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Forming a Non-Profit Organization

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1. Create a business plan.

Before applying for nonprofit status, outline all business planning aspects of the organization. Carefully consider the organization's purpose or mission, programs or activities, budget, funding sources, evaluation and board leadership before beginning the application process. Without adequate planning, there might be unanswered questions in the incorporation process.

2. Determine whether the project is really needed.

After planning, determine if the community needs the program. Are there other organizations already performing this work? Are there resources available to support this project?

3. Look for an existing organization to adopt the new project.

Look for an existing organization that will accept the project as one of their own programs. There are over 130,000 registered nonprofits in California alone, placing charitable contributions and other assets at a premium. It’s advantageous to partner with an organization already in place. First seek inclusion with an organization performing similar work or with an organization that has expressed interest in the project. If the project cannot be re-homed, then seek separate corporate status.

4. Decide whether the new project is really a nonprofit.

Does the project need to be set up as a nonprofit organization? Realize there is no advantage to becoming a nonprofit organization except for secure tax-exempt status. Tax-exempt organizations do not pay income taxes and, if they are a 501(c)(3), donors can also receive a charitable deduction for contributions if they complete the appropriate tax form. Competition for charitable contributions and foundation and corporate grants is greater now than ever before, making it difficult to sustain organizations through traditional funding streams. Consider incorporating as a for-profit before applying for nonprofit status.

When an organization becomes a nonprofit, it belongs to the people of the State of California, not to the founder or even to the board. The direction and purpose of the project is determined by a board of directors acting on behalf of the community. If a founder desires to retain control of the project, it is recommended that a for-profit company be formed.

5. Determine the type of 501(c)(3) the organization should be.

Determine the type of nonprofit organization. The group can be incorporated as a charitable or public benefit corporation, a mutual benefit corporation, or a religious corporation. A public benefit organization is formed for scientific, cultural or educational purposes to benefit the public. A mutual benefit corporation is a trade association or social group which benefits its members. A religious organization is formed for broad general religious purposes.

6. Decide whether or not the organization will be a membership organization.

The degree of members’ involvement with the organization may determine whether or not members have legal rights. Some memberships are opportunities to support an organization financially and do not include the right to vote for the board or determine program direction. Other organizations have members who play a major role in determining the program direction and the makeup of the board. Again, the planning process should clarify this question before the start of the incorporation process.

7. Write articles of incorporation and bylaws and file them with the Secretary of State.

The planning steps should help with this process. The mission statement will need to be included in the Articles. Use language acceptable to the Internal Revenue Service (IRS) and to the Franchise Tax Board. The Articles must meet certain standards and include the name of the organization, how the organization is organized according to state law, a statement of purpose (mission), a statement that the organization will not engage in activities forbidden by law, dedication of assists, providing for distribution of assets upon dissolution and name and addresses of agents. There are various filing fees required so be sure to check fee schedules.

Bylaws outline the governance procedures of the organization and must be consistent with nonprofit laws. This is the area in which a nonprofit attorney might be beneficial.

8. Conduct the first meeting.

Conduct the first meeting to appoint directors, accept the Articles of Incorporation, adopt the bylaws, authorize submission of tax-exempt applications and authorize financial transactions such as opening bank accounts. The new board of directors must take this step. With this meeting, the board of directors assumes legal and fiduciary responsibility for the new organization. After submitting the Articles, a Domestic Nonprofit Corporation Statement from the Secretary of State will be provided which must be completed and returned within 90 days of filing the Articles.

9. Seek nonprofit status from the federal government.

To apply for federal tax exemption, complete and submit the proper forms to the IRS. It is usually difficult to complete, so this is another area in which an attorney might be helpful. A budget and fundraising plan must be submitted with the form. The federal application determines whether the organization meets the "public support test." (To receive and maintain 501(c)(3) status, an organization must receive most of its money from broad public sources or from government.)

There are a number of companies that can assist in the process of incorporating the nonprofit and offer other services, such as preparation of initial tax forms and bylaws, to help establish the new organization.

10. After the federal exemption comes through, continue the application to the State.

After receiving exempt status from the IRS request state exemption by submitting a copy of the federal determination letter from the IRS. Once federal exemption is received, the state exemption is routine. After incorporating with the state, a Notice to Register and a Registration Form will be provided to register with the state Registry of Charitable Trusts. The trust oversees the activities of public benefit nonprofits.

11. Become familiar with the annual forms the organization must file.

Once incorporated, there are three annual reports which must be submitted - RRF-1 with the Attorney General's office, Form 990 with the IRS (Office of Exempt Organizations), Form 199 with the Franchise Tax Board - and one which must be submitted biennially: the Statement of Domestic Nonprofit Corporation with the Secretary of State.

The IRS's Exempt Organization Division's “Life Cycle of a Public Charity” section has all the filing information for the federal forms and another good resource from the Attorney General's office is the "Guide to Charities."

12. Seek technical assistance and support.

Forming the nonprofit organization is just the beginning. Make sure the organization is well managed, well governed and meets a valuable and needed purpose. Consultants and/or management support organizations (MSOs) can help manage the new organization. Be sure to also check the local MSO for a wide array of training programs and technical assistance that is particularly helpful to new organizations.

 

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