Form a California Nonprofit Corporation
A nonprofit corporation is a corporation formed for purposes other than generating a profit. Although a nonprofit can make a profit and participate in profit-making activities, no part of the organization’s income can be distributed to its directors or officers; however, a nonprofit organization can pay reasonable salaries to officers, employees, and others who perform services for it. A nonprofit corporation can be a church or church association, school, charity, medical provider, legal aid society, volunteer services organization, professional association, research institute, museum, or in some cases a sports association. Nonprofit corporations can apply for tax-exempt status at both the federal and state level.
Step 1: Incorporate as a California nonprofit corporation at the state level: If you want to incorporate, you must file articles of incorporation with the California Secretary of State. Creating articles of incorporation for a nonprofit corporation can be more involved than creating one for a for-profit corporation because you will need to include language about the purpose of your nonprofit corporation in order to be eligible for 501(c)(3) tax exemptions. Drafting the articles of incorporation generally does not require the assistance of a lawyer, and usually the filing fees are significantly less than the filing fees for incorporating as a for-profit corporation.You will also need to create corporate bylaws which are the internal rules and procedures of the nonprofit corporation. Drafting bylaws that are highly customized to your business may involve some complexity. Additionally, you must keep a records book at the nonprofit’s place of business.The incorporators and/or directors of a newly formed nonprofit corporation should hold an initial organizational meeting to adopt bylaws and elect initial directors (if not named in the articles of incorporation), among other things. Minutes of this meeting must be recorded.
Step 2: Apply for 501(c)3 corporate income tax exemptions at the federal level: You need to file Form 1023 in order to apply for tax exempt status under 501(c)(3). The application process is complicated, but can be done without the assistance of a lawyer if you are willing to devote the requisite time and energy to the process. The filing fee for the application is high: $300 if your gross receipts have not exceeded or will not exceed $10,000 annually over a 4-year period, and $750 otherwise. You do not have to apply for tax-exempt status if you anticipate bringing in gross receipts of less than $5,000 per year. If you actually bring in more than $5,000 in any particular year, however, you will need to file Form 1023 within 90 days of the end of the year.
There are three types of California nonprofit corporations: public benefit, religious and mutual benefit.
- Public Benefit Corporation – Nonprofit corporations formed for a public or charitable purpose. Most public benefit corporations are organized for scientific, literary or educational purposes which benefit the public or charitable purposes which qualify for tax exempt status under Section 501(c)(3) of the IRS Code.
- Religious Corporation – Religious purpose organizations qualify as religious organizations as well as more formal religious groups.
- Mutual Benefit Corporation – Mutual benefit corporations are formed to benefit their members. These organizations typically include trade associations, automobile clubs and social groups.
Most nonprofit organizations are public charity corporations that have obtained tax-exempt status under section 501(c)(3) of the US Internal Revenue Code (the “tax code”). In order to qualify as a public charity, a nonprofit corporation must be formed and operated for charitable purposes and be publicly supported, receiving funds from governmental entities or private donations.
The purpose of your nonprofit corporation must be listed in the Articles of Incorporation; therefore, it is very important that the purpose of the corporation be well described in the Articles of Incorporation. To determine whether or not your company’s purpose is acceptable to be classified as a nonprofit corporation, contact an attorney or accountant.
Prohibition on political and legislative activities
An important issue is the federal tax code’s rule against 501(c)(3) organizations engaging in political and legislative activities. Because the proscribed activities violate the tax code (and may result in the revocation of the organization’s tax-exempt status, the imposition of an excise tax, and liability for back taxes), you must understand how 501(c)(3) defines each type of activity:
- Political activity – direct or indirect participation in any political campaign for elected public office.
- Legislative activity – No “substantial part” of a 501(c)(3) organization’s activities may be devoted to lobbying. Influencing legislation includes any of the following activities: support of or opposition to legislation, direct contact with members of a legislative body, urging the public, or a segment of the public, to contact members of a legislative body.
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