Although a somewhat cumbersome process, properly registering your organization as a 501(c)(3) nonprofit allows it to benefit from tax-deductible donations and exemption from certain state and federal taxes. Nonprofits are initially formed at the state level, while the Internal Revenue Service regulates 501(c)(3), or exempt, organizations. As such, a nonprofit must pursue both state and federal registration in order to receive the most benefits.
501(c)(3) is a tax-exempt status granted by the Internal Revenue Service to nonprofit organizations. After an organization is formed at the state level, the IRS will grant 501(c)(3) status if the nonprofit applies and meets certain requirements regarding the organization's purpose and distributions of profits. Generally, the IRS may grant exempt status if the nonprofit was formed for religious, charitable, scientific, literary or educational purposes and the nonprofit does not distribute profits to any individual above reasonable compensation. Additionally, the IRS restricts the political activity of 501(c)(3) organizations. Once an organization has 501(c)(3) status, it may be exempt from federal and state taxes, and donations to the organization are tax-deductible for the donee.
Before formally registering your nonprofit with the state, you must select a name for the organization. The state recommends you check with the California Secretary of State to see if the name is available, as a nonprofit corporation cannot have the same name as any other nonprofit corporation already registered. After you select an available name, you may reserve the name with the state before registering.
Articles of Incorporation
To officially incorporate your nonprofit with the state, you will prepare and file articles of incorporation with the Secretary of State. The articles must include the name of the organization, and name and contact information for the registered agent who will be responsible for accepting service of legal documents on behalf of the corporation. Additionally, the articles must include a provision that the nonprofit is organized as a public benefit corporation, and not to benefit any individual person. If you plan to file for 501(c)(3) status, the IRS recommends you also include the charitable purpose of the nonprofit and a statement that the organization will not engage in any political activity.
Statement of Information
The state of California recommends that nonprofits prepare and file a Statement of Information with the Secretary of State within 90 days of filing the articles of incorporation. The statement must include information about what the nonprofit does, name and addresses of its officers, address of the nonprofit, and contact information for the registered agent. The statement may be mailed to the Secretary of State or completed online. Your nonprofit must update the statement every two years.
Board of Directors and Bylaws
Generally, nonprofit organizations are managed by a board of directors. In California, you must have one or more directors for your nonprofit. Additionally, you may draft bylaws which set forth rules for how the organization will be managed. Although you do not need to file the bylaws with the state, you should keep a copy of the bylaws at the nonprofit's headquarters.
Federal Tax Exemption Application
After your nonprofit is formed in the state, you may then pursue 501(c)(3) status with the IRS. The process for applying for exempt status begins with completing Form 1023. On the form, you will include detailed information about the nonprofit's finances, board of directors and activities. The form should be mailed to the IRS with the appropriate fee.
California Exempt Status
After you have 501(c)(3) status from the IRS, you may also apply for tax-exempt status with the state to avoid certain state taxes. You may apply for state tax-exemption by filing Form FTB 3500A, the Affirmation of Internal Revenue Code Section 501(c)(3), with the State of California Franchise Tax Board. The state recommends you include a copy of your federal determination letter that confirms your 501(c)(3) status with your application.
References & Resources
- Citizen Media Law Project: Forming a Nonprofit Corporation in California
- Internal Revenue Service: Exemption Requirements
- Public Counsel Law Center: Steps to Form a Nonprofit Tax-Exempt Corporation in California
- California Legislature: Corporations Code Section 5130-5134
- Internal Revenue Service: Application for Recognition of Exemption
- California Secretary of State: Name Availability