How do we form a nonprofit organization?
You’ve got the passion, the knowledge and the resources to get started. But how do you actually set up a nonprofit organization?
First, it’s important to understand what a nonprofit is from a legal standpoint. A nonprofit is simply an organization that does not distribute profits to shareholders. However, when most people refer to nonprofits, they are talking about recognized tax-exempt organizations.
Here, we’ll discuss the formation of an organization structured as a California Nonprofit Public Benefit Corporation, organized for charitable purposes and exempt under Internal Revenue Code §501©(3) and §23701d of the California Revenue and Taxation Code.
Before you begin.
It’s important to note that there are many steps you’ll need to take prior to legally forming a nonprofit corporation. While you are likely eager to get your mission-driven charitable endeavor off the ground, failure to adequately research the need for your programs and services, and determine fundraising feasibility, will ultimately undermine your efforts.
It’s also possible that your planning phase will reveal alternative legal structures that are better suited to your needs. See What other legal structures are there for nonprofits? for more.
Setting up your legal structure.
The legal process of forming a nonprofit starts with filing for both federal and state tax-exempt status. At the federal level, this is done through the Internal Revenue Service. Filing with the state in which your nonprofit is located is done through that state’s department of revenue. Keep in mind, while this discussion of federal designation applies to organizations anywhere in the United States, each individual state also has its own laws, so be sure to refer to specific state laws before you begin.
The following steps will help you incorporate a nonprofit organization and obtain tax exemption from the Franchise Tax Board and Internal Revenue Service (IRS):
- Prepare articles of incorporation and file them with the Secretary of State. This process typically takes 10-12 weeks if filed by mail and 2-3 weeks if hand-delivered to Los Angeles or Sacramento.
- Prepare your organization’s bylaws.
- Apply for an Employer Identification Number (EIN) with the IRS. This process typically takes 30 days.
- In California: Register with the California Attorney General’s Registry of Charitable Trusts. California charities must register within 30 days after receiving their first assets.
- Recruit a board of directors and conduct an initial meeting. At this time, directors will accept their role, adopt or ratify bylaws, elect officers and authorize application for tax exemption. You’ll also want to create bank accounts and complete other steps necessary to begin operations.
- Apply to the IRS for recognition of federal tax exemption. This process typically takes 90 days.
- Apply to the Franchise Tax Board for recognition of state tax exemption. This process typically takes 90 days.
The legal process of incorporating and obtaining tax-exempt status is arduous and time-consuming. The steps outlined above note the average processing time for each application, assuming that application materials are complete and that requests for additional information are readily addressed. Regardless of how thorough you are, know that obtaining nonprofit status will take time.
To help navigate the process, you may want to hire an attorney familiar with nonprofit law to assist in preparing and submitting required materials. This can be particularly beneficial if you want to speed up your application or if you encounter problems preparing the required documentation.