By definition, non-profit corporations exist not to make money but to fulfill one of the purposes recognized under federal law: charitable, religious, educational, scientific or literary activities. Under the law, as long as a nonprofit is organized and operated for one of these recognized non-profit purposes, it can make a profit.
Since they serve a public purpose, non-profit corporations enjoy special treatment under the law. For instance, a non-profit may be eligible for certain tax exemptions at the state-level.
The treatment of profits, however, is also treated differently. With a for-profit business, owners and shareholders generally receive the profits. With a non-profit, any money that’s left over after paying the organization’s bills is put back into the non-profit.
Non-profits are permitted to make money in ways that are unrelated to their non-profit purposes, and such income is often essential to the survival of non-profit corporations. Unrelated business activities, however, should not reach the point where the group looks like a regular commercial business.
So, while a non-profit corporation may know how to generate revenue and control costs, the ultimate goal is to fulfill the organization’s mission.
#1. The first task of forming a non-profit 501(c)(3) corporation (the most commonly used kind) is to select your board of trustees or directors. In some states, including California, these individual members are referred to as “directors.” In other states, they’re referred to as “trustees.” Some states require a minimum number of trustees or directors to sit on the board. In California, you must have at least one director for your non-profit.
It’s important to choose directors or trustees that are passionate about the purposes of the non-profit to ensure that the organization’s objectives are effectively carried out. Also, when choosing the individual members to sit on the board, it’s important to have a variety of skill sets and professional backgrounds.
#2. Choose an available business name. The name of your non-profit cannot be the same as the name of another on file with your state’s corporations office, which in California, is the Secretary of State’s office. The name must also end with a corporate designator, like “Corporation” or “Limited.”
#3. File articles of incorporation with the state’s corporate filing office and pay a small filing fee (typically under $125). Though filling out the articles of incorporation form is not difficult, if you plan to file for recognition of your federal tax-exempt status as a public or private charity, you’ll want to ask your attorney about the special language you must include in your incorporation and governance documents.
#4. Apply for your federal and state tax exemptions. To apply for tax-exempt status, you must complete IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. To get the most out of your your tax-exempt status, you’ll want to file your Form 1023 within 27 months of the date you file your articles of incorporation.
#5. Draft bylaws. Bylaws are the internal rules that govern the day-to-day operations of a non-profit corporation, such as rules and procedures for holding meetings, voting on issues, and electing directors and officers.
#6. Hold the first meeting of the board of directors. At the first meeting, the directors take care of formalities such as adopting bylaws, electing officers, and recording receipt of federal and state tax exemptions. After the meeting is completed, minutes of the meeting should be created and filed in the non-profit’s records binder.
#7. Obtain licenses and permits that may be required for your corporation. Check with your state department of consumer affairs for information concerning state licensing requirements for your type of organization. For example, if you sell anything to consumers, you’ll need a sales tax permit and your activities may require a zoning permit.
To schedule your consultation with Mike McColloch, please contact him at (760) 632-1100 or through his online contact form.