Forming a Tax-Exempt Nonprofit Entity

Starting a nonprofit organization may seem like a challenging prospect, but knowing the proper forms to file and legal measures to take can make the experience less daunting.

Charitable nonprofits typically strive to be tax exempt under section 501(c)(3) of the federal Internal Revenue Code (IRC). Companies tax exempt under 501(c)(3) do not pay federal income taxes on income they generate, unless the income comes from activities sufficiently unrelated to the companies’ core charitable objectives. Donations to 501(c)(3)s can be tax deductible, if structured and documented correctly.

Nonprofits may also qualify for tax exemption for reasons other than being charitable. However, these other tax exemptions often come with different rules and limitations. For example, Social Welfare Organizations, nonprofits geared towards benefiting their members or influencing public opinion and the legislative process, can be tax exempt under 501(c)(4). Unlike 501(c)(3) organizations, donations to 501(c)(4) organizations are not tax deductible.

Nonprofit Versus Tax Exempt

In California, a nonprofit entity is characterized according to how it was created. The articles of incorporation should specify that the organization is not for-profit; all of the proceeds must be used for nonprofit purposes. California Nonprofit Corporation law recognizes the following types of corporations as nonprofit, each of which are suitable for different nonprofit purposes:

  • Nonprofit Public Benefit Corporations.
  • Nonprofit Mutual Benefit Corporations.
  • Nonprofit Religious Corporations.

In rare cases, other entity types may function as nonprofits.

Nonprofit corporations tend to follow the same business structure as for-profit corporations, except that the assets of nonprofits will never be useable for the benefit of any owners. In nonprofit corporations, there must be at least one director, articles of incorporation, and bylaws established under the organization’s name. Nonprofit corporations must also apply for a Federal Employer Identification Number (FEIN). Nonprofits also may have additional documents to register with California. Once the necessary documents are filed with the state, nonprofits can prepare to file the appropriate IRS and state forms for tax exemption.

An organization is tax exempt once it qualifies for a federal or state tax exemption.

Applying for Nonprofit Tax Exempt Status

In order to obtain federal tax-exempt status, you must complete and file a form with the IRS. For organizations seeking 501(c)(3) status, this will typically be a Form 1023. The form must be signed by a representative of the corporation.

Assuming the corporation sought and successfully obtained 501(c)(3) tax exempt status, the IRS will issue a 501(c)(3) determination letter. The corporation also is required to apply for California Franchise Tax Exemption. If the corporation has already obtained a 501(c)(3) determination letter, it can file the determination letter along with form FTB3500A with the California Franchise Tax Board. California also offers a limited property tax exemption to certain charitable nonprofits, which requires going through the Board of Equalization and local assessors.

Help Starting Your Nonprofit

There are many things you should consider when forming a nonprofit. There are many state and federal requirements for obtaining and maintaining nonprofit and tax exempt statuses, and seeking legal help is the best way to ensure you have met all legal requirements. For more information related to the formation of nonprofit organizations, speak with an experienced business law attorney today. At the Royse Law Firm, we provide knowledgeable representation to businesses and individuals in the Los Angeles, Palo Alto, and San Francisco areas.

Disclaimer: This blog and website are public sources of general information concerning our firm and its lawyers, as well as the information presented. They are intended, but not promised or guaranteed, to be correct, complete, and up-to-date as of the date posted. This blog and website are not intended to be, and are not, sources of legal opinion or advice. The materials, information, and communications on this blog and website do not apply to any particular person, entity, or situation, and do not apply to you or to your specific situation. You will need to consult with an attorney and/or other appropriate professional about your specific situation. Thank you.
Roger Royse
rroyse@rroyselaw.com

Roger Royse, the founder of the Royse Law Firm, works with companies ranging from newly formed tech startups to publicly traded multinationals in a variety of industries. Roger regularly advises on complex tax structuring, high stakes business negotiations and large international financial transactions. Practicing business and tax law since 1984, Roger’s background includes work with prominent San Francisco Bay area law firms, as well as Milbank, Tweed, Hadley and McCloy in New York City.
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