How to start a nonprofit in California in 8 steps
Have big plans to change your community for the better? If you live in California and have an entrepreneurial spirit—and a dream to make a difference in your community—starting a nonprofit might be the way to go.
While starting a small business in California can make a lasting positive impact on your neighborhood no matter its purpose, nonprofit organizations have special community-centered goals that aren’t profit-oriented. So whether you’d like to start an after-school care program for children of low-income families or a microfinance firm for disadvantaged neighborhoods, we’re cheering you on.
In this article, you’ll learn basic steps for how to start a nonprofit organization in California. And you’ll also cover some frequently asked questions, including:
- What is the difference between a nonprofit and for-profit
- How to create a nonprofit in California and set up your legal structure
- How much it costs to start a nonprofit in California
- If nonprofit organizations need small business insurance
- What funding avenues and costs to consider
1) Consider the different types of nonprofit
Your very first step to starting a nonprofit is to have an idea of what type of charitable organization you’d like to start, a strong sense of your mission in the community, and an idea of how your organization will serve your area.
Maybe you want to open a free health clinic for immigrant families or a counseling center for teens. Or perhaps you hope to open up a cafe that helps rehabilitate people into the workforce. Or maybe you’ve been dreaming of starting a small museum that honors the culture of your community.
In California alone, there are over 110,000 organizations registered as 501(c)(3) corporations, or tax-exempt charities, according to the California Association of Nonprofits. You’ll need to determine if there’s an organization in your area already doing what you’d like to do, and if so, what differentiates your nonprofit idea—or how you can partner with similar organizations in your community. (This should all be outlined in your business plan. More on that later!)
Before we move on to the next step, let’s dive into some common questions about nonprofits.
What is the difference between a nonprofit and a for-profit?
The difference between a nonprofit and a for-profit organization is that nonprofits aren’t operating to create a profit. Instead, they have the goal of providing for the needs of the community. Any financial gains made by a nonprofit, through sales, grants, or charitable gifts, are put back into the organization for its growth to invest in the services it provides to society.
In most cases, California nonprofits are exempt from paying income taxes. The purpose behind tax-exempt status is to lower operating expenses for nonprofit organizations so those funds can be invested back into the work the organization does to serve the community.
What is the difference between a foundation and a nonprofit organization?
Nonprofit organizations exist to fill specific needs and services within a community and are funded by grants, donations, or foundations. On the other hand, foundations are considered charitable organizations that are self-funded or funded by an entity (usually a family, large business, or corporation).
Foundations often award money to charitable causes (such as nonprofit organizations) and are also classified under nonprofit tax-exempt status.
What are the requirements to start a nonprofit?
You don’t need a special education or background to start a nonprofit unless it's required for the services you’ll directly be providing to your community (such as licensed clinical counseling, for example). You do need to register your organization with your state and file for tax-exempt status—more on that below.
But overall, entrepreneurs looking to start a nonprofit community-focused organization have to go through many of the same steps that for-profit entrepreneurs do in California. And speaking of, the next step is creating a business plan and choosing a name for your organization—something every business must do.
2) Create a business plan and name your California nonprofit organization
No matter how you’ll be serving your community, you’ll need to create a business plan and develop a business name—just like any other entrepreneur.
In your business plan, you’ll need to outline your goals, create a mission statement, discuss how your nonprofit will uniquely meet the needs of your community, and research what other organizations may be providing similar services in your area.
This step might sound overwhelming at first, but drafting a business plan and setting initial goals for your dream can be fun (and help your nonprofit be more successful in the long run).
You’ll also need to include the following in your business plan:
- Why your community needs your nonprofit
- How you’ll operate and fund your nonprofit
- What competing organizations are in your area
- And, of course, your overall mission and purpose (and name!)
Both your mission statement and your organization’s name should be reflective of the services your nonprofit provides.
After you’ve brainstormed a few favorite names that align with your mission, check with the California Secretary of State Business Name Search to make sure your organization’s name isn’t already spoken for.
Nonprofit directors are required to register their organization’s name with the California Secretary of State. You can do that when you file your articles of incorporation (that’s the next step!), but if you need some time and want to reserve your future nonprofit’s name in advance, you can complete a Name Reservation Request Form to do so for a fee of $10.
3) Register your nonprofit organization in California
Every California business must choose a structure to operate under. Your nonprofit must comply with legal rules and regulations set in California, including officially registering with the state.
There are a few ways you could set up your nonprofit, including an LLC, but a corporation typically offers the most benefit (protection from liability and eligibility for grants). We’ll discuss registering as a nonprofit corporation below, but it might not be the right fit for you in some cases.
No matter the goals for your organization, getting professional legal advice from an attorney about the type of nonprofit that’s right for your specific situation is recommended.
Nonprofit organizations are required to have a board of directors that help oversee the organization. In California, you need to have at least one person on your board to register your nonprofit organization with the state officially. But for important tax and accountability considerations, you’ll want to grow your board so you have the correct oversight and direction in place. Learn more about what to consider when selecting a board of directors.
You’ll also need bylaws and a conflict of interest policy drafted to submit along with certain paperwork required to register your organization.
How is a nonprofit organization created in California?
To officially create your nonprofit, you’ll need to register it with the State of California through filing articles of incorporation and then apply for tax-exempt status. This part of the process is detailed—and it has some upfront costs.
You’ll need to:
- Choose at least one person for your board of directors
- Have a name to register your nonprofit under
- Decide on your nonprofit’s legal structure (a corporation, LLC, etc.)
- Create and record your bylaws
- File your nonprofit articles of incorporation with the California Secretary of State (or register your nonprofit as an LLC)
- File your Statement of Information with the state
- Apply for tax-exempt status with the Internal Revenue Service (IRS) and the State of California Franchise Tax Board
- Register with the California Attorney General’s Registry of Charitable Trusts
The initial filing fee for public benefit nonprofit organizations with the State of California is $30, but some additional fees may apply depending on your specific needs. And remember, you’ll need to draft bylaws for your organization—signed by your board of directors—to submit and have on file with the state as well.
Within 90 days of the date of your nonprofit incorporation, you’ll need to file a Statement of Information via form SI-100. You’ll also want to provide your nonprofit's name, business address, and the registered agent’s name (the individual responsible for receiving legal paperwork related to the organization).
You also need to register with the IRS and obtain your Employer Identification Number. This ID number will be used when you file your business taxes. After that, you can file for tax-exempt status with the State of California Franchise Tax Board and with the Internal Revenue Service.
- For federal tax exemption, you’ll apply via IRS Form 1023 or Form 1023-EZ.
- For state tax exemption, you’ll apply via Form FTB 3500 or FTB 3500a.
You won’t have tax-exempt status until you have your official determination letter in hand. Once you have one from the IRS, you can use that as part of your application for state tax-exempt status to simplify the process. Getting your tax-exempt status could take a couple of months, so make sure you start this step as soon as you can.
Be sure to also file Form CT-1 for your initial registration with the California Attorney General’s Registry of Charitable Trusts. Your determination letter, articles of incorporation, and bylaws should be included when you file this form.
Remember, consult with legal and tax professionals to get this part of the process done correctly if needed. You’ll also have to maintain your state tax exemption and federal tax-exempt status through regular filings with the State of California and the IRS.
Whew. That’s a lot of detail—and the paperwork isn't over yet. Next, you have to make sure you have the right licenses and permits in place to operate.
4) Apply for licenses and permits
Now that you’ve established your nonprofit organization with the state and filed for federal and California tax-exempt status, it’s time to apply for the appropriate licenses and permits.
All California businesses, including tax-exempt organizations, must apply for a business license to legally operate within the state.
Resources including CalGold and the U.S. Small Business Administration can help you determine which types of California permits and business licenses you need before opening your nonprofit.
For example, a nonprofit cafe that operates to rehabilitate people into the workforce would still need to apply for any relevant food permits for restaurants in California. At the same time, a community arts center would have a different set of licensing needs.
Your permit and license requirements can also depend on your organization’s location. You should consider any hyper-local permits you’ll need as well. Make sure to check directly with your city and county government for requirements in your area.
Once you have all the appropriate paperwork in place, you can start taking steps to serve your community—and getting funded!
5) Get your financials in order: Secure startup funding and set up a business bank account
Getting funding is a crucial step for any nonprofit organization. (In fact, this step is so important that there are people who make entire careers out of nonprofit fundraising and grant writing.)
Once you’ve registered with the state and applied for tax-exempt status, you’ll need to set up a business bank account before you start collecting funds. Then, once you have that in place, start thinking about generating funds for your organization.
Make sure you’ve got a good estimate in place of how much money it will take each year for you to operate fully. You’ll need to cover all your operating costs—including salaries for any employees—just like any other business. Understanding your costs will help you project your annual funding needs and communicate those needs to potential donors.
There are several avenues you can explore for nonprofit funding:
- Individual donations through charitable individuals
- Applying for grants from the government, charitable foundations, or a public charity
- Securing sponsorships from businesses
- Collecting small fees from those who partake in your services
- Selling goods and services, like branded gifts or attendance to events
How much does it cost to start a nonprofit in California?
The base fee to register your nonprofit with the State of California is $30, and added fees may apply depending on your needs. In addition, you’ll need to file for tax-exempt status from both the IRS and the California Franchise Tax Board, which can require additional filing fees. You’ll also need to apply and pay for any relevant California business licenses and permits.
And if you need legal assistance or professional tax help to set up your organization (which is recommended), you may have additional costs there, too.
Overall, while there are basic filing, registration, and license fees for all nonprofits in California, each organization has unique needs—and unique costs associated with those needs. Make sure to dig into your specific costs ahead of time, and if needed, do some initial fundraising to cover those costs.
Can the founder of a nonprofit receive a salary?
Employees of a nonprofit, including founders or presidents who work for the organization as employees, can earn a taxable salary from the organization. Salaries for employees that help run and grow the nonprofit are part of administrative operating costs—just like a for-profit business.
However, the board of directors (which may or may not include the organization’s founder) usually serve on an unpaid volunteer basis and provide direction and accountability for the organization.
Next up, before you start the hiring process, let’s check that you have the right insurance coverages in place. This is an operating cost you need to plan for; some coverages are required in your state.
7) Purchase business insurance for your nonprofit organization
Once you’ve secured some funding—but before you hire any employees and start serving the community—you’ll need to get the right business insurance. Don’t forget this step!
Depending on the industry you’re in and the structure of your nonprofit, you may be required to purchase one or more types of policies:
- Workers’ compensation coverage is required by the State of California if you have one or more employees. This can help cover lost wages or medical treatment if someone who works for your nonprofit is injured while working.
- California general liability insurance helps to protect your organization if someone sues your nonprofit for property damage or bodily injury.
- Commercial auto insurance is essential for any nonprofit organization that owns, operates, or rents at least one vehicle.
- Business interruption insurance can help cover costs should your organization be forced to close for a covered reason temporarily. You’ll still have operating costs to cover even if you have to close temporarily, and this coverage can help.
- Business property insurance covers your building if it’s destroyed or damaged in a covered event.
- Business personal property insurance covers damages to the items inside your building if they’re damaged or lost in a covered event.
These coverages (other than workers’ compensation) can also be purchased in one policy bundle called a Business Owner’s Policy, which can give you comprehensive protection for your nonprofit and keep it serving the community when accidents occur.
8) Create a marketing plan, hire employees, find volunteers, and more
Now that your organization is registered with the State of California and you have the proper insurance protections in place, you can get to work serving your community.
Develop a marketing plan for your nonprofit
Before you can hire employees, find volunteers, and serve your area, people need to know about you!
Get the word out through creating a website and social media accounts for your organization, sharing flyers and business cards in your area, or holding an opening-day event. Make a long-term plan for marketing to people who will need your services and potential donors and volunteers.
Unless you’re running your nonprofit as a one-person show—with the support of your board of directors and volunteers, of course—you’ll eventually want to hire your first employee.
The Employment Development Department can help you get the information you need to hire correctly. And there are specific new employee forms you should complete (along with several other steps to go through) to make sure you’re complying with California requirements.
No matter the goals of your nonprofit, committed, passionate volunteers are the lifeblood of lasting community work. Reach out to high schools, universities, churches, businesses, and community associations to spread the word and find people who align with your cause that can donate their time.
To avoid burnout, make sure you’re consistently sharing the need for volunteers and the roles you need to be filled in your nonprofit. That way, you have a steady stream of relationships with those who can help your organization grow.
Start making a difference with Huckleberry
After you’ve registered your organization, secured startup funding, and set up your team, you can launch! It’s finally time to do the work you’ve been dreaming of.
At Huckleberry, we’re here to support your organization as you serve your community. As your nonprofit grows, remember to regularly review your nonprofit insurance coverage to make sure you have enough.
Not only are certain small business insurance coverages required in California for your organization, but having the right coverages in place is an indication that you’re serious about having your financial house in order. This can boost the confidence of your donors and volunteers because they know their generosity is being protected, too!
Ready to get started? You can get a fast online nonprofit insurance quote from Huckleberry. It only takes a few minutes, and there are no strings attached.