Creating a Nonprofit in California: Attorney Insights

Nonprofits need a realistic business plan, reliable funding strategy, and strong leadership to remain viable and serve their communities. Before launching, organizers should assess operating costs, fundraising prospects, competing providers, and whether employees or volunteers can support the mission. A carefully selected board should share the organization’s charitable vision and understand its oversight duties.

“Where is the money going to come from, what’s the reasonable budget going to look like, how will the organization go about doing its business of doing good?” asks Cynthia R. Rowland, who practices nonprofit law at Farella Braun + Martel in San Francisco. “Think of it in terms of having a business plan.”

Nonprofits Need Reliable Funding Sources

Even nonprofits have to make ends meet, she points out, so it is essential to understand realistic sources of funds and to know the other providers offering similar services in your community.

“We see a lot of startups that are founded with absolutely golden impulses,” Rowland says, “without thinking through the really tough realities of fundraising, operating a business, operating with employees or volunteers, and that it just takes a lot of work and effort to make it viable for the long run.” 

Find the Right People To Serve on the Nonprofit’s Board of Directors

Another crucial step? Finding the right people for a board of directors.

“The chance of success can be really small without a strong initial board,” says Gene Takagi, who focuses on nonprofit law at NEO Law Group in San Francisco.

“Getting a group of like-valued people who share a common vision for what this organization might do is really important, and it ensures that the purpose of the organization is truly charitable.” 

Proper structuring can avoid headaches later. “To use a construction analogy,”  says Takagi, “it’s like building a really solid foundation that is compliant and that you can build upon, versus not being so sure about that foundation. And, as you put more and more programs and activities and employees on top of it, with a shaky foundation it could be like a house of cards and all collapse on you.”

The Role of California State Laws and the Attorney General’s Office in Your Nonprofit

When you start a nonprofit in California, keep a few things in mind — chief among them the role of the attorney general’s office. 

“The charities operating in California that have activities here, or are fundraising here, are accountable to the attorney general, who supervises the charity community through the Registry of Charitable Trusts,” Rowland explains. “So, in addition to the IRS tax-exempt status that’s a fundamental part of forming a nonprofit, organizations that are in California need to pay attention to the California state reporting requirements.” 

Another California-specific law, Takagi says, applies to the boards of nonprofit organizations: “A majority of your board members must not be compensated, or related to anyone compensated, by your organization.”

There’s also a dollar figure relevant to California nonprofits, he adds: “If you’ve had gross revenues of $2 million, you generally trigger the audit requirement under California law.”  

Alternatives to Founding a New Nonprofit Organization

Before starting a nonprofit, attorney Erik D. Dryburgh recommends exploring a few alternatives. A donor-advised fund, for example, lets you fund an existing charity and make grants to charitable causes by putting in your money and taking an immediate tax deduction, without having to launch your own organization. 

“If you want to create a private foundation, you should at least explore doing a donor-advised fund, because you’re not creating a whole brand-new entity,” Dryburgh says. “There are substantially fewer transaction costs, and it’s a much cheaper and easier, albeit somewhat more limited, alternative.” 

Partnering with an Existing Charity

If you’re interested in conducting charitable activities as opposed to grantmaking, you might want to consider whether there is an existing charity with whom you could partner or volunteer, Dryburgh suggests.

“I try to get people to realize that they are creating, essentially, a version of a business; it’s just philanthropic. There are transaction costs to set it up, and transaction costs every year. You’ve got to file tax returns with all these agencies and pay the CPA. You’ve got to be able and willing to maintain the business. It takes some care and feeding.”

In your nonprofit’s articles of incorporation, Takagi says, “Make sure that your purpose statement isn’t so narrowly construed that you evolve outside of that. If they have a very specific purpose statement, they might soon be operating outside of that statement, which is outside of their corporate authority. That can get organizations into trouble.”

Rowland says it’s important to take a step back. “The philanthropists I know who are most impactful think of it in an ecosystem relationship, and not just ecological but civic-minded: what it means to live in a community and treat each other well and make sure that we all have enough opportunity and reward for our hard work,” she says.

“It’s all a balancing act. Simply grantmaking and giving money away, that alone doesn’t solve problems, but big-picture-thinking goes a lot further.” 

For-Profit Corporations Creating Nonprofits

All three attorneys mentioned a trend in the California nonprofit sector in recent years: for-profit corporations creating nonprofit entities as part of their operations. 

“We’re seeing more of a blur between the nonprofit and for-profit sectors. For-profits are trying to become more socially minded. Part of that may be for marketing reasons, because the public is starting to put the power of the purse behind organizations that reflect more of their values than not, but also because some corporations feel that they want to be good corporate citizens,” Takagi says.

“It used to be, if you’re a big enough corporation, you can form a foundation, and that foundation can engage in grantmaking. I think for-profits now think, ‘Well, we actually want to do more than just give grants to other organizations; we actually want to do good things.’”

Find Legal Help

If you have questions about starting a nonprofit in California, consult with an experienced attorney in your area.