Starting a nonprofit organization can be a daunting prospect. You see a need in your community and want to do what you can to help. You know it’s possible to start a nonprofit, but the unfamiliar territory may hold you back. Let’s take a closer look at the steps that will allow you to get on your way to fulfilling your mission.
Choose your name
The first step in starting an organization is choosing your entity name. In Michigan, you can search for a business entity by name to see if your desired name is available.
Once you have chosen an available name, you’re ready to file Form SS-4, Application for Employer Identification Number with the IRS. You may or may not have employees, but this is the number that the IRS will use to identify you going forward. It is possible to file the SS-4 online and get your EIN in a matter of minutes. Find out more here.
When filing the SS-4, it is important to choose Corporation, Church or church-controlled organization, or Other nonprofit organization (and specify trust or association) as the type of entity because the IRS requires that an organization be one of these types to qualify for exempt status.
Articles of Incorporation
At this point, you’re ready to file your Articles of Incorporation with the State of Michigan Department of Licensing and Regulatory Affairs. This is a critical step in the process of becoming a nonprofit. It’s imperative that you include the proper wording required by the IRS:
- The articles must limit your organization’s purposes to those described in IRS Section 501(c)(3).
- Charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children and animals.
- The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.
- Example: High School Scholarship Endowment is a nonprofit corporation and shall be operated exclusively for educational and charitable purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code or the corresponding section of any future federal tax code. Specifically, the purpose of the organization is to assist the school district for outstanding graduates to offset costs of higher education.
- The articles must not specifically authorize activities that do not further your exempt purpose. In other words, the articles prohibit the organization from engaging in unrelated activities. In the following example, we have taken that a step further by prohibiting the earnings of the corporation from being used to benefit the individuals, restricting the organization from engaging in political campaign activities, and restricting the undertakings to those that further the exempt purpose.
- Example: Notwithstanding any other provision of these Articles, no director, officer, employee, member, or representative of this corporation shall take any action or carry on any activity by or on behalf of the corporation not permitted to be taken or carried on by an organization exempt under Section 501(c)(3) of the Internal Revenue Code as it now exists or may be amended, or by any organization contributions to which are deductible under Section 170(c)(2) of such Code and Regulations as it now exists or may be amended. No part of the net earnings of the corporation shall inure to the benefit or be distributable to any director, officer, member, or other private person, except that the corporation shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the purposes set forth in these Articles of Incorporation. No substantial part of the activities of the corporation shall be the carrying on of propaganda, or otherwise attempting to influence legislation, and the corporation shall not participate in, or intervene in (including the publishing or distribution of statements) any political campaign on behalf of or in opposition to any candidate for public office.
- Finally, the articles must permanently dedicate organization assets to the exempt purpose.
- Example: Upon termination or dissolution of the corporation, any assets lawfully available for distribution shall be distributed for one or more qualifying exempt purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or shall be distributed to the federal government, or to state or local government, for a public purpose.
Board, Bylaws, and Conflict of Interest
After filing the articles of incorporation with the State of Michigan, your next step is to choose a board of directors who then adopt bylaws and a conflict of interest policy. While the IRS does not require that your organization have bylaws and a conflict of interest policy, adopting them is a best practice. If you have them, you’ll be required to attach them to Form 1023 when you file it. If you don’t have them, you’ll have to explain how your officers, directors, or trustees are selected and how you will manage conflicts of interest. Form 1023 provides an example of a conflict of interest policy that can be your starting point. We recommend consulting an attorney to assist you in preparing your bylaws.
Apply for exemption
Now it is time to prepare and file your application with the IRS to obtain tax-exempt status. You may qualify to file 1023-EZ, which will save you time and money in the application process. To find out if you’re eligible, read the instructions and answer the questions in the Eligibility Worksheet found at the end of the instructions https://www.irs.gov/pub/irs-pdf/i1023ez.pdf. If you’re able to file the 1023-EZ, you’ll have to register at https://www.pay.gov/ to file and pay online.
To prepare the full Form 1023, we recommend using the interactive version of the form. Throughout the form are helpful hints and links to more resources. Also, when you answer a question that requires more narrative, it automatically adds space on an additional page to type the answer. Be sure to include all required additional documentation and answer all applicable questions. We suggest you consult a professional at this point to review your prepared Form 1023 and answer any further questions you have. Be sure to include the user fee with your application. Once the Form 1023, supporting documentation, and user fee are postmarked, you can start operating as if your application is already approved. Donations made to you during this time will be tax deductible as long as your application is approved. If it’s not approved, then they won’t be. If your year end occurs during this time, you are required to file a Form 990 series return or file for an extension, by the due date.
There are certain organizations that are not required to file Form 1023. Contributions to the following organizations are tax deductible. Although these organizations don’t have to apply for exemption, they may choose to. If they do, they are required to file annual information returns, as discussed later.
- Churches, including synagogues, temples and mosques
- Integrated auxiliaries of churches and conventions or associations of churches
- Any organization that has annual gross receipts that are normally not more than $5,000
Although nonprofit organizations are exempt from income tax on activities related to their exempt purpose, they may still be liable for sales tax. We suggest you consult a professional to help determine the requirements for your organization’s specific activities. In general, nonprofit organizations are exempt from paying sales tax on their purchases, or collecting sales tax on the sale of goods, if the purchase of tangible personal property is used or consumed primarily in carrying out their exempt purpose. They are not exempt if it is unrelated. One important aspect here is regarding fundraising. Fundraising is not a charitable activity, even though the organization uses the income generated to accomplish their exempt purpose. Because fundraising is not a charitable activity, transactions that would normally be taxable for sales tax are still taxable. So, a gala fundraising event will still have to pay sales tax to the facility where it’s held. If the organization conducts a silent or live auction at the gala, they are required to collect and remit sales tax on the tangible personal property sold.
Another consideration regarding sales tax: The State of Michigan has a special rule for 501(c)(3), 501(c)(4), schools, churches, hospitals, parent cooperative preschools, and nonprofit organizations with an exemption ruling letter. Sales made at retail that are less than $5,000 collectively for the calendar year can be exempt. Note that it is not an exemption on the first $5,000 of sales, it is an exemption if your total sales are less than $5,000. However, you are required to remit all sales tax collected. So, for example, your organization sells t-shirts and you charge $10 for the t-shirt, plus tax, so the customer pays you $10.60. Regardless of whether your total sales are less than $5,000, you are required to remit the $0.60 to the state because you collected it. If, instead, you charge $10 for the t-shirt and the customer pays you only $10, and your total sales for the year are less than $5,000, then you do not have to pay any sales tax. If you charge the $10 and get paid the $10 and your sales do end up being more than $5,000, you will have to back into how much sales tax was included in the $10 and pay it to the state.
Nonprofit organizations must register for Michigan Taxes before selling tangible personal property, regardless of whether or not an exemption will apply. Register online at https://www.michigan.gov/uia/. You can also register for Michigan Treasury Online, which will allow you to file and pay the required monthly, quarterly, and annual sales, use and withholding tax forms: https://mto.treasury.michigan.gov/.
License to solicit
Michigan law requires organizations to register with the Department of Attorney General if they solicit and receive charitable contributions in Michigan. To register, an Initial Solicitation Form, with attachments, must be filed. There is no fee to register. For faster processing, the Charitable Trust Section accepts registrations by email or e-filing. Your license expires seven months after the end of your fiscal year, and the Renewal Solicitation Form is due 30 days before that expiration. So if you are a calendar year end, that means that your renewal is due July 1, and your previous license expires July 31.
The financial information included in your form will also determine if you are required to have audited or reviewed financial statements. If contributions, plus net fundraising and gaming activity, less governmental grants, is between $275,000 and $525,000, then reviewed financial statements are required. If over $525,000, then audited financial statements are required.
To maintain their exempt status, organizations must stay current on filing a 990-Series return annually. If gross receipts are normally $50,000 or less, the organization is eligible to file Form 990-N e-Postcard. This filing requires only a few pieces of information. If gross receipts are less than $200,000 and total assets are less than $500,000, an organization would be eligible to file Form 990-EZ. Gross receipts or assets equal to or above those thresholds must file Form 990. Returns are due on the 15th day of the 5th month following the end of your fiscal year. This means May 15 for calendar year filers and November 15 for June fiscal year filers. Organizations that choose to file an annual information return above what they’re required to file, must file a complete return; they cannot fill it out partially.
Though it may seem daunting at first, the steps provided here will help you start your nonprofit organization. They will also ensure that your nonprofit starts out in conformity with the rules that are most important for compliance with federal and Michigan authorities.