LINKS
Home Home
Public Charity Public Charity
Private Foundation Private Foundation
Trust Trust
INDEX OF LAWS INDEX OF LAWS

 

Publicly Funded Charitable Corporation

Publicly Funded Chapter of a National or State Charity

Publicly Funded Unincorporated Association

Privately Funded Charitable Corporation

Privately Funded Unincorporated Association (not including trusts)

Privately Funded Trusts


 





-- 5 Rules

 

To read more detailed explanations, click on the "MORE" following each rule. Please hit the "Back" button to return to this page.

 

  1. A charity must benefit the public or serve a public purpose.  MORE
     
  2. Not all nonprofits are charities. To be a charity, the nonprofit must fit the legal definitions of a charity in Michigan and federal laws to take advantage of the benefits of charitable, tax exempt status.  MORE
     
  3. All assets and resources of a charitable organization must be used to carry out the charitable purpose.  Assets of a charity cannot be used to simply benefit an individual, a small group of individuals, or any non-charitable entity.  The charity must be very careful to pay no more than fair market value for the products and services they purchase. This rule applies not only to purchases and contracts, but also to payment of salaries. Charities must pay salaries that accurately reflect the services provided by the employees that help carry out the charity's mission. MORE
     
  4. No one owns a charity, but the officers and directors have the duties of care, loyalty and obedience in carrying out the charitable purposes of the organization.  In other words they are the stewards of the charity and have a legal obligation to faithfully carry out their obligations. MORE
     
  5. Forming a nonprofit does not automatically make the organization exempt from state or federal taxes.  The organization must apply for tax exempt status with the IRS, but, once granted, federal tax exempt status will create many benefits for the organization. MORE

Back to the top


 

 

 

  Forming a charity is always good for the community.
 

  Sometimes good intentions may be better served by not forming a new charity. See Item 1, 5 Basic Steps to Creating a Charity.

 

  One of the most common misconceptions is that the tax exempt status or the permissions granted to one organization can be "used" by or "transferred" to another organization.
 

  Almost every legal requirement or permission is specific to the one organization that applied for it, or to which it was granted. The status or permission cannot be transferred to another organization. Whether it's a tax exempt status, a sales tax exemption, a vehicle dealer's license, or a day care license, each organization must comply with the laws on its own.  (A fiscal agency relationship or fiduciary relationship may be established with another charity, but this is a contractual arrangement in which one charity may provide financial or management services to another; it does NOT result in the tax exemption of one charity transferring to another.  Advice of legal counsel is highly recommended before entering into contractual agreements for the operations or fiscal agency or fiscal management of a charity.) 

Back to the top

 

 

1.  Consider reasons it may be unwise to create a charity, including:

 

  • There is another charity already providing the same service or assistance to the same population, community, or individuals.
     
      • There is a charity with a mission so similar or broad that the proposed mission could become a program of the already-established charity.
              Example: the idea is to provide clothing to a certain ethnic group or group of refugee families, and an organization (Org X) already exists in the community that provides English language training, translation services and job placement to that same group of individuals or families. The mission statement of Org X is broad, stating that its purpose is to “provide services to refugees to help them adapt to life in the United States.”  Org X may be interested in setting up a restricted fund and/or a specific location to provide the service of seeing that those individuals or families have the clothing they need for the various seasons and weather conditions they will face in Michigan. Org X would add this program to the translation services and job placement services that they already offer.
         
  • There is already a charity, or possibly more than one charity, competing for the same donations and grants.
     
  • There is a very limited need for the service to be offered, or the need is more appropriate as a short-term project rather than an ongoing charity.

 

2.  Put together a group of people who can help carry out the mission. 

This may become the initial board of directors, but for now, it's a planning board.

 

3.  Decide what type of charity will be most appropriate to carry out the charitable mission you have in mind and how it will be funded and establish the legal entity.

The next section below describes the types of charities you need to consider. While reading through the following steps is recommended, if you wish to skip directly to creating the legal entity in Michigan, go to the State Laws page.

 

4.  Obtain an Employer Identification Number (EIN), sometimes called the Tax Identification Number (TIN).

This is a nine-digit number that will identify your organization for IRS purposes, when opening bank accounts, claiming exemption from state taxes, and for any other purpose where a specify identification is required. This number should be obtained only after the legal entity is formed. To learn how to obtain this number go to the IRS Rules page of this website. This number is NOT a "tax exempt number" as it is sometimes called; obtaining this number DOES NOT mean that the organization is tax exempt.

 

5.  Apply for tax exempt status.

This is a much longer, more complex form and IRS process. To learn how to apply for tax exempt status, go to the IRS Rules page of this website.

 

Back to the top



Financing & Structure

 

The financing and structure of the charity will help determine what laws and rules apply to its operation.  It will determine how the IRS views the charity in terms of what reporting and disclosure is required. So, read these descriptions carefully and try to categorize the charity you have formed or intend to form. Once you have decided which type of charity you wish to form, you can return to the homepage to link to various resources to form the legal entity on the State Laws page, get a federal tax ID number and tax exempt status on the IRS Rules page, or look for resources for either a Public Charity, a Private Foundation or a Trust on those pages.

 

Publicly funded charitable corporation

 

  • It operates as an independent legal entity.
  • It is incorporated in Michigan under the Michigan Nonprofit Corporation Act. 
  • It solicits and/or accepts charitable contributions from individuals, foundations, companies, or a combination of these sources, or it has fundraising events.
     

Note: A charity incorporated or formed in another state, or even in another country, can operate in Michigan and solicit support in Michigan, but this site is mainly focused on charities formed and operating in Michigan.

 

Publicly funded chapter of a national organization 

 

  • It operates with a separate board, but is a part of a larger or parent organization.
  • It operates under a charter or agreement with the larger, national or parent organization. 
  • It solicits and/or accepts charitable contributions from individuals, foundations, companies, or a combination of these sources, or it has fundraising events.
     

Unincorporated publicly funded association

 

  • It is not incorporated, but instead is an association operating under a constitution and bylaws.
  • It solicits and/or accepts charitable contributions from individuals, foundations, companies, or a combination of these sources, or it has fundraising events.
     

NOTE: Unincorporated associations can obtain a tax ID number (Employer Identification Number (EIN)) and can obtain tax exempt status upon application to the IRS, but an unincorporated association has questionable legal standing to enter into contracts or hold title to either real or personal property. Typically, the individual who signs documents will be personally liable for obligations entered into by the association.
 

Privately funded charitable corporation 

 

  • It is a corporation formed to either do charitable work or to fund charitable work with private funds.  In other words, the organization is a foundation that gets most or all of its funds from one individual, a small group of individuals, a family, a corporation or business, or other private source.
  • It is an organization formed to administer and distribute those funds to support charitable projects or organizations. 
  • It is determined by the IRS to be operating as a “private foundation.”
     

Privately funded unincorporated associations, not including trusts

 

  • You and other interested people chose to form an unincorporated association. An unincorporated association operates under a constitution and a set of bylaws that are adopted by the organizers. The organizers may choose a charitable mission and the association is funded from private sources – individuals, companies, private foundations. 
  • While an unincorporated association is able to obtain a tax ID number (Employer Identification Number -- EIN) and can obtain recognition from the IRS as a tax exempt entity, it is not a separate legal entity and has questionable standing to enter into contracts or hold personal or real property. The directors of the association must sign documents in their own personal capacity and remain liable for the documents they sign. These organizations are uncommon since funders almost always want to deal with an entity that has the capacity to enter into contracts and carry out the terms of the contracts.

 

Privately funded trusts

 

  • The trust is privately funded, and it is not incorporated.  Instead, the charity was formed by executing a trust document.  The trustees will most likely want to apply for tax exempt status for a number of reasons: because the assets of the trust will carry out or fund charitable work, not named individuals; because the donors/grantors will want their contributions to the trust to be tax deductible; and because they will not want the trust to be subject to taxes on income.

 

Back to the top



 

Tax Exempt Status

Because charities are carrying out purposes that benefit the public, and sometimes carrying out programs that would otherwise be provided by the government, as charities they qualify for an exemption from most taxes that are paid by individuals, families and organizations and companies. Also, a benefit of charitable tax exempt status under Section 501(c)(3) of the IRS Code is that donors can deduct donations to these organizations if they itemize deductions on their Income Taxes. These are huge benefits for charities, but the benefits come with conditions.

 

To qualify for tax exempt status as a 501(c)(3) charitable, educational or religious organization, the IRS requires assurances from the charity that:

  • all assets of the organization will be used to carry out the charitable mission;
  • no benefit will inure any individual or individual interest; and
  • if the organization dissolves, all of the assets that have not been used in carrying out the mission of the organization will be distributed to one or more other 501(c)(3) organizations or purposes that have similar missions/purposes.

 

These assurances must be included in the creating documents of the charity. For more information on including required language in the articles of incorporation or other creating documents, the IRS website provides the required language and sample articles of incorporation for your use. This information is also available in IRS Publication 557 that can be obtained on the IRS website. You may also read more on IRS requirements on this website on the IRS Rules page.

 

Both federal and state laws require that charitable assets be used to carry out the proposed charitable mission of the organization. Both the IRS and the Michigan Attorney General have authority to ensure that charitable assets are properly used and distributed.

Back to the top

 

 

Employer Identification Number (EIN)

Once the organization is formed, either by incorporating, forming an association, or executing a trust document, it needs to obtain a federal identification number known as the Employer Identification Number (EIN), sometimes referred to as the Tax Identification Number (TIN). Every legal entity needs such a number, whether or not they have employees. The EIN can be obtained immediately, either on the IRS website, by telephone (1-800-829-4933), or by applying for the number by mail by submitting IRS Form SS-4. There is no charge for the EIN, regardless of the application method chosen. For information on all of these options, go to the IRS Rules page of this website or go directly to the IRS website.

 

Tax Exempt 501(c)(3) Status 

The organization is not automtically tax exempt. The organization must apply for this status. For a more complete discussion go to the IRS Rules page of this website.

 

Everything Else

Now it's time to review other pages of this website for discussions of other legal requirements, such as the charitable solicitation license, charitable trust registration, employment laws, program licenses, and financial accountings. Staying Legal MI Homepage

 

You can also find a list on the MNA website discussing steps "How to Start a Nonprofit"