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INDEX OF LAWS INDEX OF LAWS

 

What is a foundation?

Forming a Foundation as a Charitable Corporation

Forming a Foundation as a Trust

Federal Tax ID Number (EIN)

Tax Exempt Status

Charitable Trust Registration

 

Corporate Filings & Requirements

Annual IRS Filings

Annual Charitable Trust Filings

 

Scholarship Programs

 

Myths & Misconceptions

Federal Benefits of Charity Status

State Benefits of Charity Status

Other Resources

 

Community Foundations

International Grantmaking

 



 

 

What is a Foundation?

It depends on where you look.

 

MICHIGAN LAW

Section 212 of Michigan's Nonprofit Corporation Act (MCL 450.2212(3)), states that a "corporation incorporated for the purpose of receiving and administering funds for perpetuation of the memory of persons, preservation of objects of historical or natural interest, educational, charitable, or religious purposes, or public welfare may use the name foundation." This may be a family foundation; a foundation created by an individual, a group of individuals, or a corporation; or a community foundation.


 

FEDERAL LAW (IRS CODE)

The Internal Revenue Service uses a different definition of a foundation and makes a determination that a charity is either a public charity or a private foundation, depending on how it obtains its financing.  When the IRS reviews a charity's application for 501(c)(3) status, it first assumes that the organization is a privately funded foundation. But it will then look at the application to determine if, instead, the organization falls under one of the exceptions described in Section 509(a) of the IRS Code. The exceptions are those organizations that are typically seen operating programs in their communities and receiving broadly based public support (from donations from the public, grants from foundation, public dollars, or a combination of these sources), or organizations that engage in an inherently public activity.  Another exception are organizations that operate as "supporting organizations" for other charities.  One example of a supporting organization is an educational foundation that operates to support a school. If you want to read the IRS exemptions, go to the IRS website. If the organization is not exempt in one of these specific ways, then it is considered by the IRS to be a private foundation.

 

The practical effect of the state and federal definitions working together is that thousands of private foundations that typically obtain their funds from one or a few individuals, companies, or groups, distribute those funds through grants and gifts to individuals, public charities, governmental entities and programs to carry out charitable programs in their communities.  The private foundation does not typically operate charitable programs, but rather funds charitable programs that are operated by others. 

 

Community foundations, as you can see from the definitions, are foundations under Michigan law, but they are public charities under the IRS Code. Because this page deals only with PRIVATE FOUNDATIONS, information for community foundations is found on the PUBLIC CHARITY page.

 

The IRS also provides very useful information for private foundations in Publication 4221-PF, Compliance Guide for 501(c)(3) Private Foundations.

 

 

 

 

While there is a general guide to forming a charity available on the MNA website in the Getting Started Guide, the following is a guide to the specific forms and filings of incorporating a charity. As you scroll down, you will find each form listed with a brief explanation and a link directly to the form on the Michigan Department of Licensing and Regulatory Affairs, Bureau of Commercial Services website.

 

NOTE:  If you wish to review all the forms provided on the website in order to ensure coverage of all requirements, you may link to the entire list of corporation forms.

 

 

Corporation Forms

Those that wish to incorporate must file articles of incorporation with the Corporation Division that is in the Michigan Department of Energy Licensing and Regulatory Affairs Bureau of Commercial Services.  This is the state agency where you must file not only the original articles of incorporation, but also annual reports to maintain the corporation, amendments, and assumed names for the corporation.

 

Note that if you want expedited service, filing fees increase.  See Form #272.

 

 

1.  The form to file the original articles of incorporation is Form 502, ARTICLES OF INCORPORATION – NONPROFIT

REQUIRED LANGUAGE FOR CHARITIES:  You will most likely be filing with the IRS for 501(c)(3) tax exempt status. The IRS will only grant 501(c)(3) status if your creating documents include required language that affirms a charitable purpose for the corporation; dedicates all assets of the corporation to carrying out the charitable mission; and provides that all assets of the corporation will be passed on to another charitable organization if the corporation is dissolved. 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 at Forming a Charity.

 

2.  If you make a mistake in the articles of incorporation you filed (typos, misspelling, punctuation), you can correct mistakes by filing Form 518, CERTIFICATE OF CORRECTION.

 

3. To make substantive changes in the original filing (such as changing the corporate name or revising certain articles), the organization can amend the articles that were previously filed by filing Form 515, CERTIFICATE OF AMENDMENT – PROFIT AND NONPROFIT.

 

4.  Sometimes a charity will wish to make major changes in its purpose, structure, and/or operations and may choose to restate its articles of incorporation, rather than file a number of amendments; or the organization may have filed several amendments over a period of time and would prefer to replace all of the previously filed articles and amendments by filing a completely new set of articles of incorporation that includes all of the changes.  In these situations, the prior articles are superseded/replaced by the restated articles of incorporation.  To restate articles of incorporation, file Form 511, RESTATED ARTICLES OF INCORPORATION – NONPROFIT.

5. To change the name of your corporation, the specific article in the articles of incorporation that includes the legal name must be amended, so it is necessary to file Form 515, CERTIFICATE OF AMENDMENT – PROFIT AND NONPROFIT.

 

6. To file an assumed name (a different name under which the organization wishes to do business, an acronym, or a program name), the organization must file Form 541, CERTIFICATE OF ASSUMED NAME. The instructions for the form notify the filer that the "certificate is effective for a period expiring on December 31 of the fifth full calendar year following the year in which it was filed" unless a Form 543, Certificate of Termination, has been filed prior to that date.

 

7. To change the address of the organization or the name of the resident agent during the year prior to filing the Annual Report discussed below, the organization must file Form, 520 CERTIFICATE OF CHANGE OF REGISTERED OFFICE/RESIDENT AGENT.

 

8  ANNUAL CORPORATE FILINGS - see below under "Maintaining the Foundation" for information on what is required of nonprofit corporations. 

 

9. OTHER CORPORATION FORMS are available for specific circumstances such as EXPEDITED SERVICE REQUEST, RESIGNATION OF AGENT, CERTIFICATE OF APPOINTMENT OF RESIDENT AGENT, CERTIFICATE OF DISSOLUTION, RESERVATION OF NAME, and others.  To view all corporate forms go to the Corporation Division website's Document Management System.

 

Bylaws

There are no statutory requirements for the language of the bylaws, but they must provide for the specific rules under which the organization will operate.  See the page of Corporation Requirements for some of the issues that are not covered by Michigan's Nonprofit Corporation Act that should be considered when writing bylaws.  The Michigan Nonprofit Management Manual, 5th Edition is also a good source for topics that should be included in the bylaws of the organization

 

 

Forming a Foundation as a Trust

 

A person who wants to form a foundation may choose to not incorporate, but they will probably not form an unincorporated association, because that is often an individual effort.  Instead, a person may create a foundation using a trust instrument.

 

To create a trust, there are no printed forms to complete such as the corporate filing documents; there are no Michigan laws that dictate what specific language a charitable trust document must contain; nor is there any state agency where the trust document must be filed unless it is subject to Michigan Attorney General oversight as a charitable trust once the trust holds assets. Because the rules for creating trusts are not specifically set out in laws and forms, it may be wise to seek advice from a professional such as an attorney who has experience forming charitable trusts. 

 

To assist you in getting started, there are some elements that every charitable trust should include.

 

1. The name of the trust, which may reflect the name of the creator of the trust and/or the beneficiaries of the trust assets;

 

2. The legal name of the original trustee, including enough information to avoid confusion with other possible trustees;

 

3. The names of successor trustees or a detailed description of how the successor trustee(s) will be named;

 

4. A statement of the charitable purpose of the trust;

 

5. Rules for administering and distributing the trust assets;

 

6. Language required by the IRS in order to obtain recognition as a 501(c)(3) entity (see the next subsection below);

 

7. Permission for the trustee(s) or successor trustee(s) to amend the trust, if desired; or limitations on the power to amend. Trusts should include the power for the trustee(s) to amend the trust to the extent required to maintain tax exempt status in the event laws or rules change.

 

Required IRS Language:

 

In order to obtain tax exempt status as a 501(c)(3) charitable trust, the IRS will require that specific language be included in the trust document. You can find the required language and a discussion of IRS requirements on any of the following sites:

 

 

To find more detailed discussions of forming a trust, including sample trusts, refer to the Other Resources below.

 

 

Once the legal entity is formed, either by incorporating or executing a trust document, the entity needs to obtain a federal identification number known as the Employer Identification Number (EIN). Every legal entity needs an EIN, 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 mail by submitting IRS Form SS-4. There is no charge for the EIN, regardless of the method used to request it. For information on all of these options, go to the IRS website.

 

 

IRS Tax Exempt Status

 

To obtain tax exempt status as a 501(c)(3) organization, you must apply to the IRS using IRS Form 1023 (Form 1023 Instructions). This is a rather lengthy and complex form that requires detailed information to justify why the organization should be recognized as exempt from paying taxes. 

 

When should you apply?

You can send the application to the IRS as soon as you have taken the initial steps to form the nonprofit corporation or trust, including executing the trust document or filing the articles of incorporation; choosing or naming the trustee(s) or officers and board of directors; obtaining the EIN; and establishing plans for how the charity will operate. Look at the IRS website to locate the Form 1023 and Instructions and other information, including the attachments and user fee that must accompany the application.

 

If an organization applies for tax exempt status within the first 27 months after the end of the month in which the foundation and the application is approved, the tax exempt status will be retroactive to the date the foundation was created. If application is made after the first 27 months, then tax exempt status will be retroactive only to the date the application was made.

 

For a more extensive discussion of the application process and references to several helpful publications, go to the IRS website page Exempt Organizations - Help from the IRS. The IRS publications are also listed in the Other Resources section below.

 

 

 Michigan Attorney General Oversight -- Charitable Trust Registration

 

Michigan's Supervision of Trustees for Charitable Purposes Act

Michigan's Attorney General, through the Charitable Trust Section, administers the requirements of the "charitable trust act." Under the provisions of that law, every charity that holds assets in Michigan must register as a charitable trust with the Charitable Trust Section, unless some specific exemption in the law applies. Assets include cash, funds, investments, real property, or personal property held by the charity. Under the law, such charities are considered “charitable trusts” because they hold assets in trust for a charitable purpose, and the board of directors and officers of the charity are the trustee(s) of those assets.  Because the Act contains no threshold, charitable assets of ANY value that are held in trust are subject to registration.

 

For a more complete discussion of the oversight of the Michigan Attorney General, you may want to read the article “How and Why the Michigan Attorney General Supervises Charitable Trusts.” It is found on the attorney general's website.

 

Charitable trust registration requires the filing of two forms: the Charitable Trust Registration Statement and the Charitable Trust Inventory. If you feel that the foundation is exempt from such filing, then file the Request for Exemption form, along with all of the requested documentation. You will find links to all forms and a more complete description of forms and procedures at the Charities section of the Attorney General's website.

 

You may also choose to e-file forms with the Charitable Trust Section by going to the website and clicking the E-Filing link on the Charities section of the Attorney General's website. E-Filing is free of charge for all Attorney General forms.

 

Note: Occasionally, a private foundation will wish to solicit or receive contributions from the public, triggering the need for a charitable solicitation license.  To learn more about obtaining the license to solicit charitable contributions, go to the Public Charity page of this website and the Charities Section of the Michigan Attorney General's website.

 

 

 

Every charity needs maintenance to keep it running efficiently and in compliance with all laws.

 

Annual Corporate Filings & Requrements

 

Filings

Every Michigan nonprofit corporation must file an Annual Information Form by October 1 each year. In August, the Corporation Division sends the Nonprofit Corporation Annual Information to each nonprofit corporation.  The form must be completed and returned by October 1.  This form asks if there are any changes in information since the last Annual Information form was filed. This form is no longer available on the Corporation Division website because each form bears an identifying bar code that is specific to the corporate entity. If the corporation does not receive the form in the mail or cannot locate it, call the Corporation Division at 517-241-6470. It is important to keep the Corporation Division informed of any address changes so that the form will be sent to the appropriate person or office. To notify the Corporation Division of changes, file the Certificate of Change of Registered office and/or Change of Resident Agent form.

 

If a corporation's annual filing is more than two years late, the corporation will be automatically dissolved by the Corporation Division.  The corporation will then need to file a Form 525, CERTIFICATE OF RENEWAL OF CORPORATE EXISTENCE, along with any missed annual filings, filing fees, plus late filing fees.

 

Requirements

Michigan's Nonprofit Corporation Act provides for the creation of nonprofit corporations and prescribes standards under which they must operate.  The Michigan Corporations page of this website contains a partial list of requirements with references to section numbers of the law. While the Act is long, many of its sections are not difficult to understand. To link directly to an index of the sections, click on the section number included in each paragraph.

 

 

Annual IRS Filings

 

Every private foundation is required to file annually with the IRS on Form 990-PF (Instructions) Filing is required even if the foundation holds no assets and has had no financial activity throughout the year. Failure to file the form may subject the foundation to significant fines and penalties.

 

Private foundations that have income from activities that are unrelated to their charitable purpose may also need to file a report and pay taxes on "unrelated business income."  That form is the IRS 990-T (Instructions). In addition, private foundations may be required to file IRS Form 4720 and pay excise taxes on certain activities or income. For a list, go to the Excise Taxes section below.

 

 

Annual Charitable Trust Filings

 

While charitable trust registration under Michigan's Supervision of Trustees for Charitable Purposes Act is a one-time filing with the Michigan Attorney General's Charitable Trust Section (CTS), there is an annual reporting requirement to maintain an up-to-date registration. Six months following the end of each fiscal year, the registered foundation must file a financial accounting.  The accounting may be a copy of the IRS Annual Information Return (IRS 990, 990-EZ, 990-PF); an audit; or a treasurer's report that includes a statement of income and expenses and a balance sheet. 

 

Trusts may, instead, choose to file a copy of a bank trust accounting; or, if the trust is under the jurisdiction of the court, then a copy of the accounting that the organization submits to the Probate Court fulfills the annual reporting requirement. 

 

Exemptions from the annual CTS filing:

 

Very small foundations may apply to the CTS for a waiver from the annual filing requirement. The exemption applies to organizations with annual revenue less than $25,000 and total assets less than $100,000. It is important to know that the waiver is discretionary and can be denied or revoked by the Attorney General.  To request a waiver, you must contact the Charitable Trust Section at 517-373-1152 to request a CT Annual Report Waiver Form. Since all foundations that have been determined by the IRS to be private foundations must file an IRS 990-PF, regardless of the amount assets, this waiver is not generally used by private foundations. Simply copying the 990-PF and sending to the CTS complies with the annual filing requirement for registered trusts.

 

 

 

 

How Not To Jeopardize Tax Exempt Status

 

To read IRS guidelines on issues that may jeopardize the tax exempt status of a private foundation, go to the Life Cycle of a Private Foundation on the IRS website.  Issues discussed include:

 

  • failure to operate the foundation exclusively for charitable purposes
  • using the assets or resources of the foundation to benefit a private individual or private interest
  • involvement in political campaigns or substantial lobbying activities
  • conducting a trade or business that is not related to the exempt purpose of the foundation
  • sanctions imposed because an organization "insider" has received an "excess benefit"

 

Excise Taxes

 

Private foundations may also be subject to excise taxes.  To read more information on circumstances that may trigger excise taxes for the organization, go to Life Cycle of a Private Foundation on the IRS website. Issues discussed include:

 

  • intermediate sanctions imposed because an organization "insider" has received an "excess benefit"
  • self dealing
  • tax on net investment income
  • failure to distribute income
  • excess business holdings
  • investments that could jeopardize the foundation's charitable mission
  • taxable expenditures

 

Disclosure Requirements

 

The IRS requires 501(c)(3) charitable organizations to make the following documents available for public inspection and copying by those who request them:

 

Disclosure to the general public

      • The organization’s Form 1023, Application for Recognition of Exemption, along with all documents the organization submitted in support of its application
      • The IRS ruling letter
      • IRS 990-PFs, including all schedules, attachments and supporting documents filed for three years following the due date or the filing date of the return, whichever is later

                   NOTE:  While Schedule B, Schedule of Contributors, is exempt from the disclosure requirement by public charities, private foundations must disclose the Schedule of Contributors.

 

For more information on disclosure requirements, see the IRS webpage;  IRS Publication 557, Tax-Exempt Status for Your Organization; and IRS Publication 4221, Compliance Guide for 501(c)(3) Tax-Exempt Organizations.

 

 

Scholarship Programs

 

Private Foundations

Special IRS rules apply to private foundations that wish to award scholarships.  If the scholarship award program does not meet IRS requirements, it may be deemed to be taxable expenditures. The IRS provides information under two categories:

 

  • Grants to individuals – This information is for private foundations making grants to individuals for the purpose of travel, study, or similar purposes.  Most often the grants would be in the form of scholarships for the pursuit of educational opportunities.  To learn about the IRS requirements, go to the IRS website and look under the topic Grants to Individuals.
  • Company-related scholarship programs – This information relates to company-related private foundations that award scholarships, often giving preference to children or relatives of employees.  Such programs must obtain prior approval from the IRS to ensure that they are operating under strict guidelines to avoid private benefit or substitution or enhancement of employee compensation packages.  To learn more about rules that apply and the prior approval process, go to the IRS website under the topic Company Scholarship Programs.

 

Information concerning the impact of the Pension Protection Act of 2006 on scholarship funds, including sample procedures for implementing scholarship programs, can be found at the  website for the Council of Foundations. Use the Search box on the sites to locate resources.

 

 

 

Myths & Misconceptions

Common Myths Debunked

 

Federal Benefits of Charity Status

 

Once a charity obtains recognition from the IRS as a charitable tax exempt organization under Section 501(c)(3) of the Internal Revenue Code, the organization can enjoy a number of benefits, such as:

 

  • The organization pays no tax on income obtained from their exempt activities.
  • Donors may deduct contributions on their personal tax forms, if they itemize deductions, creating a huge incentive to donate.
  • Pamphlets, newsletters, merchandise, and fundraising letters qualify for reduced postal rates.  For more information on this benefit, go to the page of this website that discusses IRS Rules.

 

Nonprofit Postal Rates
Pamphlets, newsletters, merchandise and fundraising letters qualify for reduced postal rates. Fees may apply if the organization wishes to do bulk mailings for reduced postage.  Go to the United States Postal Service, Business Mail 101 website for explanations of what organizations and what mailings qualify for lower rates.  On the site, you will find links to the form to apply for lower rates, eligibility rules, and other helpful information. 

 

For information on eligibility for nonprofit postage rates, you may also go to Publication 417.

 

 

State Benefits of Charity Status

 

Here are the benefits the charity will enjoy:

  • The organization pays no tax on income obtained from their exempt activities
  • Contributions to some charities, such as homeless shelters, food banks and recognized community foundations, qualify for tax credits on state income taxes, directly reducing the tax bill for the donor.
  • Michigan charities qualify for exemption from state sales tax and use taxes, business taxes, and local property taxes on real and personal property that is used solely by the charity to carry out its tax exempt mission.
  • Charities may obtain special liquor licenses to allow the sale of alcoholic beverages at special events.
  • Charities may obtain permits to conduct games of chance, such as raffles, Bingo, and Las Vegas nights.

 

 

 

If you want to proceed on your own or learn more before consulting a professional, here are some sources of information (including sources for sample trusts):

 

 

 

Community Foundations

 

Donors who give to community foundations may take a tax credit on their annual Michigan tax return.  The Council of Michigan Foundations discuss this benefit on the CMF website.  While there is a way to apply for recognition from the Michigan Department of Treasury, the rule states that there may not be two community foundations recognized for any area of the state. Since all areas of the state are currently covered by recognized community foundations, applications would not currently be accepted.

 

International Grantmaking

 

The United States International Grantmaking project of the Council on Foundations offers resources on their webpage to learn about the laws that apply to international grantmaking, including Executive Order 13224, issued September 23, 2001, and the U.S. Patriot Act.