark Office to ensure that the name you choose doesn’t infringe on anyone else’s rights.

Additionally, you can check to see if the name is taken by checking with the California Secretary of State (SOS). In order to register a nonprofit business name in California you have to submit the name to the California Secretary of State. You might have to pay $10 to reserve to ensure that someone else doesn’t take it from you.

If you have plans on moving your nonprofit to another state in the country, you should also make sure the name is available there. Otherwise, you can run into trouble and have to operate under an alternate name in that state. This can even result in an extra charge when you register your nonprofit in that state due to the name change.

Step 3: Choose a Legal Entity

The next part of the process is choosing a legal entity. A legal entity is the structure of your company, which can influence how you pay taxes and how the public views your business.

While you can start a nonprofit as any legal structure, the recommended path to take is starting one as a corporation – this is what most people refer to when starting a nonprofit. This is because you may have to change the way a nonprofit LLC is taxed and managed to be eligible for nonprofit status.

For these reasons, we recommend forming a corporation. You’ll end up needing more than one member in the nonprofit for your best chances of success, according to California state law and the IRS.

Step 4: Choose a Registered Agent in California

If you’ve decided to organize your business as an LLC or corporation in California, the next critical step is to choose a registered agent. This is a necessary requirement when drafting your Articles of Organization, the document required to officially register your LLC or corporation with the California Secretary of State.

So, what does a registered agent do? A registered agent is a person or business entity responsible for handling important documents on behalf of your business, including tax forms, legal notices, lawsuits, and official government communications. Essentially, your registered agent acts as the main point of contact between your business and the state.

Who can be a registered agent? The registered agent must be a California resident or a corporation authorized to operate in the state, such as a registered agent service. If you want to serve as your own registered agent, you’ll need to appoint an individual within your company, as California law doesn’t allow business entities to serve as their own registered agents.

For further information on the requirements for registered agents in California, refer to the California Corporations Code.

Step 5: File Articles of Incorporation

The next step is to file your articles of incorporation. Every corporation needs to file its articles of incorporation with the California Secretary of State to remain compliant and be approved to do business in the state. Your articles of incorporation need to include the following information:

• The name of the nonprofit
• The purpose and benefits of your nonprofit
• The agent for service of the process; someone who can receive lawsuits and handle other official matters in the state of California
• Any limitations placed on the nonprofit due to its tax-exempt status
• The contact information for the nonprofit, including all addresses
• Dedication and dissolution clauses

California also has more than one legal designation for nonprofits. This means that you have to identify the type of nonprofit in California that you plan on forming based on how your company will operate. The three designations you can choose from include nonprofits that focus on religion, mutual benefit, and public benefit.

Finally, an Incorporator needs to sign off on the articles of incorporation. This person is responsible for ensuring that everything is in order when you file the articles of incorporation. However, you can have multiple board members sign off on most documents.

Step 6: Appoint Your Board of Directors

When you file the articles of incorporation, you don’t always have to have all of your board members, which is when this step comes into play. We recommend doing so during the initial registration process. However, if you’re waiting for a proof of concept or want to hold off on appointing board members you have every right to do so in California.

You should also note that you don’t need a board of directors to form a nonprofit in California. The state allows you to have as little as one board member when you create the nonprofit organization.

Unfortunately, the IRS doesn’t feel the same way. While it’s possible to have only one board member, the IRS might not grant your corporation a tax-exempt status due to the lack of board members.

The federal government feels as if a nonprofit owned and run by a single person can lead to problems that compromise the nonprofit’s integrity. Therefore, the IRS recommends having at least three board members when forming a nonprofit. On the high end, the IRS recommends having 25 or fewer board members.

Board members aren’t just people on a board that have no responsibilities. They have legal obligations and duties to the nonprofit and always have to act in the best interest of the company and the people the nonprofit is working with.

Board members also have to manage the nonprofit’s finances and ensure that it remains compliant with tax-exempt status, California state laws, and federal laws.

Step 7: Draft the Bylaws and Conflict of Interest Policies

Nonprofits are usually corporations, but if you happen to have started a nonprofit LLC you can skip this step. For corporate entities, however, you have to come up with your bylaws. The bylaws for a corporation outline how the corporation will operate, which is even more important for a corporation that will be helping the community as a nonprofit.

Ultimately, the purpose of drafting bylaws is to ensure that the company is being run properly It also helps the board determine if the best practices are in place for the company. Aside from helping the board feel more comfortable, it may also help shareholders and government entities feel more comfortable about your business.

Information to include in your bylaws includes:

• The powers of all the board members
• What the board members will be handling
• How directors of the company are elected or selected
• How the board can take certain actions involving the corporation
• When and how board meetings are called
• What goes on during a board meeting and how it’s conducted
• Authorization of board and non-board committees
• Reports due to members and board members of the corporation
• Mission statement and the overall purpose of the company
• Core values for the corporation

Most of the information present in the bylaws can be pulled right from your business plan if you wrote a comprehensive one.

Aside from bylaws, there are some separate policies that a company should have in place, especially a nonprofit. For example, nonprofits should have a conflict of interest policy. This outlines where a nonprofit can operate and how it won’t overstep.

Even if you don’t choose to have a written conflict of interest policy, you still need to notify the IRS about how you would handle a conflict of interest. You’ll have to fill out the 1023 form. This form will help you outline how you handle conflicts of interest, which can help your nonprofit down the line in addition to making you compliant.

Step 8: Take Initial Board Actions

When forming a nonprofit corporation, the board needs to take action. Taking action allows the corporation to have all of the other steps we covered in place and ready to go. This needs to be done in a meeting setting where all of the board members are present to voice their opinions, vote on outcomes, and sign off on the forms.

Some initial actions that board members should take include:

• Adopting and outlining the conflict of interest policy and bylaws
• Determine the authorized number of directors if this has been outlined within the company’s bylaws
• Choose the fiscal year
• Establish a bank account and consider lines of credit
• Get approval for tax-exempt status
• Determine how the president of the nonprofit will be compensated, usually the CEO of the company

Depending on the type of nonprofit you may have to include more information, but this will help you get started.

Directors may also want to fill out other relevant paperwork for the corporation or at least begin the process. This may include annual disclosures and consenting to receive electronic transmissions – the latter is required by law in California.

Step 9: Obtain an EIN

You may be wondering “What forms does a nonprofit have to file in California?” The next few steps cover the forms you need to submit to get your nonprofit up and running. The first application you’ll want to submit is to get your EIN, or employer identification number.

Companies need an employer identification number in order to function as a corporation, as this is the number that employers use to file their taxes with the IRS. During the initial action, or even prior to it, board members should apply for an EIN. This can be done online, through mail, and sometimes over the phone depending on your situation.

Step 10: File a Statement of Information with the California Secretary of State (SOS)

Once your nonprofit corporation becomes incorporated you need to fill out a Statement of Information. Every corporation needs to file its Statement of Information in California within 90 days of incorporation. Failing to do so will result in fines and penalties unless you have an extension.

You can file this paperwork online, in the mail, or you can deliver it in person. This is a filing requirement, so you need it filed to remain compliant. So, without it, you can’t legally operate in California. In fact, you can face daily fines and penalties for not filing your Statement of Information.

The information that you need to include in your Statement of Information may vary based on the company. However, you should include the principal officers, address, and the agent of service. These forms are straightforward to fill out, so all you need to do is follow the steps on the California Secretary of State website.

Step 11: Apply for Federal Tax Exemption Status

The most challenging part of starting a nonprofit in California is applying for tax exemption status. During this part of the process, you need to apply for the federal tax exemption status. This is how you start a nonprofit under Internal Revenue Code (IRC) Section 501c3.

You have to fill out form 1023 and make sure every section is completed properly to avoid any legal problems or run the risk of not getting approved for nonprofit status. While challenging to complete, the form must be done online, so you don’t have to worry about mailing anything or visiting any federal offices.

To start a 501c3 you’ll have to fill out the form online and create a pay.gov account. The IRS has videos online about how you can properly create an account and complete the necessary forms..

In totality, the form has 10 parts and 8 sections that you need to complete before you can be approved for 501c3 status in California. The good news is you can save the form and return to the form any time you need; this makes it easier to take breaks when you need them

It’s also important to note that there may be different forms based on how much revenue a nonprofit generates. For example, nonprofits that don’t earn more than $50,000 during the first three years may be eligible to fill the 1023-EZ. This online form is less complicated, but expect to pay around $600 to file this paperwork.

Step 12: Apply for Tax Exemption Status in California

The next step is to apply for your tax exemption status in California, which can be recognized under the California Revenue and Taxation Code. This needs to be done through the California Franchise Tax Board.

To file for tax exemption status properly, you need to fill out the 3500A form. This form also has to be sent in with the letter of determination from the IRS that states that you have 501c3 status. Once you send this form in, the Franchise Tax Board will recognize the company as tax-exempt from the federal date of the exemption.

It’s also important to note that you can have a nonprofit in California that’s only tax-exempt in the state of California. In these cases, the company will have to fill out the 3500 form. This form is more complicated, though, and it’s not always possible for you to get approved.

We recommend getting your federal exemption first before you plan on filing for state tax exemption in California. Doing so is only bound to help you in the process.

Step 13: Register for Charitable Fundraising and Secure Permits

When you want to start a nonprofit in California, you also have to make sure you’re compliant with California’s rules and laws. This means you might need zoning permits, business licenses, and insurance to keep your nonprofit running properly.

Most California counties require a business license in order for you to operate in the area. What’s more, you may need permits to sell food or provide food for people in need at places like a food kitchen.

You can secure most of these permits by working with the county you plan on operating in, so it’s important to check the zoning and license requirements of that area. Also, you’ll need these permits and licenses in each county you plan on operating in, so one might not be enough.

Another necessary part of the process is registering with the Attorney General’s Registry of Charitable Trusts. You have to fill out the CT-TR-1 to fundraise with your nonprofit, which is one of the primary methods a nonprofit has for making money. You have 30 days to file for this paperwork, or else you can end up with a nonprofit that doesn’t have any cash flow.

California Nonprofit FAQ

Have questions about starting a nonprofit in California? We have answers to the most common questions below.

Do California Nonprofits Need Registered Agents?

Yes, like any other business in California, nonprofits need a registered agent. A registered agent will function as the point person for legal issues and contact the state of California.

Registered agents can be the owners of the nonprofit, employees, or other people who work for the nonprofit. Additionally, people from outside the nonprofit can be a registered agent.

Who Owns a Nonprofit in California?

Nonprofits don’t have any owners. Having an owner for a nonprofit would defeat the purpose, so instead of an owner, they have board members and trustees. The board will set the policies for the nonprofit and determine how cash flow is distributed, hiring employees, and managing strategies for expansion.

While there isn’t one single owner for a nonprofit in California, it still operates like a traditional business just with more voting and discussion around implementing policies.

Can the Founder of a Nonprofit Be on the Board?

Yes, the founder of a nonprofit can be on the board. Ultimately, it’s up to the founder and the role that they want to take in the company.

Founders can also be a part of the nonprofit in other ways, like supporting the nonprofit as a silent investor or someone who handles the fundraising. Ultimately, there aren’t many restrictions on who can be on the board. For example, even a husband and wife can be on the board of a nonprofit.

How Long Does It Take to Start a Nonprofit in California?

You can start a nonprofit in California fast. In fact, you can form your nonprofit in around 1-3 days. You can even pay a rush fee to have your articles of incorporation filed within 24 hours or on the same day.

However, that doesn’t mean your nonprofit is ready to go. You’ll still have to wait for the IRS to approve your nonprofit for tax-exempt status. This process can take up to 6 months, but usually, it will happen in less.

How to Start a Nonprofit Organization With No Money?

Nonprofits can be expensive to start and maintain, especially because they’re often not focused on making money like other businesses in California. The good news is that you don’t need money to start one if you have people who are willing to invest in your nonprofit.

The best way to start a nonprofit with no money is to have investors help you with startup costs. These shareholders won’t get paid, so you’ll have to find people who want to help the community. Another way to secure funds is to apply for loans. If you have some startup capital or collateral it can be easier to get a business loan.

Yet another way to start a nonprofit with no money is to raise money through fundraising events. This can also be helpful for maintaining revenue and paying employees. While noble, the financial aspect of nonprofits can be complicated, so make sure you focus on it in your business plan.

Start a Nonprofit in California Today!

Starting a nonprofit can be one of the best things that you do. When you get a group of people together who really care about the community you can accomplish goals that elevate those around you. In fact, some nonprofits help people through natural disasters and can even save lives.

If you want to start an organization that has a purpose beyond making profits, a nonprofit business is right for you. While starting a nonprofit can take a long time and the application process to be tax-exempt can be rigorous, it’s worth the effort.

That said, when you’re starting a nonprofit in California, make sure you follow all of the steps we covered in this article. Filing the right paperwork, choosing your board members, and ensuring that your company is operating correctly is essential to prevent you and your company from getting into trouble with California and the IRS.