How to Start a Nonprofit in California 2025: Complete Step-by-Step Guide with Costs & Forms

Quick Overview

Before diving into the details, here's what you need to know:

Table of Contents

1. Nonprofit vs. 501(c)(3): Understanding the Difference
2. Nonprofit vs. LLC: Which Structure is Right for You?
3. Is a Nonprofit Right for You? Pre-Planning Checklist
4. Complete Cost Breakdown: What You'll Actually Pay
5. Step-by-Step Formation Process
6. Federal & State Tax Exemption Process
7. Attorney General Registration & Charitable Solicitation
8. IRS Rules & Nonprofit Compliance Requirements
9. Board of Directors: Requirements & Responsibilities
10. Can You Pay Yourself as a Nonprofit Founder?
11. Timeline: Your First Year Milestones
12. Common Mistakes to Avoid
13. Frequently Asked Questions (from Google's People Also Ask)
14. Tools & Resources

1. Nonprofit vs. 501(c)(3): Understanding the Difference

This is one of the most confusing aspects for new nonprofit founders, and it's critical to understand: nonprofit and 501(c)(3) are not the same thing.

What is a Nonprofit?

A nonprofit is a legal business structure you create by incorporating with the State of California. It's like forming a corporation, but instead of having owners/shareholders, it has a board of directors. When you file Articles of Incorporation for a nonprofit corporation with the California Secretary of State, you've formed a nonprofit—but you may not yet have tax-exempt status.

Key characteristics:

• Legally recognized business entity
• Has a board of directors (governance structure)
• Cannot distribute profits to members or founders
• Must operate for a stated charitable, religious, educational, or social purpose
• Subject to California nonprofit law

What is a 501(c)(3)?

A 501(c)(3) is a federal tax classification from the IRS. It's not a structure; it's a status that makes your nonprofit eligible for tax exemptions. When you file Form 1023 or Form 1023-EZ with the IRS, you're applying for 501(c)(3) status.

Key characteristics:

• Federal tax-exempt classification
• Donors can claim charitable deductions
• Organization doesn't pay federal income tax
• Donations to you are tax-deductible
• Subject to IRS oversight and Form 990 filing requirements

Can You Have a Nonprofit Without 501(c)(3) Status?

Yes, but it's uncommon and generally not recommended. You could:

• Form a nonprofit corporation but never apply for 501(c)(3) status
• Pay state and federal income taxes on any surplus revenue
• Donors cannot deduct their contributions
• Very few nonprofits operate this way

Bottom line: Most nonprofits pursue BOTH statuses because:

1. California nonprofit status gives you the legal structure
2. 501(c)(3) federal status gives you tax exemptions and attracts donors

The Timeline for Both Statuses

2. Nonprofit vs. LLC: Which Structure is Right for You?

If you want to create an organization that serves a community need, you might consider either a nonprofit or an LLC. Here's how they compare:

Nonprofit Corporation vs. LLC Comparison

Can an LLC Be a Nonprofit in California?

Technically, yes—but it's not recommended. California allows "nonprofit LLCs," but they're rarely used because:

1. They still pay the $800 annual California LLC tax (nonprofits don't)
2. They don't automatically qualify for 501(c)(3) federal tax exemption
3. They require all the same compliance as nonprofits but without the tax benefits
4. They're more expensive than nonprofit corporations

Bottom line: If you want to start a charitable organization, form a Nonprofit Corporation, not an LLC.

The $800 California LLC Fee Question

Do I have to pay $800 every year if I have an LLC?

Yes. California charges an $800 annual LLC tax (called the "Franchise Tax") for every LLC, regardless of income. This applies to:

• For-profit LLCs
• Nonprofit LLCs
• Single-member LLCs
• Multi-member LLCs

This is one reason nonprofits are better for charitable work—you avoid this annual fee.

When to Choose Each Structure

3. Is a Nonprofit Right for You? Pre-Planning Checklist

Before you spend time and money forming a nonprofit, ask yourself these questions:

Mission & Impact:

• [ ] Do you want to serve a specific community or cause?
• [ ] Does your mission align with IRS 501(c)(3) purposes (charitable, educational, religious, scientific, literary, social welfare)?
• [ ] Is there a demonstrated need for your organization's services?
• [ ] Are you prepared to serve others' interests over personal gain?

Commitment & Time:

• [ ] Are you prepared to donate significant personal time initially?
• [ ] Will you commit to the nonprofit for at least 3–5 years?
• [ ] Do you have time to serve on the board of directors?
• [ ] Can you attend quarterly board meetings minimum?

Financial & Legal:

• [ ] Do you have $350–$675 to cover startup costs (or access to startup funding)?
• [ ] Are you comfortable with financial transparency (Form 990 is public)?
• [ ] Can you find 2 other unrelated people to serve on your board?
• [ ] Are you willing to follow nonprofit compliance rules?

Governance:

• [ ] Can you recruit and work with a board of directors?
• [ ] Are you willing to have decision-making power shared with board members?
• [ ] Can you maintain appropriate boundaries as founder/staff vs. board member?

If you checked most boxes: You're a good candidate for starting a nonprofit.

If you checked fewer than half: Consider whether an LLC, sole proprietorship, or partnership might better suit your needs.

4. Complete Cost Breakdown: What You'll Actually Pay

One of the most common questions is: "How much does it cost to start a nonprofit in California?" Here's the complete breakdown.

State & Federal Filing Fees (Required)

Optional But Recommended Costs

Cost Scenarios

Scenario 1: DIY Minimal Budget (No Attorney)

• Articles of Incorporation: $30
• Statement of Information: $20
• State Tax Exemption: $25
• Federal 1023-EZ: $275
• Total: $350

Scenario 2: DIY with Basic Help (Self-registered agent)

• Scenario 1 + Certified copies (5 × $5): $25
• Scenario 1 + Brief attorney consultation: $100
• Total: $475–$500

Scenario 3: DIY with Moderate Legal Review

• Scenario 1 + Attorney review of documents: $300
• Scenario 1 + Attorney-drafted bylaws: $400
• Total: $650–$800

Scenario 4: Full Attorney Service (Most Common)

• Attorney completes all filings: $1,500–$2,500
• Includes document preparation, research, compliance advice
• EIN application assistance
• Total: $1,500–$2,500

Scenario 5: Complex Setup (Multiple Programs, International)

• Full attorney package: $3,000–$5,000+
• Multiple 501(c)(3) classifications
• International operations
• Tax planning
• Total: $3,000–$5,000+

Starting with No Money: Is It Possible?

Short answer: Yes, but with limitations.

What you can do for free:

• Read California nonprofit law online
• Download forms from Secretary of State (free)
• Download IRS Form 1023-EZ (free)
• Create bylaws using templates (free or low-cost)
• Apply for EIN online (free)
• Use open-source nonprofit accounting software

What you can't avoid:

• $350 in mandatory filing fees (this is the law)
• You'll need to borrow or find funding for these fees
• If you can't afford filing fees, many communities have nonprofit support organizations that provide micro-grants or fee waivers

Recommendation: Even if you have no money initially, the $350 is a worthwhile investment to get your nonprofit officially formed.

5. Step-by-Step Formation Process

Now let's walk through forming your California nonprofit step-by-step. This is where the legal structure gets created.

Step 1: Choose and Reserve Your Nonprofit Name

What you need to do:

1. Choose a name for your nonprofit that isn't already taken
2. Verify it's available through the California Secretary of State
3. Optionally reserve it for 60 days ($10 fee)

Name requirements:

• Must include "Nonprofit Corporation," "Corp.," or similar indicator
• Cannot mislead people about your organization's purpose
• Cannot include words requiring special approval (e.g., "bank," "insurance" without proper licensing)
• Should be unique and distinguishable in California records

How to check availability:

• Go to the California Secretary of State Business Search: https://businesssearch.sos.ca.gov/
• Search your proposed name
• If available, you can proceed or file a Name Reservation (Form NR)

Timeline: Immediate (same day)

Cost: $10 (optional name reservation); $0 if skipped

Step 2: Recruit Your Board of Directors

Requirements:

• Minimum 3 directors (California law requires this)
• Directors cannot be related by blood or marriage
• At least one director must be a California resident
• Directors must be 18+ years old and of sound mind

Who can serve:

• You (the founder) can be one of the three directors
• Friends, family members (unrelated), community leaders, professionals
• Does NOT need to be connected to nonprofits yet—they're learning

What to do:

1. Identify 2–3 potential directors who share your mission
2. Have informal conversations about the role and time commitment
3. Document their consent to serve (you'll need this for your bylaws)
4. Clarify expectations: Board meetings (typically quarterly), governance duties, confidentiality

Important note on compensation:

• Generally, board members should NOT be paid for serving on the board
• This changes if they're also employees (Executive Director, Program Manager, etc.)
• Even then, compensation must be reasonable and board-approved

Timeline: 1–4 weeks (depending on how quickly you can recruit)

Cost: $0

Step 3: Draft Your Articles of Incorporation

The Articles of Incorporation is the foundational legal document that establishes your nonprofit as a legal entity in California.

Required information in Articles:

1. Nonprofit Name - Exactly as it will be registered
2. County - Where your principal office is located
3. Nonprofit Purpose - Brief statement of charitable/educational/religious purpose
4. Initial Directors - Names, addresses of your 3+ directors
5. Registered Agent - Name and physical address (must be a California resident or registered agent service)
6. Dissolution Clause - States where remaining assets go if nonprofit closes (typically another qualified nonprofit)

What NOT to include (common mistake):

• Detailed bylaws (these go in a separate document)
• Specific fundraising plans
• Personnel policies

Form to use:

• Form 202: Articles of Incorporation for a Nonprofit Public Benefit Corporation
• Available from: https://businesssearch.sos.ca.gov/
• Download in PDF or fill out online

Example of basic nonprofit purpose statement: "This nonprofit corporation is organized and operated as a nonprofit public benefit corporation for charitable, educational, and scientific purposes, specifically to provide mentorship and educational programs to underserved youth in [your county/region]."

Timeline: 1–2 weeks (to draft and get board approval)

Cost: $0 (Form is free; see filing fee below)

Step 4: Draft Your Bylaws

Bylaws are your nonprofit's internal operating rules. They govern how your board meets, makes decisions, and conducts business.

What to include in bylaws:

Where to get a template:

• LawHelp.org (California)
• LAFLA.org (Legal Aid Foundation of LA)
• Generic nonprofit bylaw templates online
• Your attorney (if hiring one)

Important: Your bylaws should be reviewed by someone familiar with nonprofit law before adoption.

Timeline: 1–2 weeks (to draft and review)

Cost: $0–$400 (depending on DIY vs. attorney help)

Step 5: Hold Your Initial Board Meeting

This is a crucial step many founders skip—but it's legally necessary.

Why it matters:

• Formally adopts your bylaws
• Designates officers (President, Treasurer, Secretary)
• Approves initial financial policies
• Documents board consent to start the nonprofit
• Creates legal record of proper governance

What to include in the meeting:

1. Call to Order - Confirm all directors present or acceptable quorum
2. Adoption of Bylaws - Vote to approve bylaws you drafted
3. Designation of Officers - Elect President, Treasurer, Secretary
4. Selection of Fiscal Year - Decide Jan-Dec or other (most use Jan-Dec)
5. Adoption of Conflict of Interest Policy - Establish how conflicts are handled
6. Approval of Initial Financial Procedures - Decide who signs checks, account setup
7. Other Business - Discuss mission, initial programs, next steps

Meeting documentation:

• Create meeting minutes (written record of what was discussed and decided)
• Have all directors sign meeting minutes
• Keep in your nonprofit records (required by law)

Template for meeting minutes: Most nonprofit organizations have standard templates; search "nonprofit board meeting minutes template"

Timeline: Same day or within a week of recruiting your board

Cost: $0

Pro tip: You can have this meeting in person, by video call, or even by email (if bylaws allow). It doesn't need to be formal or expensive.

Step 6: File Your Articles of Incorporation with California Secretary of State

This is the official step that creates your nonprofit.

What to file:

• Completed Form 202 (Articles of Incorporation)
• Original signature required
• Filing fee: $30

Where to file:

• Online: businesssearch.sos.ca.gov (preferred; fastest)
• By mail: California Secretary of State, Business Programs Division, 1500 11th St., Sacramento, CA 95814
• By hand delivery: Secretary of State office in Sacramento

Processing time:

• Online filing: 1–2 weeks
• Mail filing: 2–3 weeks

What you get back:

• Certificate of Incorporation (official document showing your nonprofit is formed)
• File number for your records

Cost: $30

After this step: You are now officially a California nonprofit corporation! Congratulations—but you're not done yet. You still need federal and state tax exemptions.

6. Federal & State Tax Exemption Process

Being a nonprofit corporation doesn't automatically make you tax-exempt. You need to apply for tax-exempt status separately at both the federal (IRS) and state (California) levels.

Part A: Federal Tax Exemption (501(c)(3))

Step 1: Obtain Your Employer Identification Number (EIN)

Before applying for 501(c)(3) status, you need an EIN (also called a Tax ID Number). This is the IRS's identification number for your organization (like a Social Security number for businesses).

How to get an EIN:

1. Go to https://www.irs.gov/ein
2. Click "Apply for an EIN Online"
3. Fill out the online Form SS-4
4. Answer questions about your organization (name, address, purpose)
5. Receive your EIN immediately upon completion

What to have ready:

• Nonprofit name
• Principal office address (physical address in California)
• Nonprofit mailing address (can be same)
• Your personal name and Social Security Number (as organizer)
• Nonprofit purpose statement

Cost: $0 (completely free)

Timeline: Immediate (same day)

Keep this: Save your EIN—you'll need it for everything else (bank account, 501(c)(3) application, tax filings)

Step 2: Choose Between Form 1023-EZ and Form 1023

Now you apply for 501(c)(3) status. The IRS has two forms; your choice depends on your situation.

Form 1023-EZ: The Quick Option

Form 1023: The Full Application

Which should you choose?

For most brand-new California nonprofits: Start with 1023-EZ. If denied, you can reapply with Form 1023.

Step 3: Complete Your 1023-EZ or Form 1023 Application

Form 1023-EZ (Easy Option):

You'll be asked:

• Organization name, EIN, address
• Principal officers and directors
• Nonprofit purpose
• Expected annual revenue (should be under $50K)
• Confirmation that you don't have issues that would disqualify you

Form 1023 (Full Application):

You'll be asked:

• Detailed organizational information
• Financial projections (2 years forward)
• Detailed program descriptions
• Governance structure
• Compensation of officers/directors
• Conflicts of interest policies
• Much more detailed questions about your nonprofit's operations

Help with these applications:

• IRS.gov has detailed instructions
• Free tax clinics in many California counties
• Your attorney (if hiring one)
• Form 1023 requires Schedule O (supplemental info) and attachments

Step 4: Submit Your Application to the IRS

For Form 1023-EZ:

• File online at IRS e-postcard system
• Receive confirmation immediately
• Get determination letter within 2–4 weeks

For Form 1023:

• Mail to IRS address (varies by state; check IRS.gov)
• Include check for $600
• Include supporting documents (bylaws, financial projections, etc.)
• Track your application online

Timeline:

• 1023-EZ: 2–4 weeks to approval
• 1023: 2–4 months average (sometimes longer)

Cost:

• 1023-EZ: $275
• 1023: $600

What you get:

• Determination Letter (official IRS approval of 501(c)(3) status)
• This letter proves you're tax-exempt to banks, donors, and the public

Part B: California State Tax Exemption

In addition to federal 501(c)(3) status, you must also apply for California state tax exemption to avoid state income tax and franchise taxes.

Form 3500: California Exemption Application

What it is:

• Application for exemption from California corporate income tax
• Filed with California Franchise Tax Board (FTB)

What you need:

1. Your EIN (from IRS)
2. Your nonprofit registration number (from Secretary of State)
3. Your IRS determination letter (501(c)(3) approval)
4. Form FTB 3500 completed

How to file:

1. Download Form FTB 3500 from ftb.ca.gov
2. Complete the form with your organization's information
3. Mail to: Franchise Tax Board, Exempt Organization Unit, Sacramento, CA
4. Include your IRS determination letter as proof

Timeline: 2–4 weeks for approval

Cost: $0 (no filing fee)

What you get:

• Exemption Certificate
• California considers you tax-exempt for state purposes
• You'll no longer pay California corporate income tax

Important: You typically file this AFTER receiving your federal 501(c)(3) determination letter.

7. Attorney General Registration & Charitable Solicitation

If your nonprofit plans to solicit donations (ask for money) in California, you must register with the California Attorney General's Registry of Charitable Trusts.

Who Must Register?

You must register if you:

• Have a nonprofit corporation OR
• Are planning to solicit charitable contributions OR
• Have active programs

You may NOT need to register if:

• You don't solicit donations and don't plan to
• You're a religious organization (broad exemption)
• You're a hospital or accredited school
• You're only supported by government grants

How to Register

Form CT-1: Initial Registration

1. Go to oag.ca.gov/charities
2. Download Form CT-1 (Initial Registration)
3. Complete the form with:
   • Organization name and address
   • EIN and California registration number
   • Names/addresses of officers
   • Your nonprofit's mission and programs
   • Projected revenue
4. Mail with supporting documents:
   • Copy of Articles of Incorporation
   • Copy of bylaws
   • Copy of IRS determination letter (if received)

Timeline: 1–2 weeks for approval

Cost: No filing fee

What happens:

• You're added to Attorney General's database
• You receive a Charitable Organization Registration Number
• You can legally solicit donations in California

Annual Compliance (Form CT-2)

After initial registration, you must file:

• Form CT-2 annually if you receive donations
• Due date: 4.5 months after your fiscal year ends
• Reports your fundraising activities and income

8. IRS Rules & Nonprofit Compliance Requirements

This section is critical because these IRS rules govern how your nonprofit operates. Violate them, and you can lose your 501(c)(3) status.

The 33% Rule (Public Support Test)

What it is: The "33% rule" determines whether your nonprofit is classified as a "public charity" or a "private foundation." Public charities have fewer restrictions and more tax benefits.

How it works:

• Your nonprofit must receive at least 33.33% of its support from public sources (individual donors, government grants, etc.)
• If you get less than 33%, you may be classified as a "private foundation" with stricter rules

Why it matters:

• Public Charity: Donors get full tax deduction; you have fewer restrictions
• Private Foundation: Donors still get deduction BUT you have stricter rules (must distribute 5% of assets annually, face excise taxes, more IRS oversight)

Example:

• Nonprofit receives $100,000 total support
• Need 33%+ from public = need at least $33,333 from individual/government
• If you only get $20,000 from public = classified as private foundation

For new nonprofits: The IRS typically gives you a provisional "public charity" classification. You must maintain the 33% threshold to keep it.

The 5% Rule

What it is: No single person can comprise more than 5% of your organization's board composition for you to maintain public charity status.

How it works:

• If you have a 5-person board, one person can be 20% (1 out of 5)
• But the remaining members must represent at least 80% of the board
• Prevents any single outside person from controlling the nonprofit

Example:

• 3-person board: You need true independence; no one person controls
• 5-person board: A founder or major donor can be 1 out of 5 (20%)
• 10-person board: A founder or major donor can be at most 1 out of 10 (10%)

For California nonprofits: Ensure your board is genuinely independent, not controlled by a single founder or donor.

The 80/20 Rule (Excess Benefit Transaction Rules)

What it is: Officers, directors, and key employees of a nonprofit cannot receive unreasonable compensation. If compensation is "excessive," it's considered an "excess benefit transaction," and your nonprofit can lose tax-exempt status.

How it works:

• Board must approve compensation as reasonable
• Reasonable = market rate for similar roles in similar-sized organizations
• Compensation must be documented in board minutes
• Cannot be based on organization size alone

What qualifies as "reasonable":

• Executive Director role: $40K–$80K salary (depending on nonprofit size/location)
• Program Manager: $35K–$55K
• Part-time coordinator: $15K–$25K
• Board members: $0 (typically unpaid for board service)

What qualifies as "excessive":

• $500K nonprofit with $200K Executive Director salary (40% of budget—red flag)
• Paying founder $100K+ with no staff and minimal programs (out of proportion)
• Paying board members for board service (typically prohibited)
• Paying related parties (family members) above-market rates

IRS monitoring:

• Reviewed on Form 990 (annual tax return)
• IRS looks for compensation disproportionate to organization size
• If excessive, organization loses tax status; executive pays excise tax

For new nonprofits: When you start paying yourself, ensure it's documented, reasonable, and board-approved.

The 50/30/20 Rule

What it is: This is an alternative public support test for nonprofits that don't meet the 33% rule but still qualify as public charities.

How it works:

• If you receive 50% or more of support from public/government sources, you automatically qualify as public charity
• More generous than 33% rule
• Alternative if you're between 30–50% public support

Impact: Most nonprofits aim for the 33% threshold; the 50% threshold makes it easier if you're government-funded.

Form 990 Filing Requirements

What is Form 990? Your nonprofit's annual "tax return" filed with the IRS. It's public and shows your organization's finances, programs, and compensation.

Who must file:

• Most 501(c)(3) nonprofits (with some exceptions)

Filing options based on size:

Deadline example:

• Fiscal year: January 1–December 31
• Form 990 due: May 15 (4.5 months after Dec 31)
• Extensions available (6 months if requested)

Cost: $0 (filing is free)

Important: Form 990 is public. Anyone can view your nonprofit's finances, salaries, and programs on Guidestar.org or the IRS website.

California Annual Compliance: Form SI-100

What it is: California's annual Statement of Information. You must file this every two years (alternating years with federal 990).

Due date:

• Due within 90 days of incorporation, then every two years
• Check your notice from Secretary of State for specific date

Cost: $20 per filing

What you report:

• Current officers and directors
• Principal office address
• Registered agent information

How to file:

• Online at bizfilings.sos.ca.gov
• Or by mail

9. Board of Directors: Requirements & Responsibilities

Your board of directors is the legal governing body of your nonprofit. Understanding their requirements and duties is critical for compliance and success.

Legal Requirements (California Law)

Can You Start a Nonprofit by Yourself?

Short answer: No, not in California.

You NEED a minimum of 3 board members. However, you can be one of them. So:

• You (founder) = 1 director
• 2 other unrelated people = 2 additional directors
• Total: 3 directors minimum

Why 3 minimum?

• Prevents one person from having absolute control
• Requires consensus and discussion of decisions
• Provides checks and balances
• Meets IRS requirements for nonprofit governance

Board Duties & Fiduciary Responsibilities

Every board member has legal duties:

1. Duty of Care

• Must act in the nonprofit's best interest
• Must prepare for meetings and understand financial statements
• Must ask questions and participate meaningfully
• Cannot be passive or neglectful

2. Duty of Loyalty

• Must avoid conflicts of interest
• Must disclose personal relationships that affect voting
• Cannot profit personally from nonprofit decisions
• Cannot use nonprofit resources for personal benefit

3. Duty of Obedience

• Must ensure nonprofit follows its bylaws and mission
• Must ensure compliance with laws (federal, state, local)
• Must ensure financial records are accurate
• Must monitor that funds are used legally

Violations of these duties can result in:

• Personal liability (in rare cases)
• Loss of nonprofit tax-exempt status
• IRS penalties
• Legal action by members, donors, or prosecutors

Can the Founder Be on the Board?

Yes. In fact, this is common and legal. However:

If you're the founder AND a board member:

• You have fiduciary duties like any other director
• You must recuse yourself from self-dealing votes
• You cannot use the board to advance personal interests
• Best practice: Separate your founder role from officer role

Example of proper structure:

• You: Founder, Board Member, Executive Director (staff)
• Two other directors: Community members without financial stake

Example of problematic structure:

• You: Founder, Board President, Treasurer, Executive Director
• Other board members: Your family/employees
• This looks like personal control, not real governance

Board Meetings & Voting

Meeting Requirements:

• Most nonprofits meet quarterly (4 times per year minimum)
• Some meet monthly or less frequently (bylaws set this)
• Directors must be given advance notice
• You can meet in person, by video, or by phone/email (if bylaws allow)

Voting:

• Typically, all decisions require majority vote
• Larger boards may require 2/3 or 3/4 for major decisions
• Quorum (minimum attendance) is often 50% of directors
• Board votes are recorded in meeting minutes

Compensation:

• Board members typically are NOT paid for board service
• Exception: If a director is also an employee (Executive Director, Program Manager), they can be paid for that work—but not for board service
• Must be clearly documented and separate

10. Can You Pay Yourself as a Nonprofit Founder?

This is one of the most confusing questions nonprofit founders ask. The short answer: Yes, but with important rules.

The Legal Answer

You CAN pay yourself a reasonable salary as a founder IF:

1. You're employed by the nonprofit (Executive Director, Program Manager, etc.)
2. Your salary is reasonable for the role, not based on your status as founder
3. The board approves your compensation in writing
4. Compensation is documented in board minutes
5. It's a regular payment (monthly/bi-weekly), not sporadic
6. You're paid as a W-2 employee or 1099 contractor (with proper documentation)
7. Compensation is disclosed on Form 990 (public tax return)

What "Reasonable" Means

The IRS uses "reasonable compensation" test: Would a comparable organization in a similar market pay this amount for this role?

Reasonable compensation examples:

Red flags for "excessive" compensation:

• You earn 60%+ of nonprofit's budget
• You earn double the market rate for your role/region
• Board doesn't document or approve your salary
• You're paid sporadically or inconsistently
• You're paid more than similar positions at peer nonprofits

How to Pay Yourself Legally

Step 1: Document Your Role

• Board votes on your position (Executive Director, etc.)
• Board votes on your salary amount
• Decision recorded in board meeting minutes

Step 2: Establish Reasonable Rate

• Research comparable nonprofits in your area
• Look at Guidestar.org for peer compensation data
• Use resources like National Council of Nonprofits' compensation guides

Step 3: Pay Through Official Channels

• Set up nonprofit bank account
• Pay yourself via check or ACH
• Maintain payroll records
• File quarterly IRS payroll taxes (if W-2 employee)

Step 4: File Paperwork

• File Form 941 (quarterly employment taxes)
• File Form W-2 (at year-end)
• Or Form 1099 (if contractor)
• Report on Form 990 (public)

Step 5: Keep Records

• Payroll documentation
• Board approval in minutes
• Tax filings
• Bank statements showing payment

What You CANNOT Do

Common Questions About Founder Pay

Q: Can I pay myself before I get 501(c)(3) approval? A: Technically yes (as a nonprofit corporation), but not recommended. Wait until you have federal tax-exempt status so payments are documented legitimately.

Q: Can I pay myself more as "founder" than market rate? A: No. Compensation must be reasonable regardless of founder status. The IRS doesn't recognize "founder premium."

Q: Can I pay my family members? A: Yes, if they have legitimate roles and compensation is reasonable and documented.

Q: Can I pay the board members? A: Not typically for board service. Only if they're also employees in a separate paid position.

Q: What if I donate my time unpaid initially? A: Perfectly fine! Many founders work unpaid initially. When the nonprofit grows and can afford to pay, follow the legal process above.

11. Timeline: Your First Year Milestones

Here's a month-by-month guide for your first year of nonprofit operations:

Month 1: Foundation & Planning

Tasks:

• [ ] Confirm your nonprofit mission and purpose
• [ ] Recruit 2–3 board members
• [ ] Draft mission statement
• [ ] Choose nonprofit name and verify availability
• [ ] Complete bylaws draft
• [ ] Schedule initial board meeting

Costs: $0

Deliverables: Recruited board, drafted bylaws

Month 2: Legal Formation

Tasks:

• [ ] Hold initial board meeting (document in minutes)
• [ ] Adopt bylaws
• [ ] Designate officers (President, Treasurer, Secretary)
• [ ] File Articles of Incorporation with Secretary of State
• [ ] Pay filing fee ($30)
• [ ] Receive Certificate of Incorporation

Costs: $30 (Articles filing)

Deliverables: Incorporated nonprofit; Certificate of Incorporation

Timeline: 1–2 weeks for Secretary of State to process

Month 3: Tax ID & Federal Application

Tasks:

• [ ] Apply for EIN from IRS (Form SS-4) online
• [ ] Receive EIN immediately
• [ ] Open nonprofit bank account (need EIN and Certificate of Incorporation)
• [ ] Start financial records/accounting system
• [ ] Decide: Form 1023-EZ or Form 1023
• [ ] Begin 501(c)(3) application

Costs: $0 (EIN), $0 (bank account setup)

Deliverables: EIN assigned; nonprofit bank account open

Months 3–4: Federal Tax Exemption Application

Tasks:

• [ ] Complete 1023-EZ or Form 1023
• [ ] Gather supporting documents (bylaws, financial projections, etc.)
• [ ] Submit application to IRS
• [ ] Pay fee ($275–$600)
• [ ] File initial Statement of Information with Secretary of State ($20)

Costs: $275–$600 (1023 fee) + $20 (Statement of Info)

Deliverables: 1023 application submitted to IRS

Timeline: 2–4 weeks (1023-EZ) or 2–4 months (1023)

Month 4–5: State Tax Exemption & Attorney General

Tasks:

• [ ] Receive IRS Determination Letter (501(c)(3) approval)
• [ ] Apply for California tax exemption (Form 3500) to Franchise Tax Board
• [ ] Register with Attorney General (Form CT-1) if soliciting donations
• [ ] Submit all required documents
• [ ] Receive California approval and registration numbers

Costs: $0 (both state approvals are free)

Deliverables: State tax exemption approved; AG registration completed

Month 6+: Operations & Ongoing Compliance

Tasks:

• [ ] Set up accounting/bookkeeping system
• [ ] Establish conflict of interest policy
• [ ] Create financial management procedures
• [ ] Begin program operations
• [ ] Start fundraising activities
• [ ] Plan quarterly board meetings
• [ ] Document all board decisions in minutes

Costs: Variable (depends on programs)

Ongoing Monthly:

• [ ] Bank reconciliations
• [ ] Board communications
• [ ] Financial tracking

Ongoing Quarterly:

• [ ] Board meetings
• [ ] Financial reviews
• [ ] Program updates

Ongoing Annually:

• [ ] Form 990 filing (due 4.5 months after fiscal year end)
• [ ] Review and renew conflict of interest policy
• [ ] Audit (if required; typically $5K–$20K for nonprofits over $250K)

Year-End (April 15 following fiscal year):

• [ ] Form 990-N (if under $50K)
• [ ] Form 990-EZ (if $50K–$200K)
• [ ] Form 990 (if over $200K)

12. Common Mistakes to Avoid

Learn from others' mistakes. Here are the most common problems new nonprofit founders encounter:

Mistake 1: Not Recruiting Independent Board Members

What happens:

• Founder controls all three board seats (or picks family/employees)
• No real governance or independent decision-making
• IRS sees it as personal control, not genuine nonprofit
• Risk: Loss of tax-exempt status

How to avoid:

• Recruit truly independent directors
• At least 2 should have no financial relationship to you
• Recruit people who will ask hard questions
• Document board independence in minutes

Mistake 2: Skipping Attorney General Registration

What happens:

• You're soliciting donations illegally
• You can be fined by Attorney General
• Donors' contributions don't receive the legal protections
• Nonprofit cannot legally enforce donor agreements

How to avoid:

• Register with CA Attorney General within 30 days of 501(c)(3) approval
• If you plan to solicit donations, register even if not approved yet

Mistake 3: Treating Nonprofit Money as Personal

What happens:

• Paying personal bills from nonprofit account
• Taking cash "loans" that aren't repaid
• Using nonprofit for personal business
• IRS investigates; you lose tax status

How to avoid:

• Separate personal and nonprofit finances completely
• Keep detailed records of all transactions
• All payments must be for legitimate nonprofit purposes
• Board must approve all expenditures over $X amount

Mistake 4: Not Paying Taxes/Filing Forms

What happens:

• Miss Form 990 filing deadline
• IRS automatically revokes 501(c)(3) status
• You must reapply (expensive and time-consuming)
• Can face penalties and interest

How to avoid:

• Mark Form 990 deadline on calendar (4.5 months after fiscal year end)
• Hire accountant or use nonprofit software
• Request extension if needed
• File even if it's just 990-N (e-postcard)

Mistake 5: Excessive Founder Compensation

What happens:

• Founder pays self 80% of nonprofit budget
• Form 990 is reviewed by IRS
• Deemed "excess benefit transaction"
• Organization loses 501(c)(3) status; founder owes penalty

How to avoid:

• Pay reasonable market-rate salary only
• Get board approval and document in minutes
• Research comparable positions/nonprofits
• Keep salary as percentage of budget reasonable (typically 20–40%)

Mistake 6: No Conflict of Interest Policy

What happens:

• Board member votes on issue where they have financial stake
• No policy to require disclosure
• Looks like self-dealing
• IRS red flag; governance issue

How to avoid:

• Adopt conflict of interest policy (required)
• Directors disclose any conflicts
• Director with conflict recuses themselves from voting
• Document in meeting minutes

Mistake 7: Insufficient Board Meetings

What happens:

• Board meets once per year or inconsistently
• No documentation of decisions
• No governance oversight of nonprofit
• IRS sees it as non-functional board

How to avoid:

• Meet minimum quarterly (4 times per year)
• More frequently if needed (monthly for active nonprofits)
• Document every meeting in minutes
• Keep minutes for at least 7 years

Mistake 8: Combining Founder Role with All Officer Roles

What happens:

• Founder is Board President, Treasurer, Executive Director
• Complete control; no checks/balances
• Looks like personal business, not nonprofit
• Governance concerns

How to avoid:

• Separate founder/executive director roles from board roles
• Have independent officers (President, Treasurer not founder)
• Founder can be on board but not control it
• Distribute authority among multiple people

Mistake 9: Not Understanding 33% Rule

What happens:

• Nonprofit doesn't meet 33% public support threshold
• Classified as "private foundation"
• More restrictions; less favorable tax treatment
• Donor deductions limited

How to avoid:

• Understand what counts as "public" support
• Plan fundraising strategy to meet 33% threshold
• Don't rely on one major donor for majority of support
• Diversify funding sources

Mistake 10: Starting with the Wrong Structure

What happens:

• Chose LLC instead of nonprofit
• Must pay $800+ annual California LLC tax
• Cannot get 501(c)(3) status
• More expensive and less tax-efficient

How to avoid:

• Choose nonprofit corporation from the start if you want 501(c)(3)
• An LLC can be converted to nonprofit later, but it's complicated
• Get legal clarification before filing

13. Frequently Asked Questions (from Google's People Also Ask)

Based on Google search data, here are the most commonly asked questions about starting a nonprofit in California.

Questions About Costs

Q: How much does it cost to start a nonprofit in California?

A: The minimum cost is $350–$675 in filing fees if you do it yourself:

• Articles of Incorporation: $30
• Statement of Information: $20
• State Tax Exemption (Form 3500): $25
• Federal 501(c)(3) Application (1023-EZ or 1023): $275–$600

If you hire an attorney for full service, costs range $1,500–$5,000+. See Section 4 for detailed breakdown.

Q: Can I start a nonprofit with no money?

A: Technically, no—the filing fees are required and total ~$350 minimum. However:

• Many nonprofits offer micro-grants to cover startup fees
• Community funding organizations may waive or reduce fees
• You can borrow or fundraise the initial $350
• Some services (attorney review) can be skipped to save money
• You can start with this minimal investment and grow

Q: How much money is a nonprofit allowed to make?

A: There is NO income limit. A nonprofit can earn unlimited revenue. The requirement is that:

• All revenue must be reinvested in the nonprofit's mission
• No profits can be distributed to founders or members
• Excess revenue builds reserves or funds expansion
• The amount spent on administration must be reasonable

Questions About Structure & Alternatives

Q: What is the difference between a nonprofit and a 501(c)(3)?

A: See Section 1 for detailed explanation. Short answer:

• Nonprofit = legal structure (like a corporation)
• 501(c)(3) = federal tax classification
• You need BOTH for a complete nonprofit with tax benefits

Q: Is it better to have an LLC or a nonprofit?

A: Depends on your goals:

• Use nonprofit if you want to serve the public good, get donations, and get tax exemptions
• Use LLC if you want to run a business, earn profit, and distribute income
• See Section 2 for comparison table

Q: Can an LLC be a nonprofit in California?

A: Technically yes, but not recommended:

• An LLC can be set up to operate as a nonprofit (no profit distribution)
• But you still pay the $800 annual California LLC tax
• You don't automatically get 501(c)(3) status
• Nonprofit corporation is better for charitable organizations
• See Section 2 for comparison

Q: Is it hard to start a non-profit in California?

A: Difficulty level: Medium

• Filing is straightforward (forms are standard)
• Understanding tax laws takes effort
• Legal requirements are clear
• Hardest part: Finding good board members and maintaining governance
• Attorney guidance recommended ($200–$500) for first-time founders

Questions About People & Governance

Q: How many people do you need to start a nonprofit in California?

A: Minimum 3 people as board members (required by law):

• All 3 must be 18+, of sound mind
• Cannot all be blood-related or married
• At least 1 must be a California resident
• You (founder) can be one of the 3

Q: Can I start a nonprofit by myself?

A: No, not in California. You need minimum 3 board members. However:

• You can be one of them
• You recruit 2 others
• They don't have to have nonprofit experience
• They're learning alongside you

Q: Do all non-profits need a board?

A: Yes, absolutely. A board is legally required:

• Minimum 3 directors
• Provides governance and oversight
• Makes financial decisions
• Ensures legal compliance
• Required by IRS for 501(c)(3) status

Q: Can I pay myself as a founder of a nonprofit?

A: Yes, IF you meet these conditions:

• You have a legitimate job title (Executive Director, etc.)
• Your salary is reasonable for the role
• Board approves your compensation
• It's documented and regular (monthly, not sporadic)
• You're paid as W-2 employee or 1099 contractor
• See Section 10 for details

Q: How many board members does a 501c3 need in California?

A: Minimum 3. Maximum is set in your bylaws (typically 5, 7, 9, or 11). Benefits of larger boards:

• More diverse perspectives
• More people to share duties
• More connections and fundraising capacity
• More workload to distribute

Questions About Compliance & Rules

Q: What is the 33% rule for nonprofits?

A: The 33% rule determines if you're classified as a "public charity" or "private foundation":

• You must receive at least 33.33% of support from public sources (individual donors, government, etc.)
• If less than 33%, you may be classified as private foundation with stricter rules
• See Section 8 for full explanation

Q: What is the 80/20 rule for nonprofits?

A: The 80/20 rule refers to "excess benefit transaction" rules. It means:

• Officers and key employees cannot receive compensation more than 20% above reasonable
• Compensation must be "reasonable" for the position and organization size
• Board must approve and document compensation
• Violation = loss of 501(c)(3) status
• See Section 8 for full explanation

Q: What is the 50/30/20 rule for charities?

A: Alternative test for public charity status:

• If you receive 50%+ from public/government sources, you're automatically public charity
• More generous than the 33% rule
• Helpful for nonprofits receiving significant government funding
• See Section 8 for full explanation

Q: What is the 5% rule for nonprofits?

A: No single outside person can comprise more than 5% of board composition:

• Prevents any one person from controlling your nonprofit
• Requires board independence
• Applies to ensure genuine governance
• See Section 8 for full explanation

Q: What is a 501c3 not allowed to do?

A: 501(c)(3) organizations cannot:

• Distribute profits to members or founders
• Engage in substantial political activity or lobbying
• Support or oppose candidates for office
• Operate primarily for benefit of members (must be public benefit)
• Use resources for personal benefit (excess benefit transactions)
• Engage in illegal activity
• Operate for commercial purposes
• Pay excessive compensation to officers

Q: Do nonprofits pay taxes in California?

A: No (if approved for tax exemption):

• Exempt from federal income tax (with 501(c)(3) status)
• Exempt from California corporate income tax (with state exemption)
• Exempt from California franchise tax
• May still need to file payroll taxes if you have employees
• Still pay sales tax on some purchases (unless you have sales tax ID exemption)

Q: How long does it take to become a nonprofit in California?

A: 2–4 months total for complete setup:

• Form nonprofit: 1–2 weeks (Secretary of State)
• Get EIN: Immediate
• 501(c)(3) approval: 2–4 weeks (1023-EZ) or 2–4 months (1023)
• State tax exemption: 2–4 weeks
• Attorney General registration: 1–2 weeks
• Timeline is 2–4 months if all parallel

Q: How long does it take to get 501c3 approval?

A: Depends on which form:

• 1023-EZ: 2–4 weeks
• Form 1023: 2–4 months average (sometimes longer if questions asked)
• You get approval letter showing when status is effective

Other Common Questions

Q: What are the three types of nonprofits?

A: The IRS has many classifications (501(c)(1) through 501(c)(29)), but most are 501(c)(3):

• 501(c)(3): Charitable, educational, religious, scientific, literary (most common)
• 501(c)(4): Social welfare organizations, civic leagues
• 501(c)(6): Business leagues, chambers of commerce, trade associations

Q: What are the four types of charities?

A: California typically refers to four nonprofit corporation types:

• Public Benefit Corporations: For public benefit (charities, education)
• Religious Corporations: For religious purposes
• Mutual Benefit Corporations: For mutual benefit of members
• CID Corporations: For common interest developments (homeowners associations)

Q: Is owning a non-profit profitable?

A: No, by definition. Nonprofits:

• Cannot distribute profits to owners/founders
• Must reinvest all revenue in mission
• Can build reserves, but for organizational stability not personal profit
• Founders can earn reasonable salary as employees, not as profit distribution

Q: Do all nonprofits need a board?

A: Yes. Board is:

• Legally required by California law
• Required for 501(c)(3) status
• Provides governance and oversight
• Minimum 3 members in California

Q: What can nonprofits not do?

A: Nonprofits cannot:

• Distribute profits to members or founders
• Operate primarily for private benefit
• Engage in substantial political activity (501(c)(3) limitation)
• Support or oppose candidates for office
• Discriminate based on protected class (in most cases)
• Conduct business outside their stated mission
• Have no legitimate community purpose

14. Tools & Resources

Here are the official resources you'll need to start your California nonprofit:

California Secretary of State Resources

File Articles of Incorporation:

• Secretary of State Business Programs: businesssearch.sos.ca.gov
• Form 202 (Articles of Incorporation): sos.ca.gov/business/cdbodies/nonprofit-corporations

File Statement of Information:

• Due within 90 days of incorporation
• File online: bizfilings.sos.ca.gov
• Cost: $20

Search for Available Names:

• California Business Search: businesssearch.sos.ca.gov

IRS Resources

Get Your EIN:

• IRS EIN Application: irs.gov/ein
• Form SS-4 (online application): immediate processing

Apply for 501(c)(3) Status:

• Form 1023-EZ (simplified): irs.gov/pub/irs-pdf/f1023ez.pdf
• Form 1023 (full application): irs.gov/pub/irs-pdf/f1023.pdf
• Form 1023 instructions: irs.gov/pub/irs-pdf/i1023.pdf
• IRS 501(c)(3) page: irs.gov/charities-non-profits/section-501c3-status

File Form 990:

• Form 990-N (e-postcard): epostcard.form990.org
• Form 990-EZ: irs.gov/pub/irs-pdf/f990ez.pdf
• Form 990: irs.gov/pub/irs-pdf/f990.pdf

California Franchise Tax Board Resources

Apply for State Tax Exemption:

• Franchise Tax Board Charities Page: ftb.ca.gov/file/business/types/charities-nonprofits
• Form FTB 3500: ftb.ca.gov
• Mailing address: FTB, Exempt Organization Unit, Sacramento, CA

California Attorney General Resources

Register with Attorney General:

• California Attorney General Charities Page: oag.ca.gov/charities
• Form CT-1 (Initial Registration): oag.ca.gov/charities/registration
• Form CT-2 (Annual Report): oag.ca.gov/charities/filings

Nonprofit Legal Templates & Help

Free Templates:

• LAFLA (Legal Aid Foundation of LA): lafla.org/nonprofits
• LawHelp (California): lawhelp.org
• NOLO: nolo.com/products/nonprofit-bylaws

Nonprofit Support Organizations:

• California Association of Nonprofits: calnonprofits.org
• National Council of Nonprofits: councilofnonprofits.org
• Support your local nonprofit support organization (many counties have them)

Accounting & Financial Management

Nonprofit Accounting Software:

• Wave (free): wave.com
• Zoho Books (free tier): zoho.com
• Nonprofit accounting firms in your area

Research Comparable Compensation:

• Guidestar: guidestar.org (search other nonprofits' Form 990s)
• National Council of Nonprofits compensation guides: councilofnonprofits.org

Formation Services (If You Want Help)

Formation Services:

• LawZone: legalzoom.com
• Harbor Compliance: harborcompliance.com
• Foundation Group: 501c3.org
• Local nonprofit attorneys

Next Steps: Your Action Plan

Now that you understand the full process, here's what to do next:

Week 1: Planning

1. [ ] Read through this entire guide
2. [ ] Document your nonprofit's mission statement
3. [ ] Determine your nonprofit type (Public Benefit, Religious, etc.)
4. [ ] Research potential board members (identify 2–3 people)
5. [ ] Choose your nonprofit name and verify availability
6. [ ] Decide: DIY or hire attorney help?

Week 2: Preparation

1. [ ] Draft your Articles of Incorporation
2. [ ] Draft bylaws (or get template)
3. [ ] Recruit your 2–3 board members formally
4. [ ] Get their commitment to serve
5. [ ] Gather contact information

Week 3: Formation

1. [ ] Hold initial board meeting (document in minutes)
2. [ ] Adopt bylaws
3. [ ] Designate officers
4. [ ] File Articles of Incorporation ($30)
5. [ ] Apply for EIN (free, online)

Week 4: Tax Exemption

1. [ ] Complete 1023-EZ or Form 1023 application
2. [ ] Gather supporting documents
3. [ ] Submit to IRS ($275–$600)
4. [ ] File California State Tax Exemption (Form 3500)

Month 2–3: Finishing

1. [ ] Receive IRS determination letter
2. [ ] Register with California Attorney General (if soliciting)
3. [ ] Open nonprofit bank account
4. [ ] Set up accounting system
5. [ ] Plan first board meeting
6. [ ] Begin operations!

Starting a nonprofit in California is achievable, even for first-time founders. The process takes 2–4 months and costs $350–$675 (or more with attorney help). The key is:

1. Understand the basics: Nonprofit is structure; 501(c)(3) is tax status
2. Recruit real board members: Independent, unrelated, committed
3. File the paperwork: Follow the forms and timelines
4. Maintain compliance: Annual filing, quarterly meetings, proper documentation
5. Avoid common mistakes: Keep board independent, document decisions, pay reasonable compensation

Your nonprofit has the potential to make a real impact in your community. The legal and financial requirements exist to protect donors, the public, and ensure your nonprofit operates with integrity.

Start with the resources listed above, connect with local nonprofit support organizations, and don't hesitate to ask for help. Good luck!

Need Help?

• California Association of Nonprofits: calnonprofits.org
• Your local nonprofit support organization
• Legal aid clinics in your county
• Salish Sea Consulting: [Your website] for nonprofit strategy and fundraising guidance