How to start a nonprofit
A Step-by-Step Guide & Additional Resources --->
You've got an idea for making the world a better place, and you want to start a nonprofit as the means to do so. The good news is that starting a nonprofit isn't that hard to do if you have a sound plan, the right team, and sufficient startup funds.
The bad news is that running a successful nonprofit is not easy. You'll need to think through how you will bring value to the public, obtain funds, attract staff and/or volunteers, build a board of directors, and comply with the various laws that regulate nonprofits. Your answers to these questions will determine whether you should start a nonprofit or consider alternatives.
Questions to consider:
9 basic steps for starting a nonprofit public benefit corporation:
1. Determine the name of the corporation.
A nonprofit is typically formed as a corporation and its name can be a valuable asset. A corporation’s legal name must be registered with the state where the corporation is formed. A corporation name may be accepted if the name is not the same as or too similar to an existing name on the agency’s records and if it’s not misleading to the public.
You can check the business database of existing names before atributing a name to your organization. You can also reserve a name for 60 days by mailing in a Name Reservation Request, which prevents another person from registering that corporation name with the California Secretary of State while it is reserved. You must also make sure the name does not infringe on another person’s trademark rights.
2. Draft and file the articles of incorporation.
A corporation is legally created with the filing of the articles of incorporation. Articles of incorporation typically identify:
(a) The organization’s name;
(b) Its purpose or purposes of the nonprofit;
(c) The agent for service of process -- that is, a person who can receive lawsuits and other official correspondence and other matters, which can be an individual whose name and address are identified or a corporate agent registered with the California Secretary of State for such purpose;
(d) Limitations on the corporation’s operations, consistent with its tax-exempt status;
(e) The corporation’s street address and mailing address, if different; and
(f) Appropriate dedication and dissolution clauses.
For California, the articles will also identify the type of nonprofit corporation being formed. There are three types of nonprofit corporations: public benefit, mutual benefit, and religious. A nonprofit public benefit corporation (the focus of this step-by-step guide) is the appropriate choice for a nonprofit formed for charitable or public purposes. The articles of incorporation are typically signed by an "incorporator," which can be just one person but may also be signed by the initial board of directors if they are named in the Articles.
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3. Appoint the board of directors.
If the initial directors are not named in the articles of incorporation, the incorporator can and should appoint the board through a written action.
A nonprofit board may be composed of as few as one director, but the law may take issue with granting recognition status to a nonprofit with only one director. It is commonly recommended that nonprofits have between three and 25 directors.
These directors – board members – should understand their legal duties and responsibilities to act with reasonable care and in the best interests of the organization while providing direction and oversight over the organization’s activities, finances, officers, and legal compliance.
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4. Draft the bylaws and conflict of interest policy.
A corporation’s bylaws provide the fundamental provisions for governance of the corporation’s activities and affairs. Bylaws should provide guidance to the board and reassurance of sound governance practices to government authorities, funders, and other interested stakeholders.
Bylaws typically contain specific provisions detailing:
(a) The powers of the board and duties of the directors;
(b) How directors are elected or otherwise selected (e.g., by majority vote of directors at the annual board meeting);
(c) How the board may take an action (e.g., by majority vote of directors at a board meeting or by unanimous written consent);
(d) How board meetings are called, noticed, and held (e.g., four times per year with 14 days advance notice by email);
(e) How board meetings are conducted (e.g., the chair of the board presides or pursuant to Robert’s Rules, which we generally discourage for most nonprofits);
(f) The officers of the corporation (California law requires three officers: a president or chair of the board, secretary, and treasurer or chief financial officer);
(g) The duties and responsibilities of each officer;
(h) Whether the corporation has voting members or is a non-membership corporation, either of which should be clearly stated in the bylaws;
(i) The authorization of board and non-board committees (e.g., committees tasked to act with the authority of the board versus advisory committees that can only make recommendations);
(j) The level of indemnification provided by the corporation to protect its directors, officers, employees, and other agents; and
(k) The reports due to directors and members, if any (e.g., financial reports).
Bylaws may also include the corporation’s specific purpose or mission statement (which might replicate or make more specific the purpose statement in the articles of incorporation) and the corporation’s core values if they would be viewed as helpful in guiding the board on its leadership and decision-making – though the corporation should also be mindful to avoid inconsistencies between the articles and bylaws if mentioning the purposes or mission statement in both places (for which the articles will control).
If the nonprofit has voting members, the bylaws will also need to contain additional provisions regarding member rights and processes. Nonprofits considering a voting membership structure may want to first discuss such structure with a lawyer, particularly if they do not expect their members to actively participate in meetings and regularly exercise their rights to vote for members of the board of directors.
Public Counsel provides an Annotated Form of Bylaws for a California Nonprofit Public Benefit Corporation. Separately articulated policies commonly supplement the bylaws in addressing key governance and management issues. For example, although not required by federal tax law, it is considered by many to be a best practice for any nonprofit to have an adopted conflict of interest policy. Additionally, if a nonprofit does not have a conflict of interest policy, it must describe its policy regarding conflicts of interest in the IRS Form 1023. Accordingly, it would be advantageous for most nonprofits to adopt a policy. The IRS provides a sample policy in Appendix A of the Instructions to Form 1023, which can be a helpful starting point though note that this sample policy does not necessarily account for state law requirements such as the procedural requirements under California law for approving certain self-dealing transactions involving directors.
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5. Take the initial board actions at a board meeting or by unanimous written consent of the directors.
The board should take the following actions:
(a) Adopt the bylaws and conflict of interest policy;
(b) Set the exact authorized number of directors if the bylaws provide for a range for the size of the board;
(c) Adopt a fiscal year (such as a year ending December 31 or June 30);
(d) Approve establishing a bank account;
(e) Approve applying for federal and state tax-exempt status;
(f) Approve reimbursement of startup expenses (if applicable); and
(g) Approve the compensation of the president (CEO) or the treasurer (CFO) and anyone performing the functions of such officers, like an executive director (if applicable).
The incorporator may have already taken some of these actions at the time that he or she appointed the initial board, in which case the board can review and confirm those prior actions if desired.
At this step, the directors may also complete some initial forms for the organization’s records (which may also be required of the corporation’s officers) such as their completed annual disclosure of any potential or actual conflicts of interests, which is usually required by any well-drafted conflict of interest policy, and also providing a signed written consent to receiving electronic transmissions from the corporation as required by California law in order to conduct official business electronically (e.g., receiving meeting notices by e-mail).
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6. Obtain an employer identification number (EIN).
7. File the initial registration form (Form CT-1) with the California Attorney General’s Registry of Charitable Trusts.
The initial registration must be renewed annually, is required for the majority of nonprofit public benefit corporations, and must be filed within 30 days after receipt of assets. The CT-1 Form and Instructions are available online. The corporation’s articles of incorporation and bylaws should be included in the initial filing. For corporations that are in the process of applying for 501(c)(3) tax-exempt status, you can submit copies of the Form 1023 application and federal determination letter (Step 9) after receiving the determination letter to complete your filing with the Registry.
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8. File the Statement of Information (Form SI-100) with the Secretary of State.
The Statement must initially be filed within 90 days of the date of incorporation. This biennial filing requirement, which identifies the organization’s address, principal officers, and agent for service of process, can be filed online or by mail. (You can find information and instructions on completing the Statement of Information here.)
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9. Apply for federal tax exemption with the Internal Revenue Service (IRS) and receive a determination letter from the IRS.
Completing the Form 1023 application for exempt status under Internal Revenue Code (IRC) Section 501(c)(3) may be the most challenging part of the startup process. It is a legally-driven and comprehensive inquiry covering 10 Parts and 8 Schedules.
As of January 31, 2020, the IRS revised Form 1023 to be an online fill-in form that must be filed electronically at Pay.gov. While substantively the new electronic Form 1023 is mostly similar to its paper version predecessor, there are some new changes with the electronic form and e-filing process and some wrinkles that may be addressed in the future. Luckily, the IRS has added new tools and instructional videos to their website to help you understand the e-filing process. You will be required to create an account at Pay.gov in which you will be able to preview and download the form, save your progress, and return to the form at a later time. Please note that although you will be able to save your progress, the application will not allow you to advance to the next page until you have completed all of the questions on the current page, including entering required descriptions or explanations or completing required schedules.
A critical section for careful completion is Part IV, Narrative Description of Your Activities, which asks: for each past, present, or planned activity, include information that answers the following questions.
What is the activity?
Who conducts the activity?
Where is the activity conducted?
What percentage of your total time is allocated to the activity? (Combined time percentages should add up to 100%.)
How is the activity funded and what percentage of your overall expenses is allocable to this activity?
How does the activity further your exempt purposes?
Form 1023 also requires information regarding (a) organizational structure; (b) compensation and other financial arrangements with officers and directors, and certain highly paid employees and independent contractors; (c) members and other individuals and organizations that receive benefits from the organization; (d) organizational history (e.g., an organization that was spun off or previously fiscally sponsored by another organization may need to complete an additional schedule as a successor organization); (e) specific activities; and (f) actual and/or projected statement of revenues and expenses (which should be consistent with any identified activities).
Part VIII is designed to determine the organization’s classification as either a private foundation or a public charity. Public charity status is generally the more favorable tax status, but requires an organization to meet certain requirements. For most organizations, this means passing a public support test over an ongoing five-year measuring period. For organizations that will receive a large bulk of their support from few sources over their first five years, monitoring and managing of the public support ratio may be critically important. Public Charity Status Simplified (a little) is a helpful online resource from Insight Center for Community Economic Development.
If you think that your nonprofit will not bring in gross receipts of more than $50,000 per year during the next three years, and has not had gross receipts of more than $50,000 in any of the past three years, you may be eligible to file Form 1023-EZ. The full criteria are explained here. Like Form 1023, the 1023-EZ must be filed electronically. You can find instructions at this site.
The filing fee for Form 1023 is currently $600. The filing fee for Form 1023-EZ is $275. Fees are paid online here.
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