California 501(c) Nonprofit Organization Rules

By Lee Hall, J.D.

California 501(c) Nonprofit Organization Rules

By Lee Hall, J.D.

California charities include incorporated nonprofits, trusts, and unincorporated associations. Most registered California nonprofits are formed as public benefit corporations. All public benefit corporations in California must be committed to a public or charitable purpose. They and their officers and directors must always manage the nonprofit's affairs, its charitable assets, and its investments in the public interest.

Man in red apron which says "mission" and Santa hat

State Filings

A public benefit corporation registers with and is accountable to the California Attorney General's Registry of Charitable Trusts. Note that charitable organizations with at least $25,000 in annual revenue must also pay a renewal fee annually.

Tax-exempt organizations formed as California nonprofit corporations must also submit a Statement of Information (Form SI-100) with California's Secretary of State. This filing lists the names and addresses of the corporation's officers and the agent for service of process. Within 90 days after incorporating, and every two years thereafter, the nonprofit refiles this information.

Effect and Scope of Tax-Exempt Status

After charitable nonprofits register with the state, they can become exempt from both federal and state income tax. Their donors may claim federal tax breaks for their donations to a charity that comports the criteria of the Internal Revenue Code section 501(c)(3). Note that section 501(c)(3) status does not exempt a nonprofit from taxes on any income from activities unrelated to its exempt purpose.

The Internal Revenue Service (IRS) requires charities to obtain an employer identification number (EIN), whether or not the entities plan to have paid staff. Federal and state taxes apply to the payment of staff wages. California nonprofits must withhold federal income tax, Medicare, and Social Security taxes from staffers' salaries and pay the employers' part of these taxes as Federal Insurance Contributions Act (FICA) payments.

Compensation for high-level employees must be reasonable, as a charity's assets may not be diverted for personal enrichment. The IRS considers what similar organizations pay for similar services.

With a few exceptions specific to religious organizations, nonprofits follow the same laws pertaining to wages, terms and conditions of employment, and antidiscrimination policy that apply to other corporations. Nonprofits must also declare payments to independent contractors exceeding $600 a year to the IRS.

State-Specific Tax Issues

California's Revenue and Taxation Code enables charitable public benefit corporations, either incorporated or doing business in California, to apply for state income tax exemption. To qualify for the exemption, a public benefit corporation should ensure that more than half the directors (including their family members) are impartial.

Even if it does not have any financial gains, the nonprofit must secure legal exemption from California income taxes in order to avoid paying the minimum state franchise tax.

People selling items on behalf of the nonprofit might not be aware of their duty to charge state sales taxes. In fact, the state Department of Tax and Fee Administration issues no blanket sales tax exceptions for charitable entities.

Keeping Records

The nonprofit must keep copies of its founding records, including tax exemption applications. Under federal tax law, nonprofits must have these records and copies of their federal Return of Organization Exempt From Income Tax (Form 990) available for public inspection at their principal offices for three years.

Fundraising

Most charitable groups use staffers or volunteers to raise funds. Any professional fundraisers they might hire must register with the Attorney General's Registry of Charitable Trusts. If the fundraising involves a raffle, the charity must declare this with a raffle registration in the Registry.

California charitable solicitation laws apply to all fundraising within the state. For example, someone who is not affiliated with the nonprofit may not claim that donations solicited in the state will go to a charity unless the named organization signs a letter of consent in advance. The nonprofit must accurately report fundraising costs and income.

Many of the state's local jurisdictions require nonprofits to have a permit for fundraising in public or soliciting support from their residents. Some jurisdictions mandate both registration and financial reporting. A nonprofit must adhere to city and county rules.

This guide reviews key rules governing California nonprofits. For more detailed coverage and answers to specific questions a nonprofit might face in California, see the Attorney General's Guide for Charities.

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