Your company's status as a non-profit corporation provides certain protections, including exemption from personal liability as well as taxation by both federal and state government. Not all business entities qualify for non-profit status, however. Consequently, it is important that you review the legal requirements before you proceed, as erroneous designation of your business as tax-exempt can be a costly error. The rules require your close attention, but with care and diligence you can successfully register your business as a non-profit California corporation.
Why You Should Incorporate
The purpose of creating a corporation is, primarily, to provide protection from personal liability for officers and owners of the company. Someone with a claim against your corporation must sue the company, rather than the individuals. The law shields officers and shareholders of the corporation from most kinds of liability, and a successful claim against the company may usually be satisfied only out of the corporation's assets, leaving the property of officers and shareholders who run the business untouched. However, an officer who deliberately uses a corporation to disguise fraudulent activities is not protected by the corporate shield.
Preliminary Requirements for Creating a California Nonprofit Corporation
Nonprofit organizations provide necessary assistance to the public in addition to helping the poor and underprivileged. Both Federal and State governments recognize the benefit of such agencies, and offer tax breaks for companies which meet the criteria. It is important, therefore, that you review the law before proceeding. California requires that all nonprofit corporations be created for either public or charitable purposes. In addition to California law, the Internal Revenue Code Section 501 provides strict guidelines which you must meet to qualify for federal tax exempt status. Your company's exemption will be disallowed if it fails to meet the Internal Revenue Code's criteria for non-profit corporations. Some examples of proper exemptions would include a business whose primary purpose is to provide information to the public, or a company created to assist the homeless. Religious organizations are also typically granted tax exempt status. You should therefore review section 501 to ensure that your company will be eligible under the Code.
Articles of Incorporation
California requires that all nonprofit corporations file a document called "articles of incorporation." Sample articles are available for review at the California Secretary of State's web page. The articles must contain the name and business address of your corporation along with a statement of purpose identifying the type of services your corporation will offer- either public, charitable, or both. In selecting a name, California law prohibits you from choosing a name that is misleading to the public; for example, incorporating part of an established company's name into your own, whereby you might be suggesting an affiliation. In the articles, you must include your corporation's statement of purpose. To craft this statement, begin by reviewing the Internal Revenue Code section 501 and select one of the permitted uses identified there that most closely expresses the intended use of your proposed company. Track the language of the Code and include this in your statement of purpose. Your articles must also include the name and address of the agent responsible for receiving service of process and other important documents on behalf of the corporation.
Bylaws and Corporate Officers
California requires that you prepare bylaws, elect officers, and hold an organizational meeting. Bylaws are the rules governing how your company will function; you must keep a copy of the bylaws available for inspection at your company's business office. The bylaws should describe the manner in which officers will be elected, how the corporation will be structured, and when and where the annual meeting will be held. Once your articles of incorporation are filed, you should hold an organizational meeting at which you elect your corporate officers, including president, secretary, and treasurer. Once the organizational meeting is held, you will need to file a Statement of Information with the California Secretary of State. California requires that this form be filed within 90 days of receipt of the articles of incorporation. Finally, you will need to apply to the IRS for an Employer Identification Number. This will be used by you to file corporate tax returns and will allow the IRS to monitor the validity of your tax exemption.