Non-Profit Organization
1. What is a non-profit organization?
2. What does 501(c)(3) mean in non-profit language?
3. What kinds of non-profits exist in California?
4. How is a non-profit organization formed?
5. What is the hardest step during the formation process?
6. How long does the process take from start to finish?
7. Who manages and controls a non-profit corporation?
8. How is the board of director elected?
9. What are some common misperceptions about non-profits?
10. What are the ongoing requirements for a non-profit?
1. What is a non-profit organization? (Top)
A corporation organized for some purpose other than making a profit and usually afforded special tax treatment. Black’s Law Dictionary (8th ed. 2004). For example, a non-profit organization can be a charitable organizations (IRC §501(c)(3)), social welfare/lobbying organizations (IRC §501(c)(4)), labor unions (IRC §501(c)(5)), trade associations and business leagues (IRC §501(c)(6)), social clubs (IRC §501(c)(7)) or veterans’ organizations (IRC §501(c)(19)).
2. What does 501(c)(3) mean in non-profit language? (Top)
501(c)(3) is the Internal Revenue Code Section that grants an exemption for federal income tax. Non-profit organizations are typically associated with this Internal Revenue Code Section, although other non-profit organizations are exempt from federal income tax.
The reason why 501(c)(3) status is desirable for non-profit organizations is because donations to a 501(c)(3) organization qualify for federal and state income tax deductions.
3. What kinds of non-profits exist in California? (Top)
In California, a non-profit can either be an unincorporated association, charitable trust or corporation. Corp C §§18000-24001.5; Prob C §§15000-19403; Corp C §§5000-10841. Examples of an unincorporated association include: labor unions, political parties, social clubs, religious organizations, environmental societies, athletic organizations, condominium owners, lodges, stock exchanges, and veterans groups. Examples of a charitable trust include Stanford University and the Pew Charitable Trust. Examples of a corporation include universities, hospitals, and churches.
Consequently, a California non-profit corporation can be a public benefit, mutual benefit or religious corporation. Corp C §§5000-5080; Corp C §§5110-6910; Corp C §§7110-8910; Corp C §§9110-9690. Examples of public benefit corporations include foundations, community chests, scholarship programs and hospitals. Examples of mutual benefit corporations include social clubs, fraternal orders, trade and homeowners’ associations. Examples of religious corporations include churches and seminaries.
4. How is a non-profit organization formed? (Top)
Generally speaking, a non-profit corporation must file Articles of Incorporation with the Secretary of State’s office, draft bylaws, elect a board of directors, obtain a taxpayer identification number, file a Statement of Information with the Secretary of State’s office, file for tax exempt status with the IRS and the California Franchise Tax Board, and register with California Attorney General Registry of Charitable Trusts.
http://www.avvo.com/legal-guides/ugc/how-to-form-a-california-non-profit-corporation
5. What is the hardest step during the formation process? (Top)
Obtaining tax exempt status from the IRS is typically regarded as the hardest step. IRS Form 1023, the form used to obtain tax exempt status, typically takes around 15 hours to complete. http://www.irs.gov/pub/irs-pdf/i1023.pdf
6. How long does the process take from start to finish? (Top)
If you were very organized and thorough when filing documents, one could complete the process in roughly 3 months. However, the usually processing time is 6-8 months.
7. Who manages and controls a non-profit corporation? (Top)
A nonprofit corporation is managed and controlled by the board of directors. Corp C §§5210, 7210, 9210(a). Consequently, every nonprofit corporation, other than a religious corporation, must have a board of directors. Corp C §§5210, 7210.
8. How is the board of director elected? (Top)
For public and mutual benefit corporations, the board of directors are either voted in by non-profit members, be chosen by individuals currently serving on the board, be selected per the Articles of Incorporation or corporate bylaws, or in special circumstances, the superior court in any county may appoint the corporation’s initial directors on application by any party in interest. Corp C §§5220(d), 7220(d).
For religious corporations, the board of directors can be chosen via the Articles of Incorporation, corporate bylaws or in special circumstances, the superior court in any county may appoint the corporation’s directors on application of any party in interest. Corp C §9220; Corp C §9220(d).
9. What are some common misperceptions about non-profits? (Top)
Fiction: Non-profit means no profit/Fact: Numerous non-profits have multi-million dollar budgets such as Stanford University.
Fiction: Non-profits are never subject to income tax/Fact: Non-profits are taxed on net income realized from a regularly conducted trade or business that is unrelated to the purpose or functions that qualify the organization for tax exemption. This is known as unrelated business income. (UBI).
Fiction: Donations to a non-profit are fully deductible on your taxes/Fact: Only donations to certain kinds of charitable organization are tax deductible such as IRC §501(c)(3) non-profits. Furthermore, donations to IRC §501(c)(3) non-profits that are considered “private foundations” are not entitled to the same income tax deduction as donations to “public charities.”
10. What are the ongoing requirements for a non-profit? (Top)
Each year the non-profit must file a renewal report with the California Attorney General, RRF-1 and Form 990 with the IRS. These two documents constitute the tax returns for the non-profit.
