About Nonprofit Organizations

About Nonprofit Organizations

This discussion is based on California law, but the general principles should apply in any state. Check your state
statutes.

Choices

Community-based organizations ("grass-roots movements") have three principal choices of organization:

Form a Political Action Committee (PAC), which requires reporting to the state Fair Election Practices
Commission (with elaborate reporting of income and expenses).

Form a nonprofit (unincorporated) association, register with the state, and apply for exemption from state and
federal taxes.

Form a nonprofit corporation by applying to the state and apply for exemption from state and federal taxes.

Corporations

A corporation is a legal "person" that can enter contracts, incur debts, pay taxes, etc. In this way those who control and
manage the corporation have "limited liability" -- directors, officers, employees, and members are not personally liable
the corporation's debts.

Typically, business (for profit) corporations are authorized by their articles of incorporation to engage in any lawful
business activity. Nonprofit corporations, however, must restrict their purposes to those defined in the Internal Revenue
Code as nonprofit. "Nonprofit" does not mean you cannot make a profit -- your nonprofit corporation can profit from
its activities. "Nonprofit" means the corporation cannot be set up to benefit particular persons, and, if the corporation is
dissolved, any remaining assets must be distributed to a similar tax-exempt nonprofit group.

Unincorporated Associations

The unincorporated association is the common legal form of organization of labor unions, fraternities ("lodges"), and
small local groups with a single limited purpose (a garden club, for example). Unincorporated associations may own
property, sue and be sued, and are eligible for exemption from state income taxes in California and from federal
income taxes. Nevertheless, associations do not have many of the legal rights and obligations of corporations.

If your group does not presently need to attract tax-deductible contributions, does not need to apply for public or
private grants, and has no legal need to adopt the corporate form (e.g., providing limited liability to directors,
members, etc.), then an unincorporated association may be adequate.

The general provisions governing unincorporated associations in California are found in the California Corporations
Code beginning at section 20000. The general provisions governing nonprofit associations are found beginning at
section 21000. (For the text of California statutes go to California Codes.)

Tax Exemption

Nonprofit organizations may be exempt from having to pay federal or state income tax, but exemption does not
automatically occur with state recognition as a nonprofit organization. State laws governing tax exemption for
nonprofit organizations tend to imitate the federal law (but, do not assume anything).

http://airportnoiselaw.org/incorp.html[3/8/2011 2:55:49 PM]

About Nonprofit Organizations

The U.S. Revenue Code recognizes multiple types of organizations that can be exempt from federal taxes, but the two
main types fall under sections 501(c)(3) and 501(c)(4) of the code. To qualify under either type your organization must
be formally established, as either a nonprofit corporation or nonprofit association. Tax-exempt status for either type
precludes endorsement of candidates for public office.

501(c)(3) This type of corporation is for educational and research organizations. Tax-exempt status precludes
any activity aimed at influencing legislation. The corporation is entitled to a nonprofit bulk mail rate. Donations
are tax deductible.

501(c)(4) This type of corporation is for mutual benefit organizations in which the benefit is to a finite group,
i.e., community organizations. This type of corporation may influence legislation. The corporation is entitled to a
standard bulk mail rate. Donations are not tax deductible.

Getting State Recognition

Apply to the state for recognition as a corporation or association. For a state-by-state list of nonprofit organization
assistance, see states A - M and states N - Z. Also see How Do I Incorporate as a Nonprofit Organization?

In California apply to the Secretary of State. You will need to submit articles of incorporation (or articles of
association) and bylaws and pay a filing fee. Corporations formerly had to prepay the minimum franchise tax or obtain
exemption from the tax at the time of incorporation. As of January 1, 2000 this is no longer required.

In California unincorporated associations may (but are not required to) file various documents with the Secretary of
State, such as the "articles of association," similiar to articles of incorporation. These public filings help greatly in
establishing the credibility of the organization. (see California filings for unincorporated associations at the California
Secretary of State website).

The application fee for incorporation is $30; for registration as an unincorporated association it is $10.

Obtaining Tax Exemption

California tax exemption application. Obtain California Franchise Tax Board Form 3400 (equivalent to the IRS form
SS-4). See the website of the Franchise Tax Board.

Federal tax exemption application. IRS Publication 557, Tax-Exempt Status for Your Organization, has a good
overview of requirements. Also check the IRS website.

From the IRS get packet 1023 for a 501(c)(3) corporation (or association), or packet 1024 for a 501(c)(4) corporation
(or association). These packets contain model articles of incorporation and by-laws.

You will probably have an easier time getting exemption approval from the IRS if you have already obtained approval
from the state tax authority.

Next Steps

Federal identification number. Get a federal ID number from the IRS (SS-4 form).

Opening a bank account. The bank will need the federal ID number you obtain from the IRS (you don't need to be
fully incorporated to open the account). The federal ID number obligates the nonprofit corporation to pay taxes on
account interest. Alternatively, you may open an account using a Social Security number, in which case the SSN
holder is obligated to pay taxes on account interest.

http://airportnoiselaw.org/incorp.html[3/8/2011 2:55:49 PM]

About Nonprofit Organizations

If you are dealing with a bank that doesn't know you, the bank may ask to see the articles of incorporation (or
association) and/or bylaws.

Annual reports. If a corporation receives more than $25,000 in income during a year, it must file IRS Form 990 for
that year. The same form is submitted to the California Secretary of State.

More Information

A Legal Handbook for Nonprofit Corporation Volunteers or What to Do Till the Lawyer Comes, fifth edition
(Rev. November 11, 1998) by James D. DeWitt.

The Gilbert Center

How to Form a California Nonprofit Corporation, Anthony Mancuso, Berkeley: Nolo Press (800.992.6656).
(Frequently updated, excellent guide. One form of this publication comes with a diskette containing model
bylaws, forms, etc.)

http://airportnoiselaw.org/incorp.html[3/8/2011 2:55:49 PM]