Nonprofit organizations or NPOs are business entities that provide a way for people to work together for the common good. They are organized with serving purposes in mind and not generating profits. Therefore, nonprofits always aim to serve an unfulfilled need in the community.
Some of the benefits of nonprofit organizations include:
- Employee commitment
- Intrinsic rewards
- Protection from personal liability
Nonprofit organizations usually take between 3 to 6 months to be formed, which is until your determination letter is received. Help the process along by completing the required forms correctly and timeously, as this will also avoid delays in getting started.
1. Select a name for your organization
The name you choose for the Michigan nonprofit must comply with Michigan naming requirements and should also be easily searched by potential donors and members.
Some of the Michigan naming guidelines include not choosing any words that suggest a purpose other than what would be permitted by the nonprofit’s Articles of Incorporation.
Also, ensure that the organization’s name is easily searchable and that the name is available in the state of Michigan.
2. Nominate a Michigan registered agent
A resident agent in Michigan is also known as a Michigan registered agent. These individuals are required by law for every nonprofit organization in the state of Michigan.
These are designated officials tasked with receiving paperwork from the state and service of process the organization or business entity may be served in a lawsuit.
Anyone may be nominated as a registered agent in Michigan as long as they meet the following requirements:
- Physically located in Michigan: The registered agent must be a Michigan resident at least 18 years old.
- Have a Michigan street address: The registered agent must be available at the Michigan address and the address listed cannot be a P.O. box address.
- Maintain availability during business hours: The registered agent must make themself available during normal business hours to accept service of process and all other official documentation from the state.
3. Recruit your board members
The board of directors is a support system for the nonprofit. Michigan’s board of directors’ roles include structural guidance, financial management, hiring of executive directors, and more.
The board is not actively involved in the day-to-day running of the organization; however, it has an active role in maintaining the overall well-being of the nonprofit organization.
In the state of Michigan, the board of directors must:
- Be made up of a minimum of three board members (unrelated to each other)
- Elect a president, secretary, and treasurer
In addition to the roles we mentioned above, the Michigan board of directors also have legal responsibilities, which include:
- Duty of obedience: It is the responsibility of the Michigan board of directors to ensure that the organization adheres to regulations and applicable laws in the state.
- Duty of loyalty: The Michigan board of directors must always act in the best interest of the nonprofit organization and not make decisions to further their personal agenda.
- Duty of care: The Michigan board of directors must ensure that the nonprofit’s funds are used appropriately and to benefit the purpose of the organization.
4. Consent to bylaws and conflict of interest policy
Michigan nonprofits are required to have two documents to be eligible to apply for 501(3)(c) status. The documents required are:
- Bylaws: The bylaws are the rules used by the members and directors to oversee the nonprofit.
- A Conflict of Interest Policy: This is a collection of rules put in place to ensure that all decisions made benefit the nonprofit’s purpose and not the organizational members’ personal agenda.
Nonprofits in Michigan are not required by state law to file bylaws with the Secretary of State.
However, every nonprofit organization in Michigan must keep a copy of the corporation’s bylaws at the principal place of business.
5. Select a Michigan nonprofit startup corporation structure
- Charitable organizations – 501(3)(c): Charitable organizations are also referred to as true nonprofits and seek to attain IRS tax exemption status. These are the most popular types of organizations, with approximately 1.5 million registered charitable nonprofits in the United States.
- Private charitable foundations: These foundations are privately owned nonprofits and are established to assist global concerns such as medical research, education, environmental issues, and more. Additionally, private charitable foundations have a single wealthy benefactor in most cases and grant money to smaller nonprofits.
- Social advocacy groups – 501(c)(4): These groups have a primary focus on influencing and promoting political or social change. Like other types of nonprofits, they also further a specific cause through fundraising and education.
- Social welfare organizations – 501(c)(4): Social welfare organizations and true nonprofits operate in much the same way.
However, while social organizations are allowed to participate feebly in lobbying efforts to help repeal or pass legislation, the rules are much stricter for true nonprofits.
So while they can participate and promote legislation to gain support, only 10% of their total operating budget may be allocated on petitioning. The consequences of not adhering to the rules could mean that the nonprofit status is revoked.
6. Prepare and file nonprofit Articles of Incorporation
The nonprofit Articles of Incorporation marks the formation of the Michigan nonprofit. It documents where and when the organization was created and contains pertinent information to verify the nonprofit’s existence.
Additionally, when vetting the 501(c)(3) tax exemption application, the Internal Revenue Service will keep an eye out for a few introductory provisions. So you must meet both the state of Michigan’s requirements as well as the IRS requirements to avoid delays or the application being declined.
The Articles of Incorporation must be filed with the Michigan Department of Licensing and Regulatory Affairs – corporations division. Here’s what the Articles on Incorporation must include explicitly:
Your nonprofit must be limited to one or more of the following categories:
- Testing for public safety
- Preventing cruelty to children or animals
Here, you’ll need to state the purpose of the organizations’ assets and the consequences of dissolved assets
- Type of structure of the nonprofit
- Registered agent’s name and street address
- The number of directors on the board
To file the Articles of Incorporation in Michigan, you need Form CSCL/CD-502. You may file the Articles of Incorporation with the Michigan Secretary of State online or in-person at 2501 Woodlake Circle, Okemos, MI.
7. File an initial report
The requirements for filing an initial report for a nonprofit vary from state to state; however, an initial report is not required in Michigan.
8. Secure an EIN (Employer Identification Number)
The EIN is an employee identification number, also referred to as a federal tax identification number. The EIN is used to identify a nonprofit and is compulsory in the state of Michigan. Think of it as your nonprofit’s social security number.
It is important to note that the online form must be completed in a single session, and you won’t be able to return to it later or save the document.
9. Apply for federal tax exemption
To qualify for federal tax-exempt status from the IRS, Form 1023 must be completed and filed with the Internal Revenue Service. Form 1023 is the Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. It requires information regarding your organization’s history, structure, finances, operations, governance policies, activities, and more.
Small nonprofits in Michigan are legible to file Form 1023-EZ, which is a Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code. It’s a short form that can be found online.
Here are the prerequisites for federal tax exemption eligibility:
- The nomination of 3 directors, unrelated to each other
- Adopt bylaws and conflict of interest policy
- File Articles of Incorporation
- Have an EIN
Further information on completing and submitting the forms may be found on the IRS website. As mentioned earlier, the ETA on getting your determination letter is anywhere between three and six months.
However, the benefits of gaining federal tax exemption are as follows:
- Tax-exempt nonprofits in Michigan may qualify for discounted postage rates and other non-profit-mailing privileges
- Organizations with tax-exempt status will allow you to give tax deductions to donors whenever they donate money toward the cause
- Tax-exempt nonprofits in Michigan are also legible for federal, state, and local grants. That said, most people who donate to nonprofits will only do so if the nonprofit is registered as a 501(c)(3) entity and has the certificate to prove it.
- Tax-exempt nonprofits in Michigan may also receive discounted and even free announcements and press releases from media outlets.
10. Apply for Michigan state tax exemption
Once nonprofits in Michigan have received their federal tax exemption, they are automatically exempt from Michigan state income tax.
Additionally, federal tax-exempt nonprofits in Michigan are also automatically exempt from Michigan sales and use tax. Refer to the Michigan Department of Treasury for more information on state tax exemptions for nonprofits.
The exemption can be claimed with each seller or vendor by submitting a completed certificate of exemption or Form 3372 along with a copy of the IRS 501(c)(3) determination letter.
11. Other applicable permits and licenses
In order to legally operate your Michigan nonprofit, you need to attain all applicable licenses and permits to adhere to Michigan state law.
However, the requirements for permits and licenses on federal, state, and local levels may be extensive, and you should use the permit and license lookup tool for your locality and type of Michigan nonprofit corporation.
Additional state registration and reporting requirements
Michigan nonprofits who plan on conducting raffles, bingo, and other charitable games must obtain a license as per the Michigan Charitable Gaming Law. For qualification requirements, head over to the Michigan Lottery Charitable Gaming website.
Additionally, you may need to obtain a charitable solicitation license from the Michigan Attorney General. The process to obtain this license is to first complete the Initial Charitable Solicitation Questionnaire and then send it to the Michigan Charitable Trust Division. Supporting documents that should go along with the questionnaire include your bylaws, articles of incorporation, and the nonprofit determination letter.
If it turns out that the license is, in fact, required, as per the Attorney General’s Office, you can file an Application for License to Solicite Donations. If the Michigan nonprofit raises more than $8000 per year and pays other parties for fundraising services, then the license is required.
12. Submit an annual report
All nonprofits that are formed in the state must file an annual report with the Michigan Secretary of State every two years after the date of formation.
An important note is that if the nonprofit does not submit the annual report or pay the relevant fee within the two-year period or by the due date of the report, then the nonprofit automatically dissolves by operation of law.
- Anyone with authority may file
- You may file in person or online
- Filing online is the quickest way as it will appear on the website within the hour
- Original signatures are not required
Costs of starting a new nonprofit in Michigan
- Articles of Incorporation filing fee: $20 + optional $50-1,000 expedite service
- Recognition for exemption of 501(c)(3): $275 or $600 IRS fee
After you’ve started your nonprofit, there are a few necessary steps that you should take to keep your organization running smoothly. Let’s take a closer look at them below:
Open a business bank account
- Maintain accounting and tax filing
- Ensure that your personal assets are kept separate from your nonprofits’ assets
To open a bank account, you will need to provide:
- Your EIN
- A copy of your articles of incorporation
- A copy of your organization’s bylaws.
Hire a business accountant
- Simplify payroll and bookkeeping
- Prevent your nonprofit from avoiding penalties and tax errors
- Manage your nonprofit’s funding
- Focus on growing your nonprofit
- Manage risks
You may opt for General liability, Personal liability, or Worker’s compensation insurance.
Build a website
As we mentioned earlier, you may want to create a website for your organization to legitimize your business or give it more credibility. A dedicated website is also one of the best ways to share your nonprofit’s vision, mission, and story with supporters. Consequently, it’s also a great way to announce upcoming events and goals.
Sign legal documents
One aspect that tends to get overlooked is signing legal documents in your personal capacity instead of as an authorized representative of your nonprofit.
If you’ve appointed yourself as a registered agent of the nonprofit, then the following tips will help avoid personal liability:
- State the registered name of your nonprofit
- Use your name and signature
- State your position/role in the organization as its authorized representative
When signing legal documents on behalf of the nonprofit, it is important that you do so in your capacity as the registered agent, as opposed to your capacity as an individual.
Example: Instead of signing your name only, state the name of the nonprofit corporation and then your name and position within the organization before signing.
The founders of nonprofit organizations are not allowed to make a profit, nor are they allowed to benefit from the net earnings of the nonprofit corporation. However, they can pay themselves a fair salary for their work within the organization.
501(c)(3) nonprofit corporations are for charitable, religious, educational, and scientific purposes. Additionally, all donations made to 501(c)(3) nonprofits are tax-deductible. 501(c)(4) are for social welfare groups and non-tax-deductible donations.
An LLC or Limited Liability Company may exist as a nonprofit, provided all members of the LLC are exempt organizations, or in other words, owned by the single tax-exempt organization. There are a few requirements that must also be met as per the IRS mandate.
Nonprofit organizations exist to fulfill an unmet need in the community and improve people’s quality of life at a global, national, state, local, and community level. They all have in common that they are not dedicated to private or financial gain back solely to the advancement of public interest.
Starting a nonprofit formation is not a quick process, but it is worth it. You’ll need to start by identifying a need in the community, and once that’s done, you should go about the steps mentioned in our article. Ensure that you have your paperwork in order, as this will speed up the process.