Non-Profit Organization

By: Khushali Jain & Priyanka Mehta

Corporations that have been formed for Non-commercial purposes such as Charitable, Educational, religious etc. are termed as Non-Profit Organization. For such purposes, they are permitted to accept donations, grants and funding but are prohibited to distribute any profits/ dividends to its members, directors or officers.

Incorporating a nonprofit in California involves several key steps, beginning with choosing a unique name and determining the organization's charitable purpose. The next step is filing the Articles of Incorporation with the California Secretary of State- Form ARTS-PB-501(c)(3), which formally establishes the entity. After incorporation, the nonprofit must apply for an Employer Identification Number (EIN) from the IRS, draft bylaws, and hold an initial board meeting to adopt them. To obtain tax-exempt status, the organization must file Form 1023 or 1023-EZ with the IRS for federal recognition under 501(c)(3), and separately apply for California state tax exemption by submitting Form 3500A or 3500 to the Franchise Tax Board. Compliance with additional state requirements, such as registering with the Attorney General's Registry of Charitable Trusts through Form CT-1 within the 30 days of first receiving the assets is also necessary before beginning operations.

Nonprofit organizations, even though they are tax-exempt, are generally required to file annual tax returns by the 15th day of the 5th month after the close of their fiscal year with the IRS using Form 990, 990-EZ, or 990-N, depending on their gross receipts and total assets. For example, if your fiscal year ends on December 31, your return is due on May 15. If the due date falls on a weekend or legal holiday, the deadline is extended to the next business day. These returns provide transparency about the nonprofit’s finances, governance, and activities. Organizations with gross receipts over $200,000 or assets over $500,000 must file Form 990; those with receipts between $50,000 and $200,000 can use Form 990-EZ; and smaller nonprofits with receipts under $50,000 can file the simpler Form 990-N (e-Postcard). Failure to file for three consecutive years results in automatic revocation of tax-exempt status. Additionally, many nonprofits must also file state returns or informational reports, depending on local requirements.

An audit for a nonprofit organization is an independent examination of its financial statements and records by a certified public accountant (CPA) to ensure accuracy, transparency, and compliance with generally accepted accounting principles (GAAP). While not all nonprofits are required to undergo audits, they are often mandated by state law, funding agencies, or as a condition of receiving large grants, especially those exceeding $750,000 in federal funding, which triggers a Single Audit under the Uniform Guidance. In California, nonprofits with gross annual revenues of $2 million or more must have an independent financial audit. An audit can help strengthen donor confidence, improve financial management, and support the organization’s accountability and governance practices.