Forming a Nonprofit

There are some misconceptions about tax exempt entities (aka “nonprofits”) out there. What is a nonprofit? How is one formed? (How one operates is far beyond the scope of this blog post. If you have questions about how to operate one within the bounds of the law [and there are a lot of legal bounds] then call me or e-mail me.) For purposes of this brief blog post, the terms “tax exempt entity” and “nonprofit” are used interchangeably.

Distilled to its essence, a nonprofit is a business entity (corporation or LLC) that has applied for and been granted what’s called “tax exempt status.” There are a lot of details being omitted from this short blog post, but what “tax exempt status” means is just about what it sounds like: The entity is exempt from taxation. This exemption includes both income tax as well as California’s $800.00 per year franchise tax that’s levied on just about every other California entity.

The entity (typically a corporation but it can be an LLC as well) is formed by filing articles with the Secretary of State. Take note that the articles have to comply with legal requirements as to what a tax exempt entity’s articles must say, so the articles are specialized and specific to a tax exempt entity. Once those articles are formed (and after some interim steps are taken), the entity applies to the IRS for tax exempt status using one of the Forms 1023 (hopefully the 1023EZ rather than the full blown 1023, which is onerous).

After receiving the IRS’s notice of tax exempt status, the entity must then apply for tax exempt status from the State of California. Further, the entity must also register with the California Attorney General, which has legal oversight over nonprofits. Then, of course, there are the local taxing authorities. Once that’s all done, the nonprofit has been “formed,” as it were, and now it needs to start operating. Again, how it operates within the law is beyond the scope of this post. Call me if you need help with operating your entity.

To summarize, from the perspective of formation a nonprofit is merely a specialized entity that has applied for and been granted tax exempt status by the applicable taxing authorities. The duties placed upon directors of a nonprofit are serious and must be respected. Adequate record keeping is key, as is having solid legal documentation in place, and I can help you with both of those issues.

Greg Borman is an attorney in San Diego, California. He practices corporate law, business transactions, and estate planning. He can be reached at greg@bormanlaw.com and at (858) 232-7100.

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