How to Become a Michigan 501(c)(3) non-profit organization Lois Elizabeth Bingham November 17, 2012 This presentation is for informational purposes only and does not constitute the rendering of legal advice. No attorney-client relationship is created as a result of any information offered during the presentation. What does it take? • Need a Cause that benefits the public • Form a group of people interested in the Cause • Decide how to organize the group, and organize it. • Develop plan to provide services. • Seek tax exempt status. • Execute the plan. Non-Profit vs. Tax-Exempt • A non-profit organization is a business that is organized with the intent not to earn monetary profit or gain for its directors, officers, shareholders, or members. • A tax-exempt organization is a business that does not have to pay federal income tax, state income tax, and possibly state sales or use tax. • All non-profits are not tax-exempt organizations but all tax-exempt orgs are non-profit organizations. • Not required to be a corporation to be tax-exempt. 3 Michigan Non-Profit Corporations Non-profit organizations generally incorporate to avoid personal liability of founders, board, officers, or volunteers for the acts of the group. WHAT IS REQUIRED? 1. File Articles of Incorporation with State of Michigan – – – – – – – Pick a Name (Check www.michigan.gov/lara for name availability and forms) Set forth specific purpose(s) for existence. Add language required by IRS to obtain tax exemption: no political activity; no private inurement; address distribution of assets on dissolution. Decide if organized on a stock or non-stock basis. • If non-stock, then option to elect organization by Members or Directors. Select registered office address and resident agent Add language to provide liability protection to volunteer directors Pay $20 to State of Michigan 4 Differences Between Director and Membership Non-Profits Directors 1. 2. 3. Ability to set policy and direction reserved to Directors. Directors elect new Directors Directors can choose to have “members” who may have certain benefits but no voting rights. Members 1. 2. 3. Ability to set policy and direction reserved to Directors. Members elect new Directors. Members have voting rights on issues set forth in Bylaws including election of Directors. 5 What is required? (cont’d) 2. Draft Bylaws 3. Adopt Initial Corporate Resolutions – – – – Incorporator’s Consent: adopt bylaws; appoint Directors 1st Board Meeting: elect officers, authorize officers to take initial corporate action Law requires a Board of Directors and Officers (elected or appointed by Board) Board and Officers governed by Law, Articles and Bylaws, and not Roberts Rules. 4. Complete Business Formalities – – – – Tax ID number Open Bank Account Employees? Unemployment, workers compensation, social security taxes, etc. Soliciting Funds from public? May need Solicitation License (see Michigan Charitable Trust Registration at www.michigan.gov/ag). What is a 501(c)(3)? • A specific type of tax exempt organization. • Permissible Activities – Entities organized and operated exclusively for religious, charitable, scientific, literary or educational purposes, testing for public safety, prevention of cruelty to children or animals, promotion of amateur sports competition – Specific purpose(s) is recommended • Prohibited Activities – Lobbying or Political Activity – Organization cannot be used for personal benefit of members or Board – At dissolution, assets must be distributed to another 501(c)(3) 7 Benefits of Status • Donors can claim charitable deduction on donations • Corporations and Foundations often require status as condition of grants, donations, or sponsorship • No sales tax on purchases • No income tax on net profit of organization (but tax required on income from unrelated business income) • Local gov’t may grant property tax waiver WHY? Federal Government rewards organizations for undertaking tasks for public benefit which government might otherwise have to undertake. 8 Differences between other tax-exempt orgs • Other tax-exempt organizations: – fraternal orgs (501c7) – trade associations (i.e. chamber of commerce) (501c6) – neighborhood associations (501c4) – teacher’s union (501c5) • Donations are not tax deductible for donors • Can engage in lobbying/political activity 9 How to become a 501(C)(3) • Must be a corporation, LLC, trust, or association. • Churches are automatically considered 501 (c)(3) orgs. • Public charities with annual gross receipts less than $5,000 are considered 501(c)(3). • All others MUST Complete IRS Form 1023 (the non-profit business plan) – Describe why your services are needed? – What is the vision? – Detail “past, present, and planned” activities • Describe WHO, WHAT, WHEN, WHY AND HOW • Attach newsletters, articles, brochures, pictures, etc. – Describe proposed fund-raising methods – Budget (current plus forecast for 2-3 add’l years – “reasonable and good faith estimate”). – List Directors/Officers with compensation – Detail all financial arrangement with directors, officers, employees/contractors making $50k+ How to become a 501(C)(3), cont’d • 2 types of 501(c)(3) exempt organizations: "Private Foundation" and "Public Charity". – Public Charity: Preferred status; subject to fewer IRS restrictions. Show broad public support from a variety of sources: program income, donations from public, corporations, other charities or foundations. – Private Foundations are subject to additional regulations on operations, grants, and investments. Usually single source of funding – corporation or family money • Copy of AOI, Bylaws, Tax ID # required – Conflict of Interest Policy (recommended) • File Form 1023 with the IRS within 27 months of formation. • Filing Fee: $450-$800 • Approved application is a public record, must provide copies and 3 years of annual IRS information return (IRS Form 990) if requested by public. 11 For more information . . . • Go to www.michigan.gov/lara • Go to www.michigan.gov/ag • Go to www.irs.gov/charities 12