You’ve got an idea for making the world a better place, and you want to start a 501(c)(4) nonprofit social welfare organization as the means to do so. In contrast to a 501(c)(3) charitable organization, a 501(c)(4) organization may engage in unlimited lobbying in furtherance of its social welfare purpose and some political campaign intervention activities (e.g., endorsing political candidates) so long as it is not primarily engaged in such intervention. But, generally, a 501(c)(4) organization is not qualified to receive charitable contributions deductible to its donors.

It’s easy to start a nonprofit, but just because you can, doesn’t mean you should. Even the best intentions can lead to bad results when supported by a poor strategy. Before starting a nonprofit social welfare organization, founders should invest meaningful time and thought in determining whether they can actually create a sustainable nonprofit that will effectively and efficiently bring value to the public. This means founders should create a basic business plan that (1) describes the organization’s mission and its core activities, (2) identifies the resources required to carry out those activities, and (3) details reasonable strategies for acquiring those resources. It also requires founders to realistically assess whether they can recruit strong leaders and key supporters and undertake homework for becoming knowledgeable about the basic laws governing nonprofit and 501(c)(4) organizations, the duties and responsibilities of board members and officers, and the market in which they will operate and compete. The advice of experts can also be valuable in determining whether the plan is viable and what changes need to be made, if any.

Before you get started, you’ll also want to consider whether 501(c)(4) is the right type of exemption for your plan and whether you should (1) apply for IRS recognition of 501(c)(4) federal tax-exempt status using Form 1024-A (which we generally recommend) or (2) self-declare the organization’s 501(c)(4) status and ensure that the organization complies with all the associated requirements. [Form 1024-A replaced Form 1024 as the application for recognition of exemption under Section 501(c)(4) in January 2018 – See New Form 1024-A for 501(c)(4) Organizations.]      

11 steps for starting a California nonprofit public benefit corporation exempt under 501(c)(4):

1. Determine the name of the corporation.  A nonprofit is typically formed as a corporation and its name can be a valuable asset. In California, a corporation name may be adopted if the name is not the same as or too similar to an existing name in the records of the California Secretary of State, or if the name is not misleading to the public. You can check the current database of existing names on the business search page of the Secretary of State website. You can also reserve a name for 60 days by mailing in a Name Reservation Request. You must also make sure the name does not infringe on another person’s trademark rights. This is not always easy to determine, but a good start includes running a trademark search on the U.S. Patent and Trademark Office database and a simple Google search. For some founders, it may also be important to confer with intellectual property counsel to help ensure they are not infringing on another’s rights and to protect their name from being used by other parties.

2. Draft and file the articles of incorporation.  A corporation is legally created with the filing of the articles of incorporation. Articles of incorporation typically identify:
   • The organization’s name;
   • Purpose or purposes of the nonprofit;
   • Agent for service of process — that is, a person whose name and address are identified and who can receive lawsuits and other official correspondence; and
   • Any limitations on corporate powers.

The articles of incorporation are typically signed by an “incorporator,” which can be just one person but may also be signed by the initial board of directors if they are named in the articles.

The sample articles for California nonprofit public benefit corporations found on the Secretary of State’s website are specific to those seeking exemption under 501(c)(3) and not 501(c)(4). In our opinion, form documents from governmental agencies generally meet minimal requirements but do not provide guidance on several important considerations. For example, sample articles may provides little guidance on specific purpose statements.

A word on specific purpose statements: A broad specific purpose statement provides room for the organization’s mission to evolve without requiring an amendment to the articles of incorporation. It may also make it easier to comply with charitable trust laws that require charitable funds be used consistent with the specific purpose of the organization at the time such funds were originally acquired. If, instead, you adopt a narrow purpose statement such as “to advocate for legislation and regulations to improve the environment in San Francisco County,” you can’t use funds to advocate for environmental improvements in other counties, but the statement would provide a stronger mission anchor to help ensure that your organization stays on a specific course after the founders have left.

For additional information on this issue, read Starting a Nonprofit: Articles of Incorporation and Specific Purpose Statements.

More about the agent for service of process: It is also important to understand that the agent is responsible for receiving lawsuits and possibly other important legal documents on behalf of the organization and making sure those documents reach the President or other authorized officer in a timely manner. If the agent fails to do so (e.g., fails to have his or her mail checked regularly while away for an extended period) the organization could face negative consequences such as losing a default judgment for not showing up to defend a lawsuit. An organization can identify an individual as agent or may elect to pay for a corporate agent, which may be preferred if there is no person willing to accept this responsibility or if privacy concerns are an issue (the agent’s street address will be a matter of public record).

3. Appoint the board of directors.  If the initial directors are not named in the articles of incorporation, the incorporator can and should appoint the board through a written action. Recruiting and appointing the initial board of directors may well be the founders’ most important startup task. A new nonprofit has a significantly better chance at long-term viability and impact when the right people are at the wheel. These individuals should share your organizational vision and core values but should also bring other skills, perspectives, and networks to the table.

Under California law, a nonprofit board may be composed of as few as one director, but it is generally recommended to have at least 3. California law also requires that not more than 49% of the current directors be “interested persons” as defined in Corporations Code section 5227, which includes any person receiving compensation from the nonprofit for services rendered within in the past 12 months and anyone related to the compensated person.

These directors should understand their duties and responsibilities to act with reasonable care and in the best interests of the organization while providing direction and oversight over the organization’s activities, finances, officers, and legal compliance. BoardSource offers valuable resources on nonprofit corporate governance, including these Ten Basic Responsibilities of Nonprofit Boards.

4. Draft the bylaws and conflict of interest policy.  A corporation’s bylaws typically address, at a minimum, fundamental provisions related to the management of the activities and affairs of the corporation. Bylaws should provide guidance to the board and reassurance of sound governance practices to government authorities, funders, and other interested stakeholders.

Bylaws typically contain specific provisions detailing:

4. • The purpose or mission of the nonprofit;
   • How directors are elected or otherwise selected (e.g., by majority vote of directors at the annual board meeting);
   • How the board may take an action (e.g., by majority vote of directors);
   • How board meetings are called and noticed (e.g., six times per year with 14 days advance notice by email);
   • How board meetings are conducted (e.g., the chair of the board presides);
   • The officers of the corporation (a president or chair of the board, secretary, and treasurer or chief financial officer are required by California law);
   • The duties and responsibilities of each officer;
   • The authorization of board and non-board committees (e.g., committees tasked to act with the authority of the board versus committees that can only make recommendations);
   • The level of indemnification provided by the corporation to protect its directors, officers and other agents; and
   • The reports due to directors (e.g., financial reports).

If the nonprofit has voting members, the bylaws will also need to contain additional provisions regarding member rights and processes. Nonprofits considering a voting membership structure may want to first discuss such structure with a lawyer, particularly if they do not expect their members to actively participate in meetings and regularly exercise their voting rights. Public Counsel provides an Annotated Form of Bylaws for a California Nonprofit Public Benefit Corporation on its website.

5. Take the initial board actions at a board meeting or by unanimous written consent of the directors.  The board should take the following actions:
   • Adopt the bylaws and conflict of interest policy;
   • Elect officers;
   • Adopt a fiscal year (such as a year ending December 31 or June 30);
   • Approve establishing a bank account;
   • Approve applying for federal and state tax-exempt status;
   • Approve reimbursement of startup expenses (if applicable); and
   • Approve the compensation of the executive director (CEO) or the treasurer (CFO) (if applicable).

6. Obtain an employer identification number (EIN).  An officer or authorized third party designee may apply for and obtain an EIN online.

7. Notify the Internal Revenue Service (IRS) of intent to operate as a social welfare organization.  Social welfare organizations will soon be required to notify the IRS within 60 days after the organization is established of its intent operate, as established by section 405 of the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). The IRS issued Notice 2016-09 on January 19, 2016 stating that he Treasury Department and the IRS intend to issue temporary regulations prescribing the manner in which social welfare organization will provide the notification (which the IRS hopes but has not promised will be electronic). Even organizations that seek IRS recognition of tax-exempt status using Form 1024-A will need to provide this new notification. [UPDATE: IRS Form 8976 is the electronic form used to provide such notification.]

8. File the initial registration form (Form CT-1) with the California Attorney General’s Registry of Charitable Trusts.  This annual registration is required for the majority of nonprofit public benefit corporations and must be filed within 30 days after receipt of assets. The Form and Instructions are available online. The corporation’s articles of incorporation and bylaws should be included in the initial filing. The Form 1024-A application and federal determination letter (Step 9) should be submitted upon receipt of the determination letter to complete the filing.

9. File the Statement of Information (Form SI-100) with the Secretary of State.
   The Statement must initially be filed within 90 days of the date of incorporation. This biennial filing requirement, which identifies the organization’s address, principal officers, and agent for service of process, can be filed online or by mail.

10. Make the decision whether to apply for federal tax exemption with the IRS and receive a determination letter from the IRS.  Organizations that believe they are properly classified as a 501(c)(4) organization may self-declare their tax exempt status and begin filing Form 990s, without submitting a Form 1024-A to the IRS. However, it is generally recommended to complete the Form 1024-A application for exempt status under Internal Revenue Code (IRC) Section 501(c)(4), in order to have some assurance that your plan is consistent with the requirements of 501(c)(4). Form 1024-A requires a comprehensive reporting of all activities carried on by the organization.

Form 8718, User Fee for Exempt Organization Determination Letter Request, must be attached to Form 1024-A for filing. Currently, the user fee is $600. [Updated August 2018]

The IRS may typically take 4-6 months to process a Form 1024-A application for exempt status. However, the waiting period may be much longer if the application contains errors, omissions, or other information that require additional development by a special IRS department. The IRS application process is further explained on the IRS’s Where Is My Exemption Application webpage.

11. Apply for California tax exemption with the California Franchise Tax Board (FTB) and receive an affirmation of exemption letter from the FTB.  Organizations with a 501(c)(4) federal determination letter can request California affirmation of tax exemption under California Revenue & Taxation Code section 23701f from the FTB by filing Form 3500A along with a copy of the IRS determination letter. The FTB will recognize the organization’s exemption from state income taxes as of the federal effective date. You can find a downloadable form here.

If the organization chose to self-declare its federal tax exempt status, it will need to file the long Form 3500 to apply for state income tax exemption in California.

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Should You Start a Nonprofit?

Now that you know how to start a California nonprofit, you should thoughtfully consider whether this is the right choice for your ideas and for the public benefit. There may be other ways to carry out your dreams, including working within or supporting an existing nonprofit. See Alternatives to Forming a Nonprofit – ABA Bus Law Today Jul-Aug 2009 published by the American Bar Association. One often overlooked alternative is fiscal sponsorship, a relationship that may allow a group to house a charitable project within an existing nonprofit with the ability to spin it off at a later date. Note, however, that finding a 501(c)(4) fiscal sponsor may be much more difficult than finding a 501(c)(3) fiscal sponsor. For more information on fiscal sponsorship, see Fiscal Sponsorship: A Balanced Overview published by The Nonprofit Quarterly.

Additional Resources from Alliance for Justice, Bolder Advocacy (Updated April 2017)

Primer on Social Welfare Organizations

Considering Starting a 501(c)(4)? Case Studies

Now Is the Time for Donors to Support Maximum Advocacy – Here’s How

501(c)(4) Strategy and Discussion Guide