Forming a Nonprofit Corporation in the State of California A

Forming a Nonprofit Corporation in the State of California - A Quick OverviewCenter 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 exemptpurpose 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 - 1 of 4 - - - - - - - - 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 1 of 4 - - - 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 linkhttp://www.ss.ca.gov/business/corp/pdf/so/corp_so100.pdf ) and it is recommended that this 1 of 4 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. 1 of 4