Starting a non-profit in Michigan can be daunting. It’s important to follow all the required steps to correctly form your entity and then obtain 501(c)(3) recognition from the Internal Revenue Service. This article will help guide you through the three major steps and provide advice on pitfalls to avoid along the way.
- Form your Michigan Non-Profit
The first step is to legally create your non-profit corporation in the State of Michigan. To do this, you will need to file Articles of Incorporation with the State of Michigan Department of Licensing and Regulatory Affairs (LARA). There are standard Articles of Incorporation available from the State of Michigan, but these alone will not be sufficient for your purposes if you intend to obtain 501(c)(3) tax exempt status from the IRS.
There are few critical sections in your Articles that you need to identify and develop. Most importantly, you are required to define the purposes of your organization that are exclusive for exempt purposes, such as charitable, religious, educational, and/or scientific purposes. Also, you will need to add required language stating that, in the event of the dissolution of the non-profit the remaining assets will be used for exempt purposes.
- File for 501(c)(3) Status with the IRS
Once your entity has been legally formed you need to seek tax-exempt status with the IRS. This is done by filing either a Form 1023 or the shorter Form 1023-EZ, both of which may be downloaded from the IRS website.
Form 1023 EZ is shorter form used where a non-profit does not anticipate having more than $50,000 in gross receipts in a given year or $250,000 in assets. The turnaround time for these forms is relatively quick and can be great cost saver for smaller organizations. However, there are drawbacks to using the EZ form. First, you do not technically receive a formal determination letter regarding your tax-exempt status like you would if you completed a normal Form 1023, which can be a drawback for donors, especially larger ones. Second, it’s not yet clear what the IRS wants an organization to do if it ever exceeds the gross receipt or assets thresholds noted above in the future.
The regular Form 1023 is lengthy and intensive. The form requires a great amount of attention, as it contains many technical questions. Two of the most important sections of the form are the narrative description of your activities located in Part IV and the required financial data in Part IX. The narrative section is crucial because it is your opportunity to explain your organization’s mission and programs in detail. Similarly, the financial section will identify to the IRS how your operations will be financed, which is important in determining whether you are eligible to be what is known as “publicly supported” charity or a “private foundation”, which has certain ramifications on how you run your non-profit. If you do not understand a question on the form, a good place to look is on the IRS Form 1023 instructions. However, for more complicated questions, you may need an attorney to help you.
- Register your organization with the Michigan Attorney General.
Charitable non-profits are required to register with the Michigan Attorney General Charitable Trust Section. This is an often-overlooked requirement that many organizations fail to meet. Any organization holding property for charitable purposes is required to register under the Supervision of Trustees for Charitable Purposes Act. Typically, an organization will register once they have obtained 501(c)(3) status. Also, those organizations that solicit or receive contributions in Michigan are required to register under the Solicitations Act, but certain exceptions apply. Many organizations fail to meet these requirements, and failure to register could lead to lead to fines and penalties. If you did not register, contact our office for help as we have assisted many clients who have found themselves in this situation.Setting up a non-profit in Michigan can be complicated, but the process is manageable if you follow these basic steps. For assistance with any non-profit issues that you may be having, please feel free to contact Nicholas S. Kovach at Shifman & Carlson.