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					                Forming a Nonprofit Corporation in the State of California
                                 - A Quick Overview-

                    Center for Nonprofit Resources at Shasta College

Starting a nonprofit corporation is formal process that requires a clear understanding of the
legal ramifications and requirements that are the responsibility of those individuals that
decided to pursue incorporation as a nonprofit organization. It is strongly recommended that
before venturing into the formalization process, the individual(s) of the proposed organization
have a clear understanding of the process and legal requirement that will follow upon
incorporation. It is recommended that an Internet search be conducted to gain additional
information or seek appropriate legal advice related to the procedures and options related to
starting a nonprofit organization.

By definition, a nonprofit is a corporation, community chest, fund or foundation that adheres
to certain government requirements. One such requirement stipulates that none of the
earnings of the organization may inure to any private shareholder or individual. Such an
organization is eligible to receive tax-deductible contributions (Internal Revenue Service,
2003). In essence the structure is formed with a community/humanitarian mission i.e.
religious, educational, scientific etc., where the primary objective is to offer services that do
not provide individual capital gain. Nonprofit organizations that are considered publicly funded
can obtain support through different avenues. One is direct, "which is usually charitable
donations by individuals, private foundations, and businesses" (Online Compendium, 2004).
Other means of support are indirect, with two primary sources being the government or
publicly supported granting agencies. Nonprofits can also generate revenue from exempt-
purpose activities that directly advance the organization's mission (Online Compendium,
2004).

To beginning the process of establishing a nonprofit corporation, it is strongly encouraged
that those individuals involved have a clear focus on what the mission of the organization will
be and formalize the organizational concept through the development of a formal business. A
business plan will be required as part of the Internal Revenue application process to be
recognized by the Federal Government as a nonprofit organization.

The steps recommended for the establishment of a nonprofit corporation are as follows
(http://www.wikihow.com/Start-a-501c3-Nonprofit-Organization):

-   Understand what a nonprofit is: an organization whose primary objective is to support
    some issue or matter of private interest or public concern (such as the arts, charities,
    education, politics, religion, research, or some other endeavor) for non-commercial
    purposes. There are different kinds of nonprofits, one of them being a 501(c)(3), which is
    exempt from income and (sometimes) property tax, and able to receive tax-deductible
    charitable contributions. Before you spend your money, at least consult with an attorney
    who is experienced in the area of nonprofit law so that you do not make one of the many
    major mistakes that people make when they try to incorporate by themselves.
-   Formulate a mission statement. As a non-profit organization, you exist to accomplish
    your mission, which should be crafted based upon your purpose, services and values.
    The mission statement is a concise expression that covers in one or two sentences who
    the organization is, what it does, for whom and where. It should also be compelling, as it


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    will be used in all published materials, funding requests and public relations. It should
    also portray how your organization is distinct from others. (See Tips for a sample mission
    statement.)
-   Form a Board of Directors. Forming a board requires careful thought and extensive
    recruitment efforts. Each state has regulations that determine the minimum size of the
    board, typically three, but the optimum number of people who sit on the board should be
    determined by the needs of the organization. Based on what your organization would like
    to accomplish, you should decide what special skills and qualities you will require of the
    individuals on your board. Identify qualified individuals who are supportive of your
    mission and are willing to give of their talents and time (see Tips for more information).
-   File Articles of Incorporation. Articles of Incorporation are official statements of creation of
    an organization filed with the appropriate state agency. They are important to protect
    both board and staff from legal liabilities incurred by the organization, making the
    corporation the holder of debts and liabilities, not the individuals and officers who work for
    the organization. The specific requirements governing how to incorporate are determined
    by each state. You can obtain the information you need to proceed with this step from
    your state Attorney General’s office or your state Secretary’s office. Before you spend
    your money, at least consult with an attorney who is experienced in the area of nonprofit
    law so that you do not make one of the many major mistakes that people make when
    they try to incorporate by themselves.
-   Draft bylaws. Bylaws are simply the "rules" of how the organization operates. Although
    Bylaws are not required to file for 501(c)(3) status, they will help you in governing your
    organization. Bylaws should be drafted with the help of an attorney and approved by the
    board early in the organization's development.
-   Develop a budget. Creating a budget is often one of the most challenging tasks when
    creating a nonprofit organization. A budget is the expression, in financial terms, of the
    plan of operation designed to achieve the objectives of an organization. New
    organizations may start the budgeting process by looking at potential income – figuring
    out how much money they have to spend.
-   Develop a record-keeping system. Legally, you must save all Board documents including
    minutes and financial statements. It is necessary to preserve your important corporate
    documents, including board meeting minutes, bylaws, Articles of Incorporation, financial
    reports, and other official records. You should contact your appropriate state agency for
    more information on what records you are required to keep in the official files.
-   Develop an accounting system. If your board does not include someone with a financial
    or accounting background, it is best to work with an accountant familiar with non-profit
    organizations. Nonprofits are accountable to the public, their funders, and, in some
    instances, government granting bodies, and it is vital to establish a system of controls
    (checks and balances) when establishing the organization’s accounting practices.
    Responsible financial management requires the establishment of an accounting system
    that meets both current and anticipated needs.
-   File for 501(c)(3) status. To apply for recognition of tax-exempt, public charity status,
    obtain Form 1023 (application) and Publication 557 (detailed instructions) from the local
    IRS office. The filing fee depends upon the size of the organization’s budget. The
    application is an important legal document, so it is advisable to seek the assistance of an
    experienced attorney when preparing it. Both of these documents can be downloaded
    from IRS web site listed below.
-   Apply for a federal employer identification number. Regardless of whether or not you
    have employees, nonprofits are required to obtain a federal Employer Identification


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    Number (EIN) — also referred to as the federal ID number. Available from the IRS, this
    number is used to identify the organization when tax documents are filed and is used not
    unlike an individual’s Social Security number. If you received your number prior to
    incorporation, you will need to apply for a new number under the corporate name. Ask for
    Form SS-4 when applying for your EIN.
-   File for state and local tax exemption. In accordance with state, county, and municipal
    law, you may apply for exemption from income, sales, and property taxes. Contact your
    state Department of Revenue, your county or municipal Department of Revenue, local
    Departments of Revenue, and county or municipal clerk’s offices.
-   Fulfill charitable solicitation law requirements. If your organization’s plans include
    fundraising, be aware that many states and few local jurisdictions regulate organizations
    that solicit funds within that state, county, or city. Usually compliance involves obtaining a
    permit or license and then filing an annual report and financial statement. Contact the
    state Attorney General’s office, the state Department of Commerce, state and local
    Departments of Revenue and county or municipal clerk’s offices to get more information.
-   Apply for a nonprofit mailing permit. The federal government provides further subsidies
    for nonprofits with reduced postage rates on bulk mailings. While first-class postage rates
    for nonprofits remain the same as those for the for-profit sector, second- and third-class
    rates are substantially less when nonprofits mail to a large number of members or
    constituencies. For more information on eligibility, contact the U.S. Postal Service and
    ask for Publication 417, Nonprofit Standard Mail Eligibility.

Specific information regarding the actual process for incorporation in the State of California
and submittal of the IRS Form 1023 is as follows:

To incorporate with the State of California as a non-for-profit 501(c)(3) – the Internet is your
best source for the necessary information and forms that will be required. Access the State
of CA “Business Portal” web site http://www.sos.ca.gov/business/business.htm and select
the Form, Samples and Fees link. Select the Business Entities link
(http://www.sos.ca.gov/business/bpd_forms.htm#be). On this site select the Articles of
Incorporation (Domestic Nonprofit Common Interest Development Corporation). This link will
provide the instruction and form for the required Articles of Incorporation. Follow the
instructions and fill out and submit with the $30 dollar application fee. The State web site also
provides examples of required Articles of Incorporation. You also need to check the corporate
name availability to verify there are no other corporations with the proposed organization
name .There are some tips on the same site at this link
http://www.ss.ca.gov/business/corp/corp_filetips.htm#artsnp

Prior to submittal it is recommend that you acquired an Employer Identification Number (EIN),
which will serve as an identification number for the corporation. The IRS web site has a link
that provides the information and online application process
http://www.irs.gov/businesses/small/article/0,,id=102767,00.html

At this stage you will have to register with any other governmental agency i.e. Franchise Tax
Board (Sales License), EDD (employees) etc. based on the scope of the organization.

Within 90 days you need to file a statement of information (PDF at this link-
http://www.ss.ca.gov/business/corp/pdf/so/corp_so100.pdf ) and it is recommended that this



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form be completed and submitted with the Articles of incorporation -call the State about this
and the application if you need additional information .

A Nonprofit is directed by a formal Board of Directors, which can be comprised of as little as
three individuals. It is critical that documentation be maintained regarding all aspects of the
business since the organization is open to public preview. Corporate Bylaws should be
formalized that provide clarity of the participants and organizations operational expectations.
A quick search on the Internet will provide excellent resources for review such as the
Nonprofit Expert - http://www.fundraisingexpert.com/board_guide.htm.

After State approval as a nonprofit corporation is obtained, file the fictitious business name in
a local paper. The fictitious business name filing lets the local community that the
organization is intending to begin operation using the corporate name and provides an
opportunity for the community to respond if necessary. Most corporations will require a
business license (specifically if the organization is located in the city limits). A good reference
is the City of Redding’s web site “Starting a Business in the City of Redding” that provides
information and forms required for the business (http://ci.redding.ca.us/cclerk/buslicapp.htm ).
Once established with the State Incorporations approval and Business License, a bank
account and related business accounts can be established.

Once approve the Corporation has 27 months to file the IRS 1023 application Form. It is
strongly suggested this be completed as soon as possible to start the normal 5-year review
process required to obtain the IRS Letter of Determination. The Letter of Determination is
acquired only if the organization has conducted itself to the Federal requirements for a
nonprofit and the submittal of the appropriate verification documents as required. The link to
the IRS and the application/instructions are
http://www.irs.gov/businesses/small/article/0,,id=102767,00.html
With the submittal of the application a business plan will be required and as referenced, this
document should have been completed prior to the start of the process.

Shasta College also offers a Certificate of Completion in Nonprofit Operational Management.
In addition, The Center for Nonprofit Resources at Shasta College
(http://www3.shastacollege.edu/ewd/CNPR.htm) can provide additional resource for nonprofit
organizations.

For additional information please call the Economic and Workforce Development Division at
Shasta College, Center for Nonprofit Resources, 530-225-4835.

       Disclaimer- This document is provided as a simplistic overview of the incorporation and IRS
       application process for the establishment of a nonprofit corporation. It is not intended to replace the
       assistance from a Legal representative nor is it a comprehensive document reflecting the process
       of incorporation as a nonprofit organization.




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