How to Form a NonProfit Organization

If you have reached a stage in your life where you are ready to give something back to your community, you may be interested in forming a nonprofit organization. While anyone can do charitable work, forming your own nonprofit organization can ensure that your charitable work outlives you, and becomes something to benefit future generations.

What is a Nonprofit Organization?

A nonprofit organization is an organization that does not operate for profit. There are a variety of charities and interests that can be served through nonprofit organization status. A nonprofit can serve the arts, certain charities, educational organizations, cultural groups, religion, research, political groups, historical preservation, and many other purposes.

Why Create a Nonprofit Organization?

Creating a nonprofit organization for your work is much more complicated than just donating your time to a charitable cause. The main reasons that you may consider creating a nonprofit organization are to receive charitable donations that others can deduct from their taxes, to raise money through donations, and to create a firm nonprofit organization that will be helping people for generations.

How to Start the Nonprofit Organization Process

While there are many websites and books that can help guide you in getting nonprofit status for your organization, the process is a legal one and requires a certain amount of dedication and research. If you want to pursue nonprofit status by yourself, do all of the reading that you can. You can find trustworthy information about nonprofit organization at the Secretary of State website for your state, the IRS, and from reputable publishers at your local library.

Consult your local public law library for more advanced reading material. Each state has a few specialty legal publishers, and you can probably find a legal treatise that addresses the specific needs of your state there. In California, consider Advising California Nonprofit Organizations. This is a text for attorneys on the matter, and is published by CEB (Continuing Education of the Bar)

It covers:

Qualifying to become a tax exempt organization

Articles of incorporation and bylaws, with sample forms

Liabilities, rights, and duties of directors, officers, and members

The new Form 990: required filings, recordkeeping, and reporting

Fundraising legally; managing endowments and other funds

Rules on lobbying, PACs, and endorsing political candidates

Starting a Nonprofit Corporation/Organization: Formulate a Mission Statement

Before you pursue the legal requirements, put together the basics of your nonprofit organization. Develop a mission statement with clearly written goals. The mission statement of your nonprofit should be short, concise, and portray the value and importance of your organization.

Starting a Nonprofit Corporation/Organization: Forming a Board of Directors

A nonprofit corporation is run by a Board of Directors. In creating a board, consider the needs of the nonprofit, and how they will be met. Consider your mission statement and the role of who should manage and preserve that mission. Can you find directors with expertise in the area of your nonprofit? Or, maybe you want directors with different backgrounds - legal, financial, scientific, religious, etc. Most nonprofits have at least three board members, but you can have more if you need them.

Starting a Nonprofit Corporation/Organization: Articles of Incorporation

From the short descriptors of the legal treatise on nonprofits listed above, you can see that there are a list of legal requirements that accompany nonprofit organization status. Nonprofit corporations need to meet the legal requirements of the Secretary of State, which regulates the formulation and dissolution of businesses. It will also need to adhere to federal law. Part of the process is to create and file articles of incorporation for your nonprofit. Here is an excerpt from the California Secretary of State regarding the formation of nonprofit corporations in our state:

Organization of California Nonprofit, Nonstock Corporations

California nonprofit, nonstock corporations organized for religious, charitable, social, educational, recreational or similar purposes are formed pursuant to the Nonprofit Corporation Law, commencing with California Corporations Code section 5000.

The three primary types of nonprofit corporations, namely, religious, public benefit and mutual benefit, are described below.

A. A corporation organized to operate a church or to be otherwise structured for primarily or exclusively religious purposes is a nonprofit Religious corporation.

B. A corporation organized primarily or exclusively for charitable purposes and which plans to obtain state tax exempt status under California Revenue and Taxation Code section 23701(d) and/or federal tax exempt status under Internal Revenue Code section 501(c)(3) or organized to act as a civic league or a social welfare organization and which plans to obtain state tax exempt status under California Revenue and Taxation Code section 23701(f) and/or federal tax exempt status under Internal Revenue Code section 501(c)(4) is a nonprofit Public Benefit corporation.

C. A corporation organized for other than religious, charitable, civic league or social welfare purposes and planning to obtain tax exempt status under provisions other than California Revenue and Taxation Code sections 23701(d) and 23701(f), Internal Revenue Code section 501(c)(4), or not planning to be tax exempt at all, is a nonprofit Mutual Benefit corporation.

As you can see from this basic explanation of nonprofit organizations in the State of California, there is no simple approach to creating your organization. You will need to dedicate the time to the project or hire an attorney.

Here is another excerpt from our California Secretary of State:

Organization of California Nonprofit, Nonstock Corporations

INSTRUCTIONS:

Articles of Incorporation must be drafted to include all the provisions required by the California

Corporations Code. Articles of Incorporation may include other provisions as permitted under California law (e.g., the name and address of each initial director). The attached sample meets the minimum statutory requirements and should only be used as a guide in preparing Articles of Incorporation. The document should be typed with letters in dark contrast to the paper. Documents not suitable for reproduction will be returned unfiled. Note: The file date of Articles of Incorporation is generally the date the document complying with applicable law is received in the Secretary of State's office.

Article I: The articles must include a statement of the name of the corporation.

Note: The name must be exactly as you want it to appear on the records of the California

Secretary of State.

Article IIA: Mutual Benefit Corporation: This exact statement is required by the California Corporations Code and should not be altered.

Public Benefit Corporation: This exact statement is required by the California

Corporations Code and should not be altered except to include the applicable purpose

description.

Religious Corporation: This exact statement is required by the California Corporations

Code and should not be altered.

Article IIB: A statement describing the specific purpose may be included and, in fact, must be included if the corporation is organized for public purposes or if the corporation intends to apply for state franchise tax exemption.

Article III: The articles must include the name of the initial agent for service of process.1 If an individual is designated as agent, include the agent's business or residential street address in California (a P.O. Box address is not acceptable). Please do not use "in care of" (c/o) or abbreviate the name of the city. • If another corporation is designated as agent, do not include the address of the designated corporation. Note: Before another corporation may be designated as agent, that corporation must have previously filed with the Secretary of State a certificate pursuant to California Corporations Code section 1505.

A corporation cannot act as its own agent and no domestic or foreign corporation may file pursuant to Section 1505 unless the corporation is currently authorized to engage in business in California and is in good standing on the records of the California Secretary of State.

Article IV and Article V (where applicable): The Franchise Tax Board requires this language before state tax exemption may be granted.

Execution: The articles must be signed by each incorporator, or by each initial director named in the articles. If initial directors are named, each director must both sign and acknowledge the articles. Note: If initial directors are not named in the articles, the individual(s) executing the document is the incorporator(s) of the corporation. The name of each incorporator or initial director should be typed beneath their signatures.

For more information, visit the Secretary of State website for your state. The information cited above came from the website of the California Secretary of State Debra Bowen, Forms ARTS-Nonprofit, ARTS-MU, ARTS-PB, and ARTS-RE. These forms contain sample articles of incorporation to assist you in drafting articles for your nonprofit.

Starting a Nonprofit Corporation/Organization: Drafting Bylaws

Bylaws are a statement of how the nonprofit organization will operate. While bylaws may not be required in filing for 501(c)(3) status, they should be drafted to ensure compliance with state and federal law, and in meeting the mission statement of your organization.

Starting a Nonprofit Corporation/Organization: Budget and Recordkeeping

Another milestone in the creation of a nonprofit organization is to create an official budget and system for keeping the records of the corporation. There are also legal obligations in these areas that must be met. The state should be able to provide you with a list of those requirements. You will need to preserve all board documents, legal documents, and financial statements.

Starting a Nonprofit Corporation/Organization: Accounting

Assign a member of your board to be responsible for the accounting of your organization, or hire an accountant. Either way, the person in charge of accounting should be well versed in the intricacies of nonprofit organizations, their accounting, financial record-keeping, budgeting, etc. Standard accounting procedures should be followed to maintain legal compliance.

Starting a Nonprofit Corporation/Organization: 501(c)(3) Status

Nonprofit organizations are often referred to as 501(c)(3)'s. That is the section of the Internal Revenue Code that authorizes nonprofit status, or tax-exempt status. There are several IRS publications that deal with 501(c)(3) issues. You will also need to apply for a federal employer identification number. In case you hadn't noticed yet, a nonprofit organization is also called a nonprofit corporation, and will adhere to many of the same rules that govern regular corporations.

Starting a Nonprofit Corporation/Organization: Tax Exempt Status

A final step in the formation of a nonprofit organization is to file for local and state income tax exemptions. This will allow your nonprofit corporation to be exempt from income tax, sales tax, and property taxes.

Starting a Nonprofit Corporation/Organization: Mailing and Advertising

There are laws that govern solicitation and mailing by nonprofit organizations, so make sure that you become familiar with them. These also govern fund raising. Nonprofit corporations may receive a discount on mailing through filling out a form with the U.S. postal service.

I hope that you found this guide to creating a 501(c)(3) Nonprofit Organization helpful. For more information on nonprofit groups, visit your Secretary of State, and the resources listed below.

Resources:

http://www.sos.ca.gov/business/be
http://www.irs.gov/charities/index.html
http://www.nolo.com/

Books on the Formation of Nonprofit Corporations:

I recommend NOLO Press, which published legal advice for non-lawyers. Here are some of their titles that you may find extremely helpful.

1. Nonprofit Formation Documents: Articles of Incorporation, Bylaws, and Organizational Minutes

Learn the basics about your nonprofit's important organizational and corporate documents: articles, bylaws, and first minutes.

Getting familiar with the key documents for your nonprofit corporation can be tedious, but it's essential -- these documents contain important rules about how you must operate your nonprofit. And, if you don't keep proper records, you could lose your corporate or tax-exempt status. Here's a primer on the most essential documents of a nonprofit corporation: articles of incorporation, bylaws, and organizational minutes.

Articles of Incorporation: Your Primary Corporate Document

The primary corporate document for every nonprofit corporation is its articles of incorporation. A corporation comes into existence on the date its articles of incorporation are filed with the state corporate filing office.

Articles of incorporation contain basic structural information, such as the name of the nonprofit corporation, its registered agent, registered office address, and the corporation's membership structure, if any. Nonprofit corporations also often include essential tax exemption information in their articles, such as their tax-exempt purpose, a clause dedicating their assets to another 501(c)(3) nonprofit organization or class of organizations should the nonprofit end, and other operating restrictions necessary for the nonprofit to obtain tax-exempt status.

Bylaws: Your Operating Manual

The bylaws of a nonprofit corporation are its second most important document. Bylaws basically serve as a corporation's operating manual. Anytime someone wonders something like, "What's the maximum time one of our board members can serve?" or "How many board members do we need for a quorum?" they look to the bylaws for answers. Bylaws contain the rules and procedures for holding meetings, electing directors, appointing officers, and taking care of other essential corporate formalities.

State nonprofit laws also cover basic corporate governance matters, just like your bylaws. But you can choose different rules, as long as you put the rules in your bylaws and they don't violate state law. In any case, if a nonprofit's bylaws don't address an issue covered by state law, the state rules usually kick in.

Often, nonprofits simply restate tax and governance rules in their bylaws. That way, they know that if they follow their bylaws, they are complying with state law and doing their best to maintain tax-exempt status. Restating state rules even if you don't vary from them is a good idea because it's more efficient to have all the important operating rules easily accessible in one document.

Whenever you have a choice, put material in your bylaws instead of your articles of incorporation, as they're easier to change. The voting requirements to amend bylaws are generally less stringent and you probably won't need to file anything with the state.

Organizational Meeting Minutes

The first order of business for most newly formed nonprofit corporations is to hold a meeting to approve standard items of business necessary for starting operations. This is usually referred to as the organizational meeting of the corporation. The meeting can be held by either the board of directors or the incorporators -- whoever signed and filed the articles on behalf of the corporation.

The minutes of this meeting are simply a formal record of the proceedings and actions taken. Typically, these actions include such items as:

• setting an accounting period and tax year

• for a membership nonprofit, approving the issuance of memberships, membership certificates, and, if applicable, setting and scheduling membership dues or assessments

• authorizing and establishing the board and other committees

• appointing officers

• approving the bylaws

• authorizing the nonprofit to apply for tax-exempt status or, if that's already been taken care of, stating the effective date and terms of the organization's tax exemptions, and

• approving other beginning transactions of the corporation, such as the opening of a corporate bank account.

Some nonprofit corporations -- especially those created in a rush -- don't have minutes of the first meeting of the board of directors or incorporators. It's not the end of the world; you can proceed without them or recreate them. But if you recreate them after the fact, be sure to note in your recreated minutes that they were created after the fact to memorialize actions taken by your initial board or incorporators at their first meeting.

Organize Your Corporate Records

If you have not done so already, you should set up a corporate records book to store all your key documents. You can do this on your own with a three-ring binder or you can use a customized corporate kit designed for this purpose. Your corporate records book should contain:

• the articles of incorporation

• the bylaws

• minutes of your organizational meeting (or first directors' meeting)

• a list of the names and addresses of your directors

• for a membership organization, a membership roster listing the names and addresses of your current members

• minutes of all annual and special meetings of directors and members (if any), and

• written consents to any actions taken by the board or members.

Keep your corporate records book at the principal office of your corporation so you always know where to find it. When procedural or corporate governance questions come up, you'll be able to check quickly, answer with confidence, and move on. Having your documents in order can also help in the event your group is ever involved in an IRS or financial audit, or a dispute

2. Effective Fund-Raising for Nonprofits: Real World Strategies that Work

Description

Getting tax-exempt status for your nonprofit organization is just the first step -- whether its mission will succeed depends entirely on your ability to raise money. Fortunately, Effective Fundraising for Nonprofits will show you how.

Featuring advice and stories from over 40 experienced fundraisers, foundation staffers, journalists and more, the 2nd edition of Effective Fundraising for Nonprofits explains how to:

• work with individual donors

• plan special events

• solicit grants from foundations and corporations

• get media coverage

• use the Web to further fundraising goals

• start a side business to raise funds

• and much more

The 2nd edition also covers IRS rules and regulations, grassroots strategies for struggling nonprofits, the tools and staffing needed, and dozens of resources that you can take advantage of.

Best of all, Effective Fundraising for Nonprofits is written in plain English