Understanding California Nonprofit Corporations
The foundation for charitable, educational, and mission-driven organizations
What is a Nonprofit Corporation?
A nonprofit corporation is a legal entity organized for purposes other than generating profit for owners. Net earnings cannot benefit private individuals (no "private inurement").
- No shareholders or equity owners
- Governed by board of directors
- Assets dedicated to exempt purpose
- Cannot distribute profits to individuals
Tax-Exempt Benefits
Properly structured nonprofits can receive significant tax benefits at federal, state, and local levels:
- Federal income tax exemption (IRC § 501(c))
- California franchise tax exemption
- Property tax exemptions (welfare exemption)
- Sales tax exemptions for certain purchases
Tax-Deductible Donations
501(c)(3) organizations can receive tax-deductible contributions, making fundraising more attractive:
- Donors deduct contributions on tax returns
- Eligible for foundation grants
- Can receive government funding
- Access to donor-advised funds
State vs Federal Status
Nonprofit status involves two separate processes that are often confused:
- State: California nonprofit corporation (SOS)
- Federal: 501(c)(3) tax exemption (IRS)
- Both required for full tax-exempt status
- California exemption requires federal exemption
Types of California Nonprofit Corporations
California law provides three categories of nonprofit corporations
Public Benefit Corporation
For charitable, educational, religious, or public purposes. Most common type for 501(c)(3) organizations.
- Subject to Attorney General oversight
- Assets must stay with exempt purposes
- Cannot convert to for-profit
- Most common for charities
Examples: Charities, schools, churches, hospitals, foundations
Mutual Benefit Corporation
For organizations that primarily benefit their members rather than the general public.
- Less Attorney General oversight
- Can distribute assets to members on dissolution
- Not eligible for 501(c)(3)
- May qualify for other IRC exemptions
Examples: HOAs, social clubs, trade associations, unions
Religious Corporation
For churches and religious organizations. Special rules for governance and member rights.
- Can be public or mutual benefit
- Special First Amendment protections
- Flexible governance rules
- Churches often don't need 501(c)(3) application
Examples: Churches, synagogues, mosques, religious organizations
📋 501(c)(3) vs Other Exempt Categories
While 501(c)(3) is the most common, the IRS recognizes many types of tax-exempt organizations:
- 501(c)(3): Charitable, educational, religious, scientific (tax-deductible donations)
- 501(c)(4): Social welfare organizations (lobbying allowed, no deductible donations)
- 501(c)(6): Business leagues, chambers of commerce, trade associations
- 501(c)(7): Social and recreational clubs
- 501(c)(19): Veterans organizations
Formation Process
Step-by-step guide to forming your California nonprofit corporation
Define Purpose & Structure
Clarify your charitable purpose and determine the appropriate nonprofit structure before drafting documents.
Choose & Reserve Name
Select a name and verify availability with Secretary of State. Name cannot imply for-profit status.
Draft & File Articles of Incorporation
Prepare Articles with IRS-required language for 501(c)(3) eligibility and file with Secretary of State.
Prepare Bylaws
Create comprehensive bylaws addressing governance, meetings, officers, and conflict of interest policies.
Hold Organizational Board Meeting
Conduct initial board meeting to adopt bylaws, elect officers, and authorize corporate actions.
Obtain EIN
Apply for Employer Identification Number from IRS. Required before applying for 501(c)(3) status.
Apply for 501(c)(3) Tax-Exempt Status
File Form 1023 or 1023-EZ with the IRS to obtain federal tax-exempt status.
Complete State & Local Registration
Register with California agencies and complete local requirements.
501(c)(3) Tax-Exempt Status
Federal requirements for charitable tax exemption
Form 1023 vs 1023-EZ
Two options for applying for 501(c)(3) status:
- Form 1023-EZ: Simplified, 3-page form
- Eligible if gross receipts ≤ $50K/year
- Assets ≤ $250K projected
- Form 1023: Full application required otherwise
Required Articles Language
Your Articles must include specific IRS-required provisions:
- Organized exclusively for exempt purposes
- No private inurement clause
- Limited political activity clause
- Dissolution clause (assets to 501(c)(3))
Exempt Purposes
501(c)(3) organizations must be organized for one or more of these purposes:
- Charitable
- Educational
- Religious
- Scientific
- Literary
- Public safety testing
Prohibited Activities
501(c)(3) organizations face strict limitations:
- No substantial lobbying (501(h) election available)
- Absolutely no campaign intervention
- No private inurement
- No excessive private benefit
ℹ️ Public Charity vs Private Foundation
501(c)(3) organizations are classified as either public charities or private foundations:
- Public Charities: Receive significant public support (1/3 support test) or are schools, hospitals, churches, etc. Fewer restrictions.
- Private Foundations: Typically funded by single source (family, company). Subject to excise taxes and stricter rules.
Most organizations prefer public charity status. The IRS presumes private foundation unless you demonstrate public charity qualifications.
California State Registration
Required state filings for California nonprofits
Attorney General Registration (CT-1)
Public benefit corporations must register with the Attorney General's Registry of Charitable Trusts.
- Initial registration required
- File within 30 days of receiving assets
- Annual RRF-1 reports thereafter
- Registration fee: $25
FTB Tax Exemption
California franchise tax exemption is generally automatic for 501(c)(3) organizations.
- Submit FTB 3500A with IRS determination letter
- Exemption backdated to incorporation
- Annual Form 199 reporting required
- $800 minimum tax waived
Charitable Solicitation (RRF-1)
Organizations soliciting donations in California must register annually with the AG.
- Annual RRF-1 filing required
- Include financial statements if > $25K
- Filing fee: $25-$300 based on revenue
- Due 4.5 months after fiscal year end
Property Tax Exemption
Nonprofits may qualify for welfare exemption on real and personal property.
- Apply with County Assessor
- Must be used for exempt purpose
- Annual Welfare Exemption Claim form
- Organizational Clearance Certificate from State
Ongoing Compliance Requirements
Maintaining your nonprofit's good standing and tax-exempt status
| Filing | Agency | Deadline | Fee |
|---|---|---|---|
| Form 990/990-EZ/990-N | IRS | 15th day of 5th month after year end | Free |
| Form 199/199N | California FTB | 15th day of 5th month after year end | Free |
| RRF-1 | Attorney General | 4.5 months after year end | $25-$300 |
| Statement of Information (SI-100) | Secretary of State | Every 2 years | $20 |
| Welfare Exemption Claim | County Assessor | February 15 annually | Free |
⚠️ Auto-Revocation Warning
The IRS will automatically revoke 501(c)(3) status if you fail to file Form 990 (or 990-EZ or 990-N) for three consecutive years.
- No warning letters—automatic revocation
- Organization loses tax-exempt status
- Donations no longer tax-deductible
- Reinstatement requires new application and fees
Form 990 Versions
Which form to file depends on your organization's size:
- 990-N (e-Postcard): Gross receipts ≤ $50,000
- 990-EZ: Gross receipts < $200,000 AND assets < $500,000
- 990: Gross receipts ≥ $200,000 OR assets ≥ $500,000
- Private foundations file Form 990-PF regardless of size
Record Keeping
Essential records to maintain:
- Board meeting minutes
- Financial statements and budgets
- Donor records and acknowledgments
- IRS determination letter
- Conflict of interest disclosures
Board Governance Best Practices
Building an effective and compliant nonprofit board
Board Composition
California public benefit corporations have specific board requirements:
- Minimum 1 director (3 recommended)
- If 3+ directors: majority must be disinterested
- No maximum number
- Consider diversity of skills and perspectives
Conflict of Interest
Required conflict of interest policy and procedures:
- Written policy required by IRS
- Annual disclosure by board members
- Recusal from conflicted decisions
- Document conflict management in minutes
Fiduciary Duties
Board members owe fiduciary duties to the organization:
- Duty of Care: Act with reasonable care
- Duty of Loyalty: Put organization first
- Duty of Obedience: Follow mission and law
- Business judgment rule provides protection
Compensation Rules
Strict rules govern compensation of insiders:
- Must be reasonable for services rendered
- Comparability data required
- Board should approve officer compensation
- Excess benefit = excise taxes (IRC § 4958)
Frequently Asked Questions
Common questions about California nonprofit corporation formation
The total timeline is typically 4-8 months. California incorporation takes 5-10 business days. The IRS 501(c)(3) application takes 3-6 months for Form 1023-EZ and 6-12 months for the full Form 1023. You can operate as a nonprofit immediately after state incorporation, but donations won't be tax-deductible until IRS approval (though approval can be retroactive to incorporation date if you apply within 27 months).
Yes, but with important limitations. California law permits reasonable compensation to directors for services rendered in their capacity as directors. However, many funders and governance best practices recommend keeping boards unpaid to ensure true volunteer governance. Officers and employees (who may also be board members) can receive reasonable compensation for their work, but compensation must be approved by disinterested parties and be reasonable compared to similar organizations.
A nonprofit corporation is a state-level legal entity formed under California law. 501(c)(3) refers to federal tax-exempt status under the Internal Revenue Code. You can have one without the other: a California nonprofit corporation that hasn't received IRS approval isn't tax-exempt federally, and some 501(c)(3) organizations are formed in other states. For full tax exemption and deductible donations, you need both state nonprofit status and federal 501(c)(3) recognition.
Yes, nonprofits can—and should—generate revenue. The "nonprofit" designation doesn't mean you can't make money; it means net earnings cannot benefit private individuals (owners or shareholders). Nonprofits can earn revenue from donations, grants, program fees, merchandise sales, and even unrelated business income. Any surplus is reinvested in the organization's mission rather than distributed to owners. Unrelated business income may be subject to tax (UBIT).
California law requires a minimum of one director for a nonprofit corporation. However, the IRS and governance best practices recommend at least three unrelated directors to demonstrate diverse, independent governance. If you have three or more directors, a majority must be "disinterested" (not compensated as employees and not related to anyone who is). Many organizations find 5-15 board members provides a good balance of perspectives while remaining manageable.
Yes, but it's complex. California allows conversion of for-profit corporations to nonprofit corporations, but the process involves careful consideration of assets (which must be irrevocably dedicated to charitable purposes), tax implications, and legal requirements. Converting an LLC to a nonprofit requires forming a new nonprofit corporation and transferring assets, as LLCs cannot directly convert. The IRS will scrutinize any conversion to ensure it's not merely a tax avoidance scheme. Consulting an attorney experienced in nonprofit law is essential.
No. California allows nonprofits to operate with or without formal members. If you have members with statutory voting rights (like electing board members), you must follow specific notice and meeting requirements. Many nonprofits choose to be "board-only" organizations without voting members, which simplifies governance. You can still have "supporters" or "donors" without giving them formal membership voting rights. The choice depends on your organizational culture and how you want stakeholders involved in governance.
If 501(c)(3) status is revoked, the organization becomes taxable and donations are no longer tax-deductible. The most common cause is failing to file Form 990 for three consecutive years (automatic revocation). Reinstatement requires a new application (Form 1023) with full fees and explanation of how you'll ensure compliance going forward. The IRS publishes a list of auto-revoked organizations. California tax exemption is also lost, and you may owe back taxes. Prevention through timely filing is far easier than reinstatement.