Most nonprofits are 501(c)(3) organizations, which means they are formed for religious, charitable, scientific, literary, or educational purposes and are eligible for federal and state tax exemptions. To create a 501(c)(3) tax-exempt organization, first you need to form a California nonprofit corporation. Then you apply for tax-exempt status from the IRS and the state of California. Here are the details.
Form Your California Nonprofit Corporation
To form a nonprofit in California, first you need to form a nonprofit corporation under California state law (California Corporations Code Section 5000 et. seq.).
1. Choose the initial directors for your corporation
In California, you must have at least one director on your board.
2. Choose a name for your California nonprofit corporation
The name of your nonprofit corporation cannot be the same as or too similar to an existing corporation name on record with the California Secretary of State. To see if your proposed name is available, you can check the Business Search database on the Secretary of State’s website. This is not an official name availability check. To do that, mail a Name Availability Inquiry Letter to the Secretary of State’s office. You can reserve a name for 60 days by filing a Name Reservation Request Form which will prevent another corporation from registering the name while you prepare and file your articles.
See Cal. Corp. Code §5122 for more information on name restrictions for nonprofits.
3. Prepare and file your nonprofit articles of incorporation
You create your nonprofit entity by filing articles of incorporation for a nonprofit with the California Secretary of State. Your articles of incorporation must include basic information such as:
- the name of your nonprofit
- the following statement:
"This corporation is a nonprofit public benefit corporation and is not organized for the private gain of any person. It is organized under the Nonprofit Public Benefit Corporation Law for (public or charitable [insert one or both]) purposes."
- the name and street address in California of the corporation's initial agent for service of process
- the initial street address of the corporation
- the initial mailing address of the corporation, if different from the initial street address.
The California Secretary of State has a nonprofit articles of incorporation form on its website for 501(c)(3) Nonprofit Public Benefit Corporations (Form ARTS-PB-501(c)(3)). Use this form to create your charitable or public purpose 501(c)(3) nonprofit corporation. Complete and file your articles following the instructions provided. You can create your own articles or use the fillable articles form on the website. Whether you create your own articles or use the fillable version, you will need to file your articles with the Secretary of State by mail with the appropriate filing fee. There is no online filing option.
To receive tax-exempt status from the IRS and the state of California, you'll need to have certain specific language in your articles, including:
- a statement of purpose that meets IRS requirements
- statements that your non-profit will not engage in prohibited political or legislative activity, and
- a dissolution of assets provision dedicating your assets to another 501(c)(3) organization upon dissolution.
The articles form on the California Secretary of State’s website contains the tax-exempt language required by the IRS and the state of California. For more information on IRS requirements for tax exemption, including sample language, see IRS Publication 557, Tax-Exempt Status for Your Organization, available on the IRS website. Make sure you include the required tax-exempt language in the articles you create.
4. Prepare bylaws for your California nonprofit corporation
Before you file your articles of incorporation, you’ll need to have bylaws that comply with California law. Your bylaws contain the rules and procedures your corporation will follow for holding meetings, electing officers and directors, and taking care of other corporate formalities required in California. Your bylaws do not need to be filed with the state -- they are your internal operating manual. For more information and sample bylaws for a California nonprofit, see How to Form a Nonprofit Corporation in California, by Anthony Mancuso (Nolo).
5. Hold a meeting of your board of directors
Your first board meeting is usually referred to as the organizational meeting of the board. The board should take such actions as:
- approving the bylaws
- electing directors (if not named in your articles)
- appointing officers
- setting an accounting period and tax year, and
- approving initial transactions of the corporation, such as the opening of a corporate bank account.
After the meeting is completed, be sure to create minutes that accurately record the actions taken by the board.
6. Set up a corporate records binder
You should set up a corporate records binder for your nonprofit to hold important documents such as articles of incorporation, bylaws, and minutes of meetings. For more information, as well as minutes forms, consent forms, and other resolutions, see Nonprofit Meetings, Minutes & Records, by Anthony Mancuso (Nolo).
Obtain Your Federal and State Tax Exemptions
Now that you have created your nonprofit corporation, you can obtain your federal and California state tax exemptions. Here are the steps you must take to obtain your tax-exempt status:
1. File your Form 1023 federal tax exemption application
To obtain federal tax-exempt status from the IRS, you will need to complete and file IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. This long and detailed form asks for lots of information about your organization, including its history, finances, organizational structure, governance policies, operations, activities, and more. For line-by-line instructions on how to complete the Form 1023, see How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo).
Smaller nonprofits may be eligible to file Form 1023-EZ, Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code. This is a much simpler, shorter form that is filed online. Only smaller nonprofits--those with projected annual gross receipts of less than $50,000 and total assets of less than $250,000--are eligible to use the streamlined 1023-EZ application.
See the IRS website for more information on the Form 1023 and Form 1023-EZ filing requirements.
2. Obtain your California state tax exemptions
Once you have your federal tax exemption, you can obtain your California state tax exemption. This may include exemptions from income, property, sales, and other state taxes. The website for California’s tax agency, the Franchise Tax Board, will have the form you need to file to obtain your state tax exemption, FTB 3500A, Submission of Exemption Request.
3. Other state reporting and registration requirements
Depending on your activities and the size of your organization, you may need to register with the state before doing any fundraising activities. The Office of the Attorney General, Registry of Charitable Trusts division, has information and forms about fundraising and registration requirements for nonprofits in California.