California Nonprofit Public Benefit Corporation Formation Guide

Complete roadmap for forming your 501(c)(3) charitable organization

⏱️
Total Timeline
3-9 months
From filing articles to receiving IRS determination letter. Faster with Form 1023-EZ (3-4 months), longer with Form 1023 (6-9 months).
💰
Minimum Formation Cost
$375
$30 (Articles) + $20 (SI-100) + $50 (CT-1) + $275 (1023-EZ). Standard Form 1023 costs $600 instead of $275.
⚠️
Critical Deadline
27 months
File federal tax exemption within 27 months of incorporation for retroactive recognition to your formation date.
👥
Board Independence
< 49%
No more than 49% of board can be "interested persons" (paid staff or their relatives). Unique California requirement.
Why Form in California?

✅ Advantages

🛡️ Liability protection for directors and officers
💵 Exempt from $800 annual franchise tax with state exemption
🌍 No residency requirement for directors or officers
📋 Established governance framework under CA Corporations Code
🏛️ AG oversight protects charitable assets and donor confidence

⚠️ Considerations

📑 Multiple filing requirements (SOS, AG, IRS, FTB)
📅 Ongoing annual compliance with several agencies
🔍 Strict board composition rules (49% interested persons limit)
💼 Self-dealing transaction restrictions
⏰ 30-day AG registration deadline after receiving assets

🎯 Who Should Form a California Nonprofit?

Organizations planning sustained charitable operations in California, seeking 501(c)(3) tax-exempt status for donor deductibility, requiring liability protection for founders and board members, and committed to transparent governance and public accountability.

⚠️ Consider Alternatives If...

Your project is time-limited or pilot phase (try fiscal sponsorship), you're primarily operating outside California (form in your operating state), you lack capacity for ongoing compliance (join existing organization), or you need maximum founder control without oversight (nonprofit may not be the right structure).

Complete Formation Timeline
1 Name Selection & Availability Check
Search California Secretary of State database to ensure your proposed name is available and distinguishable from existing entities. Optional: Reserve name for $10 for 60 days.
1-2 days
2 Recruit Initial Board of Directors
Assemble minimum 3 directors (odd number recommended). Ensure no more than 49% are "interested persons" (paid staff or relatives). Board members need not be CA residents.
1-4 weeks
3 File Articles of Incorporation (ARTS-PB-501(c)(3))
File with California Secretary of State using Form ARTS-PB-501(c)(3) which includes IRS-compliant language. Include organizational purpose, private inurement prohibition, and asset dedication clause. Fee: $30.
3-5 business days (online) or 4-6 weeks (mail)
4 File Statement of Information (SI-100)
Must be filed within 90 days of articles filing. Disclose principal office, directors, officers, and agent for service of process. Fee: $20. Required biennially thereafter.
Within 90 days of incorporation
5 Draft & Adopt Bylaws
Create internal governance document covering board meetings, officer duties, conflict of interest procedures, and amendment process. Not filed with state but must be kept at principal office. Include conflict of interest policy.
1-2 weeks
6 Hold Organizational Board Meeting
Adopt bylaws, elect officers, approve bank account, adopt fiscal year, authorize IRS application, and authorize AG registration. Document everything through meeting minutes.
1 day
7 Obtain Federal EIN
Apply online at IRS.gov for Federal Employer Identification Number. Instant approval. Required for bank accounts, tax returns, and exemption application.
Immediate (online)
8 Apply for Federal 501(c)(3) Status
File Form 1023-EZ ($275 fee, 2-4 weeks processing) if eligible, or Form 1023 ($600 fee, 3-6 months processing). Must file within 27 months of incorporation for retroactive recognition. File through Pay.gov.
2-4 weeks (1023-EZ) or 3-6 months (1023)
9 Register with CA Attorney General (Form CT-1)
Required within 30 days of receiving first assets/donations. Submit articles, bylaws, IRS determination letter (or application if pending), and list of directors/officers. Fee: $50.
Within 30 days of first receipt of property
10 Apply for California State Tax Exemption
File Form 3500A with IRS determination letter for streamlined state recognition under R&TC §23701d. Exempts from $800 minimum franchise tax and state income tax on related activities.
After receiving IRS determination letter
11 Set Up Ongoing Compliance Systems
Create compliance calendar for biennial SI-100, annual RRF-1, annual 990-series, and annual Form 199/199N. Establish record-keeping procedures and assign responsibility.
1-2 days
12 Begin Operations
Launch programs, accept donations, hire staff if needed. Can operate while awaiting IRS determination if filed within 27 months. Inform donors of "tax exemption applied for" status.
Ongoing

🚨 Critical: The 27-Month Rule

If you file Form 1023 or 1023-EZ within 27 months of your incorporation date, your tax-exempt status is retroactive to that date. File later and exemption starts from your application date, creating a gap where donations aren't tax-deductible. This is the single most important deadline in nonprofit formation.

Annual Compliance Requirements
CA SECRETARY OF STATE
Statement of Information (SI-100)
📅 Every 2 years during anniversary month or preceding 5 months
⚠️ First filing: Within 90 days of incorporation
$20
CA ATTORNEY GENERAL
Annual Renewal (RRF-1)
📅 4.5 months after fiscal year end
📎 Attach: CT-TR-1 or IRS 990/990-EZ
$25-$1,200 (revenue-based)
IRS
Form 990 Series
📅 15th day of 5th month after fiscal year end
📋 990-N, 990-EZ, or 990 based on size
$0 (but revocation after 3 years non-filing)
CA FRANCHISE TAX BOARD
Form 199 or 199N
📅 Same as federal deadline
📋 199N if receipts ≤$50k, otherwise 199
$0 (if tax-exempt)
Revenue-Based Requirements
Gross Receipts < $50,000 annually
Federal: File Form 990-N (e-postcard) online
State (FTB): File Form 199N online
AG: File RRF-1 + CT-TR-1 (Treasurer's Report)
Fee: $25-$50 RRF-1 fee depending on exact revenue
Gross Receipts $50,000 - $199,999 AND Assets < $500,000
Federal: File Form 990-EZ (or full 990)
State (FTB): File Form 199
AG: File RRF-1 + copy of Form 990-EZ
Fee: Sliding scale based on revenue
Gross Receipts ≥ $200,000 OR Assets ≥ $500,000
Federal: File Form 990 (full return)
State (FTB): File Form 199
AG: File RRF-1 + copy of Form 990
Fee: Revenue-based, can reach $1,200+ for largest orgs
Gross Receipts ≥ $2,000,000 (Nonprofit Integrity Act)
All of above PLUS:
• Independent CPA audit of financial statements required
• Establish audit committee with independence requirements
• Submit audited financials to AG with RRF-1
• Audit committee cannot include staff, CEO, or CFO
• No more than 50% of audit committee can serve on finance committee
Unrelated Business Income ≥ $1,000
Federal: File Form 990-T and pay tax on unrelated income
State (FTB): File Form 109
Due: Same deadline as regular 990/199 returns
Tax-exempt status doesn't exempt unrelated business income from taxation

🚨 Consequences of Non-Compliance

IRS: Three consecutive years of non-filing = automatic revocation of tax-exempt status. No warning, no grace period.

Attorney General: Delinquency triggers notification to FTB to suspend state exemption → $800 franchise tax + income tax + $25/month late fees payable personally by directors/officers (cannot use charitable assets).

Secretary of State: Failure to file SI-100 leads to corporate suspension → cannot legally operate, sue, or be sued until filing and paying penalties.

Formation & Filing Fees
Item Agency Timing Amount
Articles of Incorporation (ARTS-PB-501(c)(3)) CA Secretary of State Step 1 $30
Name Reservation (optional) CA Secretary of State Before filing articles $10
Statement of Information (SI-100) - Initial CA Secretary of State Within 90 days $20
Statement of Information (SI-100) - Biennial CA Secretary of State Every 2 years $20
Federal EIN IRS Before exemption application $0
IRS Form 1023-EZ IRS Within 27 months recommended $275
IRS Form 1023 (full application) IRS Within 27 months recommended $600
AG Registry Initial Registration (CT-1) CA Attorney General Within 30 days of receiving assets $50
AG Annual Renewal (RRF-1) - Small orgs CA Attorney General Annually, 4.5 months after FYE $25-$50
AG Annual Renewal (RRF-1) - Mid-size CA Attorney General Annually, 4.5 months after FYE $100-$300
AG Annual Renewal (RRF-1) - Large orgs CA Attorney General Annually, 4.5 months after FYE $400-$1,200
CA State Tax Exemption (Form 3500A) CA Franchise Tax Board After IRS determination $0
Federal Form 990-N / 990-EZ / 990 IRS Annually $0
CA Form 199N or 199 CA Franchise Tax Board Annually $0
MINIMUM FIRST-YEAR COSTS (using 1023-EZ) $375-$395
MINIMUM FIRST-YEAR COSTS (using Form 1023) $700-$720
Additional Potential Costs
Registered Agent Service
$100-$300
Annual fee for professional agent for service of process. Optional if you have a willing California resident board member.
CPA Audit (if revenue ≥ $2M)
$5,000-$15,000+
Required under Nonprofit Integrity Act for organizations with gross revenues of $2 million or more annually.
Legal Assistance
$2,500-$10,000
Typical range for attorney to handle formation and exemption application. Varies by complexity and geographic market.
Accounting/Bookkeeping
$1,000-$5,000
Annual cost for bookkeeping services and 990 preparation. Essential for maintaining compliance and financial records.

💡 Cost Savings: State Tax Exemption

California for-profit corporations and LLCs must pay an $800 minimum franchise tax annually regardless of profitability. Tax-exempt nonprofits avoid this expense entirely. Over 10 years, that's $8,000 in savings, more than offsetting formation and compliance costs for most organizations.

⚠️ Hidden Costs of Non-Compliance

Late RRF-1 filings: $25/month personally payable by directors and officers. Loss of state exemption: $800 franchise tax + state income tax on earnings. Three years of IRS non-filing: Complete revocation requiring reapplication with new $275-$600 fee. Budget for compliance, not just formation.

Critical Compliance Requirements
49% Interested Persons Rule (Corp Code §5227)
Requirement: No more than 49% of board may be "interested persons" at any time.
Definition: Director who received compensation for non-director services in past 12 months, or close relatives of such persons.
Practical Impact: 3-person board = max 1 paid staff; 5-person board = max 2 paid staff; 7-person board = max 3 paid staff.
Enforcement: AG can bring enforcement actions; violations jeopardize exemption.
Organizational Purpose Language (IRS Requirements)
Articles must state: Corporation organized exclusively for charitable, religious, educational, scientific purposes within meaning of IRC §501(c)(3).
Private Inurement: Must prohibit any part of net earnings from benefiting private individuals.
Asset Dedication: Upon dissolution, assets must go to another 501(c)(3) or government entity, not revert to founders.
Use Form: ARTS-PB-501(c)(3) includes compliant language by default.
Self-Dealing Transaction Procedures (Corp Code §5233)
Applies when: Director has material financial interest in contract/transaction with nonprofit.
Required procedure: (1) Interested director discloses interest in writing; (2) Recuses from discussion and vote; (3) Disinterested directors vote after determining transaction fair to nonprofit.
Documentation: Board minutes must record disclosure, recusal, and rationale for approval.
Consequence: Improper self-dealing = personal liability for directors + AG enforcement.
Bylaws & Conflict of Interest Policy
Bylaws required by CA law but not filed with state—kept at principal office.
Must address: Board meetings, quorum, officer duties, amendment procedures.
Conflict policy: IRS Form 1023 requires written conflict of interest policy; best included in bylaws.
Best practice: Use annotated template (e.g., Public Counsel) and customize for your organization.
Corporate Records Maintenance
Required records at principal office: Articles and amendments, bylaws and amendments, board/committee minutes (3+ years), accounting books/records, list of directors with addresses.
Inspection rights: Directors can inspect all records; AG can request for oversight.
Best practice: Maintain corporate minute book (physical or electronic) with all formation docs, minutes, resolutions, and returns.
Public Charity Classification & Public Support Tests
Goal: Qualify as public charity under §509(a)(1) or (a)(2), NOT private foundation.
Public support requirement: Substantial portion of support from public sources (donors, grants, earned income), not single major donor.
Advanced ruling period: First 5 years to develop public support pattern.
After 5 years: IRS examines actual support to confirm public charity status.
Why it matters: Private foundations face strict restrictions, excise taxes, required distributions.
Prohibited Political Campaign Activity
Absolute prohibition: 501(c)(3) organizations CANNOT support or oppose candidates for public office.
Includes: Direct endorsements, financial contributions, volunteer time for campaigns, candidate forums that show bias.
Lobbying allowed: Limited lobbying for legislation (not candidates) permitted; "substantial" lobbying jeopardizes status.
Penalty: Violations can lead to immediate revocation of 501(c)(3) status.
Unrelated Business Income Tax (UBIT)
Tax-exempt ≠ no taxes: Exempt from tax on income from related activities, but must pay tax on unrelated business income.
UBIT applies when: (1) Trade/business; (2) Regularly carried on; (3) Not substantially related to exempt purpose.
Threshold: $1,000+ gross unrelated income triggers Form 990-T filing and tax payment.
Example: Educational nonprofit's tuition = related (exempt); same org's T-shirt sales = unrelated (taxable).
Form 1023 vs. 1023-EZ Decision Matrix

Form 1023-EZ: Streamlined

💰 User fee: $275
⏱️ Processing: 2-4 weeks typically
📄 Length: ~3 pages + eligibility worksheet
✅ Eligibility: Gross receipts ≤$50k/year, assets ≤$250k
🚫 Excluded: Churches, schools, hospitals, supporting orgs
⚠️ Trade-off: Less IRS scrutiny upfront = less validation
🎯 Best for: Small startups, straightforward purposes, under $50k revenue

Form 1023: Comprehensive

💰 User fee: $600
⏱️ Processing: 3-6 months typically
📄 Length: 20+ pages + schedules + attachments
✅ Eligibility: All organizations can use; required if not 1023-EZ eligible
📋 Requirements: Detailed narratives, 3-year budgets, governance docs
🏆 Benefit: Comprehensive IRS review validates exempt status
🎯 Best for: Complex operations, near eligibility thresholds, major fundraising planned

🚨 Common Formation Mistakes to Avoid

1. Using standard ARTS-PB instead of ARTS-PB-501(c)(3) = articles lack required IRS-compliant language.
2. Missing SI-100 90-day deadline = penalties and suspended corporate status.
3. Board with 50%+ interested persons = violates CA law, jeopardizes exemption.
4. Filing for exemption after 27 months = lose retroactive recognition.
5. Starting operations before AG registration = violating 30-day rule, potential penalties.
6. No conflict of interest policy = IRS will question governance.
7. Failing to file three years = automatic revocation of federal exemption.

✅ Formation Checklist Summary

☑ Name available and reserved (optional)
☑ 3+ directors recruited, <49% interested persons
☑ Articles filed using ARTS-PB-501(c)(3)
☑ SI-100 filed within 90 days
☑ Bylaws adopted with conflict policy
☑ Organizational meeting held, minutes documented
☑ EIN obtained from IRS
☑ Form 1023/1023-EZ filed within 27 months
☑ CT-1 filed within 30 days of receiving assets
☑ State tax exemption obtained (Form 3500A)
☑ Compliance calendar established
☑ Corporate minute book organized