Starting a nonprofit in California can be a difficult and time-consuming process. In addition to compliance with all California incorporation standards, businesses must also become tax exempt. Typically, tax exempt corporations must create and maintain a set of operating principles that serve a specific public good. Prospective business owners can save a lot of time and effort if they understand the standards required of nonprofit businesses. The following is a checklist of requirements for starting a nonprofit corporation in California.
Draft The Articles Of Incorporation
First, creating a nonprofit organization in California requires a prospective business owner to draft articles of incorporation. The articles of incorporation are similar to any other legal corporation in California, with a few key differences. The first is the operations of the corporation must be greatly limited by the incorporation document to comply with nonprofit requirements. Additionally, the corporation’s statement of purpose must be precise and correspond to a valid area of charity under state law. For example, a statement like “improving the general welfare” is too broad while pledging to clean and maintain a certain state park is better. As you start a franchise or business, understand the ways that a nonprofit deviates from typical articles of incorporation.
Appoint The Board Of Directors
After the corporation has been created, new business owners must appoint a board of directors. Under California law, a nonprofit may have as little as one director. However the IRS may take issue with a corporation structured in this way. A more common structure for the board of directors for a nonprofit is between three and twenty-five members. The members of the board should be made up of associates that the business owner trusts as they will be under much scrutiny. Compliance with California’s board of director standards ensures business owners can operate their nonprofit legally.
Create A Conflict Of Interest Policy
New nonprofits require a conflict of interest policy in order to define what breaches company ethics explicitly. The IRS offers a short guide on what a such a policy might look like. For example, any nonprofit should avoid any arrangement wherein they compensate an entity financially who is directly related to any board members. While the IRS policy guide is a broad example designed to fit many types of businesses, it can serve as a basic foundation for drafting an individual policy. Using this policy as a guideline, new business owners can draft their own specific conflict of interest policy as they hire the right people.
File A Charitable Trust Registration Form
Before applying for tax exempt status, a nonprofit organization must file a charitable trust registration form. This form must be filed within 30 days after the articles of incorporation are submitted. It must include the corporation’s bylaws and conflict of interest policies. California law also requires that the corporation describe its structure in this form. This form must also be renewed annually. New business owners should file this form as soon as possible so they can apply for tax exempt status.
Apply For Federal And State Tax Exemptions
The final step in forming a nonprofit is to file for and receive federal and state tax exempt status. In California, nonprofit owners will often receive state tax exemptions if they provide proof of federal tax exempt status. To apply for federal tax exemption, new business owners must submit to a rigorous inspection process. Key to this process is the Narrative Description of Your Activities. In describing this, a corporation should outline what they do, who does it, where it’s done, how much time is spent on it, how much money is spent on it, and most importantly why this makes them exempt from taxation. The last part is especially important and is often the determining factor for tax exempt status. Generally, the IRS requires nonprofits to serve a specific public good. If prospective business owners have followed the previous guidelines then their nonprofit should already be structured in such a manner.
To form a nonprofit corporation or organization in California, and start your own business, you must meet a certain set of standards. Their articles of incorporation must include a specific statement of purpose as to their charitable actions. The board of directors must be appointed in compliance with IRS regulations. Their conflict of interest policy must be robust and follow the general outline provided by the IRS. A charitable trust registration form must be submitted and then renewed yearly. Finally, they have to apply for and receive both federal and state tax exempt status. Following this checklist, prospective business owners can make starting a nonprofit as painless as possible.