Forming a nonprofit corporation is a noble goal. But if you’re just starting out, the process can feel incredibly confusing. Compared to other entity types like LLCs or even standard corporations, a nonprofit has detailed start-up requirements and complicated maintenance procedures.
In this guide, we’ll walk you through the ins and outs of forming a nonprofit in California so you can get back to what truly matters: your cause.
What is a Nonprofit Corporation?
A nonprofit and for-profit corporation both have similar “nuts and bolts,” so to speak. Both businesses have a board of directors, CEOs, bylaws, annual board meetings, and the like.
But what makes a nonprofit stand out is its purpose. A business corporation typically organizes for financial gain; a nonprofit exists not to make money but to further a cause or reach a goal. Additionally, a business corporation gains investors by offering stock, which has the incentive of dividends and financial gain. Nonprofit corporations solicit contributions that don’t generate any income for those investors.
Well-known nonprofits include groups like Doctors Without Borders, Alcoholics Anonymous, and even your local YMCA.
It’s important not to confuse “nonprofit” with “no income.” Most nonprofits generate income from donations or day-to-day services. The distinction is that nonprofits use 100% of their income to pay expenses and reinvest in their cause. For example, the YMCA uses member dues and community donations for exercise programs, youth sport development, and maintaining their equipment and facilities. They also pay their employees.
Because of this, nonprofit corporations may apply for and receive a tax-exempt status (typically a 501(c)(3) designation), eliminating the corporation’s responsibility for income taxes at the federal and state levels.
Should you form one?
Before you dive into the rest of this guide, you should do a little soul-searching: should you even form a nonprofit in California? The goal is a noble one, but it certainly isn’t for everyone. And some concepts simply aren’t right for the nonprofit sector.
Here are some questions to ask:
- Will I be able to convince others to buy into this cause? How hard will it be to attract donors?
- Are there other existing nonprofits with the same goal?
- If so, do they operate in California? Nationwide? Should I form a local chapter of their nonprofit instead?
- Can I further this cause better or differently than they are?
- Can I hire employees for this cause, or will I rely on volunteers? How will I successfully recruit their help?
If you find yourself stumped by any of those questions, you may want to step back and get some help…or simply do some more thinking before diving in. But if you have answers to most of those questions, then you’re well on your way to starting a California nonprofit organization.
Starting a California Nonprofit: Step by Step
Technically, the process for creating a California nonprofit entity is pretty simple. It’s really just a matter of picking a few people and filing some paperwork (it’s the requirements immediately after forming the nonprofit that get complicated).
1. Pick & Claim a Name
Choosing a name is one of the most crucial decisions for starting your business. You want to pick a name that’s memorable, likable, and most importantly, compliant with California state law.
California has pretty simple laws for nonprofit names:
- Your name cannot include language that would be likely to mislead consumers
- Your name cannot be “the same as or deceptively similar to” the name of another entity in the state, or close to the name of another entity
If you want more information on California nonprofit names, check out the Corporate Name Section of California’s Business Entity Name Regulations.
As a result, you have a lot of leeway to pick a name that will resonate with your target audience, potential donors, and of course, with you. The ideal California nonprofit name describes what the organization does, sounds good when said out loud, and just “sticks” in the minds of people who see it.
Whenever you pick a potential name, you should check whether it’s available with an Entity Name Search. Typically, if you search your desired name and no exact or very close matches show up, your name is available to use. This seems like a very basic step, but it’s crucial to streamlining your filings.
Once you nail down an available name that you like, you can reserve it using the Name Reservation Request Form. This optional filing costs $10 to submit, but once it’s approved, your name will be protected for 60 days. That gives you plenty of time to prepare other business documents without losing your name to another business or nonprofit.
You can learn more through our guide on how to reserve a California business name.
2. Assemble your initial board
A nonprofit corporation is only as impactful as the people leading it. That’s why your initial board of directors is extremely important; you’ll want to pick a team of people that are just as passionate about your cause as you are.
More importantly, it’s helpful to choose a group with complementary strengths. For example, a medical outreach group might have a board of directors with three doctors, a nurse, a financial expert, a creative visionary, and a lawyer. The right board of directors will help your nonprofit thrive.
California has a few rules about who can serve on the board. First and foremost, your initial board must have at least 3 members. You should also keep in mind that the board cannot have more than half of its members who are receiving financial compensation from the nonprofit (for example, the CEO serving on the board). Aside from that, you can let your bylaws dictate the details about your board, such as how long each director serves (state law states a minimum of one year and a maximum of six), how they’ll resign, how you’ll replace them, and any other provisions you wish to include.
3. Appoint a registered agent
Every California entity—nonprofits, corporations, and LLCs alike—must appoint a registered agent. This individual accepts “service of process” from the state on your behalf. Basically, if the state ever needs to notify you regarding a lawsuit or an upcoming annual report due date, they’ll contact your registered agent. The agent forwards that notice to you.
California has pretty lenient criteria for a nonprofit’s registered agent, as found in the California Corporations Code:
- Every entity that files with the Secretary of State (both domestic and foreign) must appoint a registered agent
- The agent must be a resident of California or a corporation that has not terminated its capacity to act as a registered agent
- An agent must be continuously maintained
So you might ask, “Can I serve as my nonprofit’s registered agent?” Technically, you can. But we don’t recommend it. That puts your personal details (and often private details like your address and primary email) on the public record. You’ll also be busy running your nonprofit and pursuing your goals; you won’t want to tie yourself down to a registered address (especially for a tedious thing like service of process). We recommend consulting an individual you trust.
Or, if you prefer, you can hire a registered agent service instead. For a small annual fee, these services will act as your agent. That frees you up to focus on running your nonprofit.
4. File your Articles of Incorporation
Up until now, your nonprofit has just been an idea; it’s not recognized by the state government. Technically, businesses don’t “exist” until they file the appropriate paperwork. For California nonprofits, that means filing the Articles of Incorporation.
The Articles of Incorporation is a one-page document that requests some foundational information about your nonprofit. Here’s the data you’ll need to have on hand:
- The name of your nonprofit
- Business address of the nonprofit (both mailing and street address, if applicable)
- Name and address of the individual or corporation that will accept service of process on your nonprofit’s behalf
- Whether the nonprofit is organized for public benefit or charitable purposes
- The stated purpose of the business
- Name and signature of the person filing the form
All told, this form is pretty simple. California even does you a favor and includes language that’s recommended by the IRS to obtain tax-exempt status directly inside the Articles of Incorporation (it’s largely boilerplate text, but for most nonprofits, it’s helpful.
Other than that, simply fill out the required information, and you’re set to go. If you’d rather, you can file this form online instead. Either way, you’ll need to pay the $30 filing fee.
Processing speed: usually between 10-20 business days, with mail-order filings taking longer
Expedited processing: several options, including $350 for 24-hour turnaround and $750 for same-day processing
Congratulations! Your nonprofit is now a recognized entity in California!
Prepare for & Hold Your First Board Meeting
After your Articles of Incorporation form is complete, it’s time to truly get your nonprofit’s activities underway. And that means it’s time for the first board meeting.
No two board meetings will look exactly the same; after all, every nonprofit has different tasks to accomplish. California law does require that you have regular meetings annually, and you need to meet attendance minimums when passing motions and initiatives (you need a quorum or greater, as dictated by your bylaws). Your bylaws will dictate the bulk of how each meeting flows.
For example, your bylaws might require your president and CFO to report on the recent accomplishments and the financial standing of the nonprofit. For more information about these meetings, please consult the Directors and Management Section of California’s General Corporation Law.
Your very first board meeting, however, will look a bit different. Here’s what you’ll need to accomplish:
- Draft and approve the nonprofit’s bylaws: The bylaws dictate exactly how your nonprofit will be run. This includes a detailed rundown of your corporate purpose, how your board will be selected and replaced, how you’ll raise funds, how you’ll hire employees or solicit volunteers, and much more (including a provision for how to amend the bylaws). To save time, you may choose to write a draft before the meeting and revise it when your full board is present. The important thing is that the board approves the final bylaws, making them the governing document for your nonprofit.
- Draft and approve a conflict of interest policy: Occasionally, one of your nonprofit’s contributors will have personal affairs that intersect with the activities of your nonprofit. A conflict of interest policy dictates exactly what happens in those situations, protecting both the nonprofit and the individual contributor.
- Appoint someone to take minutes at each meeting: Every California nonprofit corporation must establish and maintain a corporate record. That’s why every board should appoint someone to take minutes, or a summary of every board meeting, documenting what was said and what decisions were made.
- Finalize responsibilities for each board member: If one board member will be responsible for fundraising while another raises awareness for the cause, you should assign those roles at the initial board meeting.
- Appoint officers for the nonprofit (if needed): Some corporations choose to have their officers, such as the CEO or CFO, be members of the board. Others appoint non-board members to fill these roles, creating a division between the governance and day-to-day operations. Either choice is fine, but these vital roles should be filled.
This initial meeting will be a very full, technical day (or even series of days!), but nailing down these aspects will help you establish a nonprofit that’s compliant with California state law and efficiently run.
Take Care of Taxes
Taxes as a nonprofit are a tricky beast; frankly, we recommend getting advice from a tax lawyer, accountant, or similar consultant to make sure you cover all your bases! But let’s take a quick look at the basics for nonprofit taxes.
First, apply for tax-exempt status on the federal level
If you don’t file for tax-exempt status, you’ll technically be liable for corporate income taxes. And that’s the last thing a non-profit wants. That’s why you’ll need to start out by filing Form 1023 or Form 1024, which are the applications for charitable, religious, or educational groups and other nonprofits respectively. After that application is completed, you’ll play the waiting game. The IRS can take up to 180 days to approve or reject your application, so we highly recommend completing the application correctly the first time.
Once your application is approved, you’ll receive a letter of tax-exempt status from the IRS. After that, it’s time to apply for state-level exemptions from the Franchise Tax Board. This will exempt you automatically from state income and franchise taxes, but you’ll typically have to pay sales taxes (with a few exceptions). Then there are property taxes, which you may qualify for an exemption from. For more information on these exemptions, check out the Charities and Nonprofits page by the Franchise Tax Board.
Obtain an EIN
An EIN, or an Employer Identification Number, is an important identifier to get; it acts a bit like a Social Security Number, but for a business entity. Unfortunately, you aren’t assigned one automatically.
Thankfully, it’s free to apply for an EIN online with the IRS. Even if you don’t plan to have employees right away, it’s a good idea to have this number from the get-go. Miscellaneous forms, such as license applications or even bank accounts, may request this number.
Account for employment & miscellaneous taxes
No two businesses are alike, so each nonprofit will have slightly different taxes. That said, almost all California nonprofits will need to account for withholding taxes, unemployment insurance, employment training, state disability taxes, and more.
There are also miscellaneous industry-specific taxes in California, such as fees for cannabis, lumber, and more. In most cases, these taxes won’t apply to your nonprofit, but it’s still a good idea to double-check with the California Department of Tax and Fee Administration.
That’s the basic gist of nonprofit taxes in California. We still recommend consulting with a tax professional, as they’ll be able to give you specialized advice for your unique situation.
Register for Licenses and Permits
Licenses and permits are especially important for nonprofits. And there are three major categories of potential permits and licenses: fundraising, lobbying, and licensing. Let’s walk through California’s requirements for each of those three areas.
A lot of states require you to register in order to solicit charitable contributions. California takes it a step further: any charitable entity or profit entity that holds property for charitable purposes needs to register with the California Attorney General. There is a $50 fee for registration. After your initial registration, you will need to make regular reports and renew your registration annually. The actual fee for this registration varies depending on how much revenue your nonprofit generates; filing fees range between $25 and $1,200.
If your nonprofit will be lobbying for its cause in a formal capacity (or hiring lobbyists to lobby for you), then you’ll need to ensure that you register to do so with the Secretary of State. Each registration period is two years, but the fee is $50 per year. You must also file periodic disclosure reports, always within two weeks of the end of each quarter. For more information about lobbyist registration, check out the Secretary of State’s Lobbying Filing Requirements page.
3. General licensing
Nonprofits are tax-exempt, but they aren’t exempt from licensure requirements, whether that’s for an industry-specific license or a state general business license. So you’ll need to get the licenses that apply to your unique organization.
California, unlike some states, doesn’t have a general business license that every entity in the state needs to get. So most license requirements come at the industry level instead. California upholds all federally regulated industry licenses, and then CalGold is a great place to check out the state-level license requirements. It’s up to you to learn if there are any licenses for your industry, so be sure to complete this step.
Whenever you apply for a license or permit, we recommend inquiring about the requirements for renewing your licenses. That way, you’ll know exactly how often you’ll need to renew your licenses (if applicable).
Meet Insurance Requirements
We highly recommend that every business entity maintain at least some sort of general liability policy — even nonprofit entities. There’s always a chance that something can go wrong (no matter how careful you are).
A natural disaster can happen, a break-in might cost you some important equipment, or an accident during day-to-day operations might cause a broken bone and damaged property. A general liability policy will protect your business if something like that happens.
California state law also requires you to get a workers’ compensation insurance policy if you have one or more employees working for your nonprofit. You can learn more about this requirement with the Department of Industrial Relations.
Top Resources for California Nonprofits
Nonprofit work isn’t always easy, but you never have to go it alone! There are dozens, if not hundreds of nonprofit resources available to California organizations.
On the national level, there’s the National Council of Nonprofits. They exist to advocate for and strengthen nonprofits throughout the country by providing nearly comprehensive resources, teaming up with each state’s nonprofit network, and keeping you aware of the trends in policy and public opinion. It’s also a great place to peruse the latest reports and data about charitable giving and advocacy in the U.S.
On the state level, you can always turn to the California Association of Nonprofits. In their own words, the California Association of Nonprofits acts as a “a statewide alliance of over 10,000 organizations that brings nonprofits together to advocate for the communities we serve.” CalNonprofit does require membership, but joining grants you several advantages, including discounts and insurance specifically for nonprofits.