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6 tips for forming a nonprofit to maintain tax-exempt status

On Behalf of | Feb 12, 2024 | Business Law

Forming a nonprofit organization in California can be a fulfilling endeavor. For example, it may allow you to help many people.

However, the process involves navigating a complex set of rules and regulations, and an error could cost the organization its tax-exempt status.

1. The right structure

Options include public benefit corporations, religious corporations and mutual benefit corporations. Each structure comes with its own set of rules and requirements. Carefully consider the nature of your organization and choose the most fitting structure.

2. Comprehensive mission statement

A clear mission statement defines the purpose of your nonprofit and plays a major role in obtaining and maintaining tax-exempt status. Clearly articulate your organization’s goals, objectives and the impact it intends to make. A concise and compelling mission statement can help convey your nonprofit’s commitment to social welfare or charitable activities.

3. Organizational requirements

Compliance with California’s organizational requirements helps maintain tax-exempt status. This involves drafting and filing the Articles of Incorporation with the California Secretary of State. Ensure that your documents include specific language emphasizing the nonprofit’s charitable purposes.

4. Prohibited activities

Avoid activities such as excessive lobbying, political campaign intervention and private inurement. Regularly review and update your organization’s policies to ensure compliance with both state and federal regulations.

5. Board of directors

In California, having a minimum of three directors is helpful. Ensure that your board is diverse. Members should represent different perspectives and skills relevant to your organization’s mission. Regular board meetings and accurate record-keeping show your nonprofit’s commitment to transparency and accountability.

6. IRS guidelines

To maintain tax-exempt status, nonprofits must comply with the Internal Revenue Service guidelines. This includes filing Form 1023, Application for Recognition of Exemption, within 27 months of formation. Additionally, accurate record-keeping and timely filing of annual information returns (Form 990) show continued eligibility for tax exemption.

By carefully navigating these steps, your nonprofit in California can establish a solid foundation to contribute positively to the community.