To figure out how to start a nonprofit in Michigan you need to know both the federal and state procedures. Securing federal and state tax-exempt status for a nonprofit can be a complicated and time-consuming matter. For this reason, it is advisable to consult with an attorney and an accountant with expertise in nonprofits.
Before beginning the filing process, you should:
- Read the Internal Revenue Service (IRS) publication, Tax-Exempt Status for Your Organization (Pub. 557).
- Read Michigan Nonprofit Corporation Filing Information (BCS/CD-269).
- Determine the name your organization will use, and assure it is available and doesn't infringe on any trademark.
- Develop a clear purpose for your organization that meets the requirements for a nonprofit.
- Create Michigan nonprofit corporation bylaws that will support your tax-exempt status.
- Select your board of directors; the Michigan Nonprofit Corporation Act requires a nonprofit corporation to have at least three directors.
Types of Nonprofit Organizations
In most cases, the use of the term "nonprofit" refers to a nonprofit corporation. There are other organizational structures that may be used; however, a nonprofit corporation usually offers the most advantages, and will be the primary focus here.
The two main considerations in determining the structure of a nonprofit are limiting liability for the organizers and avoiding taxes. A nonprofit in Michigan may be organized in one of the following manners:
Unincorporated nonprofit association. This is the nonprofit version of a general partnership. While it may qualify to avoid taxation, it does not protect the organizers from personal liability. Michigan statutes do not have provisions for the creation of unincorporated associations, but both Michigan statutes and case law recognize their existence.
Nonprofit corporation. This structure provides both limited liability for organizers and the greatest likelihood of obtaining both state and federal tax exemptions. You may reserve the name of your corporation for six months by filing an Application for Reservation of Name (Form CSCL/CD-540) with the Corporations, Securities & Commercial Licensing Bureau.
Nonprofit LLC. The Michigan Limited Liability Company Act has a specific provision for what is called a low-profit LLC for charitable or educational purposes. While a low-profit LLC provides the organizers with limited liability, it poses significant problems in obtaining a federal tax exemption. The position of the IRS is that an LLC may only be granted tax-exempt status if all of the members of the LLC are exempt organizations.
Obtain a Federal Employer Identification Number
Regardless of whether your nonprofit will have employees, you will need to obtain an employer identification number, which is also referred to as an EIN or a tax identification number. This is done by filing an Application for Employer Identification Number (Form SS-4) with the IRS. This may be done online, by fax, or by mail.
Filing Articles of Incorporation
You will need to file Articles of Incorporation (Form CSCL/CD-502) with the Corporations, Securities & Commercial Licensing Bureau, a division of the Michigan Department of Licensing and Regulatory Affairs.
Federal Tax-Exempt Status for Nonprofits
Avoiding federal taxes requires applying to the IRS for an exemption under Section 501(c) of the Internal Revenue Code. This is done by filing an Application for Recognition of Exemption (Form 1023) with the IRS, and paying a $600 "user fee." It can take several months for the IRS to process the application. The IRS says it will take several hours to learn how to complete Form 1023, and several more hours to complete the form.
If your nonprofit meets certain requirements, you can use Form 1023-EZ, and pay a user fee of only $275. However, Form 1023-EZ may only be filed online, after you set up an online account with pay.gov.
Nonprofits and Michigan Taxes
Michigan has a sales and use tax, which is administered by the Michigan Department of Treasury. Under current Michigan nonprofit law, there is no procedure for a nonprofit to apply for an exemption. Any nonprofit is automatically exempt from the sales and use tax if it:
- Has been granted an exemption from federal income tax under either Section 501(c)(3) or Section 501(c)(4) of the Internal Revenue Code, or
- Is exempt under Michigan law, or
- Was granted an exemption under previous Michigan law.
When the nonprofit makes a purchase, to avoid paying the tax it must complete a Department of Treasury Michigan Sales and Use Tax Certificate of Exemption (Form 3372).
Registering with the Michigan Attorney General
If your nonprofit will be soliciting donations, or will hold assets, it may need to register with the Michigan Attorney General's Charitable Trust Section by filing an Initial Solicitation Form (Form CTS-01). However, there are numerous types of exemptions. To see if your nonprofit might qualify for an exemption, and to apply for one, you can use the Request for Exemption (Form CTS-03).
Launching your nonprofit in Michigan correctly will help ensure the success of your venture over time. Learn what both the federal and Michigan-specific requirements are before you set off to do your good works. The investment of time now will pay off in the future, as your nonprofit organization grows.