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Starting a Nonprofit in California

Starting a Nonprofit in California in 8 Steps
Jamie Cattanach
Jamie CattanachUpdated March 6, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Starting a nonprofit organization allows you to use your business skills and experience to help make the world a better place. Getting a new nonprofit off the ground, however, can take a fair amount of time, effort, and money. To establish the corporate entity that will become your California nonprofit, you’ll need to figure out a unique name, get an EIN, and file several different kinds of paperwork with the government.Not sure where to start? Read on. What follows is a simple, step-by-step guide for how to start a nonprofit organization in California, including your options for funding.

What is a Nonprofit?

A nonprofit is an organization formed to serve the public good rather than for the purposes of generating a profit. Speaking more technically, a nonprofit is a business that has been granted tax-exempt status by the Internal Revenue Service (IRS) because it advances a social cause that benefits the public in some way. Any income a nonprofit generates cannot be distributed to its members, officers, shareholders, or directors. (That doesn’t mean, however, that its employees and founders can’t be fairly compensated for their work.)There are several types of nonprofits. including:
  • 501(c)(3)s These include charities, churches, and other organizations dedicated to the public good.
  • 501(c)(4)s These include social welfare organizations and local associations of employees.
  • 501(c)(5)s These include labor unions and agricultural organizations.
There are many more — in fact, there are nearly three dozen types of tax-exempt organizations defined across the U.S. tax code. Which one is right for your purposes will depend on what, exactly, your nonprofit is trying to accomplish. Recommended: Starting a Nonprofit: 11 Essential Steps 

How Nonprofits Work

Nonprofits raise money that they then spend to further their mission, not to benefit the donors or founders. Because a nonprofit must benefit the public in some way, they are required to make their financial data public so that potential donors know exactly how contributions are being spent. Nonprofits must also adhere to rules set by state charity authorities, as well as the IRS. For example, a nonprofit must avoid political involvement, may not deviate from its core purpose or mission, and is required to pay all employees fair market value wages.

Nonprofits vs Businesses

The most obvious difference between nonprofits and businesses is the fact that businesses — even those committed to social good — exist, at the end of the day, to make money. But there are a few more differences to bear in mind.
Business Nonprofit
Purpose is to create wealth for owners/shareholdersPurpose is to achieve a specific mission
Not tax exemptTax exempt
Raises funds by seeking investors who usually expect a return on their investmentRaises funds by seeking donations — donors do not expect to get their money back
Privately owned entity Publicly owned entity
Recommended: Guide to Starting a Nonprofit Animal Rescue

Starting a Nonprofit in California in 8 Steps

If you’re looking to start a nonprofit in California, here are eight steps you’ll need to follow. 

1. Name Your Nonprofit

The first thing you’ll need is a name — and a unique one at that. You can run your ideas through California’s free business search feature to make sure your idea is a new one. It’s also a good idea to make sure the name is available as a web domain and, if so, to purchase it so you can use it for your website. 

2. Choose Your Corporate Structure

Yes, nonprofits are corporations — and California offers four corporate structures for nonprofit founders to choose from:
  • Religious corporations These are for religious nonprofits.
  • Public benefit corporations These are for nonprofits that exist for public welfare or charitable purposes, such as 501(c)(3)s and 501(c)(4)s.
  • Mutual benefit corporations These are nonprofits that may or may not seek tax exemption, depending on their specific objectives.
  • Mutual benefit common interest development, or CID, corporations These are created to manage the development of a common interest — homeowners associations, for example, are often CIDs.

3. Recruit Your Board

While you’re not legally required to have more than a single person on your board of directors under California law, the IRS generally likes to see nonprofits have from three to 25 directors. (Plus, the additional help can make it easier to achieve your vision.)

4. Write Your Bylaws & Conflict of Interest Policy

To be eligible for 501(c)(3) status, your nonprofit will need to prepare these two documents:
  • Bylaws These are the rules outlining the operating procedures of the nonprofit. Bylaws typically detail the powers and duties of the directors, how they are elected, how the board will make decisions (such as by majority vote), and how board meetings will be conducted.
  • Conflict of interest policy This is a set of rules that are designed to ensure that any decisions made by the board of directors will benefit the nonprofit and not individual board members. 

4. File Your Articles of Incorporation

Next, you’ll need to determine your nonprofit’s legal structure (you can choose between an association, corporation, or trust) and file articles of incorporation, which is essentially a request for business recognition by your state. California offers “Articles of Incorporation for a Domestic Nonprofit Corporation” templates and allows you to file by mail, in person, or online. The state doesn’t charge a processing fee for the service (unless you’re converting an existing, out-of-state corporation).

5. Get an EIN

An EIN, or employer identification number, is a unique, nine-digit number that’s used to identify your nonprofit for tax purposes. (Think of it as your nonprofit’s social security number.) An EIN is also known as a Federal Tax Identification Number, and you can apply for one online with the IRS.

6. File SI-100 with the Secretary of State of California

Within 90 days of filing your articles of incorporation (and once every two years after that), you’ll need to file what’s called an “initial report,” or Form SI-100, with California’s Secretary of State. This form requires you to provide your organization’s address, principal officers, and agent for service of process, and can be filed online or by mail. There is a  $20 filing fee.

8. Apply for California Tax Exemption

Once you have federal 501(c)(3) status (more on how to get that below), you can request California recognition of tax exemption from the California Franchise Tax Board (FTB). To do this, you need to file Form 3500A along with a copy of the IRS determination letter. Typically, the FTB will recognize the organization’s exemption from state income taxes as of the federal effective date.Recommended: 5 Essential Nonprofit Financial Documents

Other Steps for Federal Compliance

In addition to fulfilling all of California’s registration requirements, you’ll also need to apply for tax-exempt status at the federal level. To do this, you will have to fill out IRS Form 1023. This form is complex and can be time-consuming to complete. It includes 10 parts and eight schedules, and will require in-depth written responses about exactly what your nonprofit plans to do with its time on a daily basis. If you think that your nonprofit will earn less than $50,000 annually, however, you may be able to fill out a shorter version of the form called Form 1023-EZ.Recommended: Guide to Opening a Nonprofit Thrift Store

Funding Sources for Nonprofits in California

To get your nonprofit up and running in California (or any state), you’re going to need funding. Besides covering your initial filing fees, you’ll also need capital to rent office space, hire employees, initiate programs, and spread the word about your organization and mission through marketing. Fortunately, there are many sources of funding for California nonprofits to consider.

Grants

Grants are a very common way for nonprofits to raise money: these are donations offered by foundations, government agencies, and corporations. Unlike loans, there’s no expectation that you’ll pay a grant back.You may want to start your grant search online. Grants.gov offers an expansive, searchable database. There are also organizations and government agencies that specifically offer grant opportunities in the state of California.Recommended: Guide to Nonprofit Startup Grants 

Donations

Many nonprofits raise significant funds through individual donations, so it’s a good idea to create an online donation page. There are numerous software programs and online platforms that make it easy to create customized donation pages and conduct fundraising campaigns. Other ways to encourage donations include: promoting your organization and cause on social media, asking for donations at community events, and hosting charity events (such as a walk-a-thon, gala dinner, concert, or auction).Recommended: Guide To Crowdfunding for Nonprofits 

Business Loans

While loans are typically associated with for-profit businesses, nonprofits can sometimes qualify for small business loans. If you have strong personal credit and your startup nonprofit is already generating revenue, it may be worth applying for a loan through your local bank or credit union (if they lend to nonprofits).You might also want to look into online business loans. Online (also known as alternative) lenders tend to have more relaxed requirements and are typically faster to fund. However, these loans often come with higher interest rates.A nonprofit business loan is similar to any other type of business loan. Typically, you receive a lump sum of money that you pay back (plus interest) in installments over time. But there are other types of business financing you may be eligible for, including a business line of credit, commercial real estate loan, or business credit card.Recommended: Guide to Crowdfunding for Commercial Real Estate

Compare Small Business Loan Rates

Lenders will often see nonprofits as higher risk, since, unlike for-profit businesses, they may not have steady money coming in to repay the loan. To find a loan at a cost your nonprofit can afford, consider using an online loan search tool. With Lantern by Sofi’s online lending platform, for example, you can quickly get access to multiple loan options matched to your organization’s needs and qualifications with just one application.

Frequently Asked Questions

How much does it cost to start a nonprofit in CA?
How many people do you need to start a nonprofit in California?
Is opening up a nonprofit in California worth it?
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About the Author

Jamie Cattanach

Jamie Cattanach

Jamie Cattanach is a full-time freelance writer whose work has been featured at CNBC, Yahoo Finance, The Motley Fool, the Huffington Post and other outlets. At SoFi, she writes about investing, retirement, student loans and how to get your money right -- no matter what that means for you.
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