Starting a non-profit the hard way

This is a continuation of my previous post regarding Unincorporated Nonprofit Associations where I mentioned "California has the most robust legal recognition of Unincorporated Nonprofit Associations but the process is a bit labyrinthine and it uses antiquated 'snail mail' forms."  I figured I'd document that process for the naive adventurous.  P.S. If you'd rather form a traditional 501(c)(3) nonprofit instead, here's a nice guide.

Standard disclaimer: I'm not a lawyer and this does not constitute legal advice.  It's just free advice from some random person on the Internet  ...you get what you pay for  ;)

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1.  Decide on a name for your association.  Unlike some states, California does not impose a business entity identifier (i.e. name suffix) on Unincorporated Nonprofit Associations but there are general restrictions you'll need to abide by.  You'll want to avoid words reserved for other business types, like "Corporation", "Limited", or "Partnership".  The safest suffix for our type is "Association" or "Assoc."

Verify your name is not already reserved in California.  It's also best practice to do an Internet search to verify name uniqueness and avoidance of potential trademark infringement issues.

For this blog post, I'll use WORLD CHARITY ASSOCIATION as the example name.

Note: on legal documents you typically use upper-case when writing the organization name (legally, an organization name is case-insensitive).

2.  Decide on a type for your non-profit.  It should be charitable, religious, educational, and/or scientific for Federal income tax exemption and California income tax exemption.  In addition to income tax, your association may also benefit from sales tax exemption.  Each state has their own process for qualification.  For example, California sales tax exemption is described in Section A.II.C.

For this blog post, I'll use a 501(c)(3) Charitable Organization as the example type.

3.  Decide on a mission statement for your non-profit.  This should be a short description of your association's purpose.  Ideally, it should be a single sentence (for brevity) but can be a paragraph.  Make sure this describes all activities within your nonprofit, otherwise you could lose your tax exempt status since all business activities must somehow relate back to your purpose.  Including your organization type in the description is recommended.

4.  Next you'll want to register your website domain.  Most nonprofits use the ".org" TLD.  This domain will be used for your website and business email.  It doesn't have to exactly match your organization name (for example, "world-charity.org" is fine).  Note: there are many domain registrars and web/email hosts out there so shop around for the best deal. For example, DreamHost offers a free domain and shared web hosting for nonprofits.

It's also handy to create a website (or placeholder homepage) early in the process so you can reference your URL on forms and social media.

You'll want to register accounts on popular social media platforms (Twitter, Instagram, Facebook, etc.).  Even if you don't use those platforms now, you never know when they might be used in the future so standardizing on and reserving an "@" handle is good practice.

5.  Unless you happen to live in The Golden State with a non-P.O. Box residence open during business hours, you'll need to use a Registered Agent.  There are a number of options to choose from but the least expensive (multi-year) is California Registered Agent Inc ($39/year).  You can register here.

Note: make sure to write down the exact name and address of the Registered Agent provided at the end of the registration process.

6.  Unlike Corporations, Unincorporated Nonprofit Associations don't have a Board of Directors or typical officers like CEO and Treasurer.  Instead, they have an ultra-simplistic structure of Managers and Members.  In addition, they don't have Articles of Incorporation or Bylaws.  Instead, they have Articles of Association (sometimes referred to as a Constitution).  This is as simple as changing the words "Incorporation" and "Corporation" to "Association".  Here's a template using IRS suggested language.  Per IRS guidelines, at least two people must sign a dated Articles of Association document -- the first must be a Manager and the second can either be a Manager or a Member.

Note: since the "Manager" title is unfamiliar to many, you may want to have hybrid descriptive titles like "President / Manager", "Secretary / Member", etc.

Create a copy of the Articles of Association for each initial organizer listed in the document and have them sign each copy (preferably in blue ink).  Scan one of them to PDF and store in a safe place.

(Optional) Acquire a rental mailbox and/or phone forwarder to give your nonprofit a bit more professional polish and avoid giving out your personal home address or phone number. Avoid a PO box since some packages can't be delivered to those addresses. Do a Google search for "private mailbox" to get some options near you. Make sure your phone forwarder has a mobile app and the reviews are good (I personally like Sonetel).

7. Register your Unincorporated Nonprofit Association with the California Secretary of State using Form LP/UNA 128 ($10 + $5 Certification Fee) -- make sure to use the Registered Agent address on the application.  At a minimum you'll want to register your association's name, but if you want to pay another $10 and submit a logo (insignia) feel free to create one from scratch, modify a free one, or pay a consultant to make you one -- have fun and be creative!

The form says "Standard processing time for submissions to this office is approximately 5 business days from receipt." but that's actually a bit misleading.  They stagger processing of different form types so a more reliable estimate is to use their processing times website, expand the "Corporate Filings" section and look for "Formations/Registrations".  It generally takes up to a week after the date they start to process all the forms so be prepared to wait up to a month just to get your form processed.  Your registered agent service should notify you once the certified copy arrives and you can download the scanned document.

Note: some sites may tell you to also submit a Statement of Information (SI-100 form) but that's not needed for Unincorporated Nonprofit Associations.

8. While that official document is being processed, as long as you have your California Entity ID from Step 7 as proof the organization is officially recognized, you can obtain a free EIN (this is a business identifier used by the federal government and others).  Despite the importance of an EIN to your tax-exempt entity, don’t apply for one until your organization is legally formed.  Apply here and don't forget to save the PDF at the very end (you only get one opportunity to do so)!

9. As long as your nonprofit has less than $5,000 in annual revenues, it may function as a 501(c)(3) without applying for IRS recognition of its status.  However, many institutions that work with or provide grants and discounts to nonprofits will require you to show IRS proof of your non-exempt status.  If you want to take the plunge immediately, you can pay the $275 fee to submit Form 1023-EZ.  If you choose not to apply for Federal income tax exemption at this time, you have 27 months to do so.  Put a reminder in your calendar so you don't forget.

10. With State and Federal recognition, you can now set up a business bank account.  It's important to keep personal and business finances separate.  Look for banks that offer nonprofit perks.  Some of the best deals are with NCUA Federally-insured credit unions (most of which are nonprofits themselves), however they may not have all the capabilities of the larger banks, like qualified to issue PPP loans.  Bank requirements vary, but most require at a minimum your EIN, Articles of Association, driver's license, and SSN.  For the modern hipster, you could eschew the traditional brick and mortar option and select a no-fee neobank instead. For example, Grasshopper.

11. Obtain a California Entity ID using Form 3500A.  Mail it to the address listed here (make sure to include a copy of your Federal income tax exemption determination letter from Step 9 above).

If you'll benefit significantly from sales tax exemption, you can investigate your options for qualifying for a tax exemption certificate that eliminates the need to either pay sales tax for goods purchased or collect sales tax for good sold.  This California guide is a good place to start.  Tax services, such as Avalara or TaxJar help manage this complexity once you've obtained your certificates.

12. If you'll be doing anything financial (including offering reasonable compensation to your association managers and/or members), you'll want to set up an accounting system.  There are many options. For example, Xero is popular.

13. Celebrate!

14. Put a reminder in your calendar to file 990-N and FTB 199N on or before the 15th day of the 5th month after the close of your organization's tax year. For example, if your tax year ends on December 31, the due date is May 15. If the due date falls on a weekend or state holiday, file by the next regular business day. There are other required legal forms needed throughout the year so here's a handy checklist.