Staying Legal MI - Public Charity

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Creating a Public Charity

What is a Public Charity?

Public charities are charities that obtain funding from public sources, such as donations from individuals, organizations, private foundations, corporations, the government, or other public charities. They carry out a charitable program that benefits the public or a segment of the public. They may provide social services, promote or support the arts, advance scientific endeavors or education. They may be churches, hospitals or research organizations. They may receive income from the conduct of activities in furtherance of the organization�s exempt purposes, or they may function in a supporting relationship to one or more existing public charities.

Private foundations, in contrast, typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources). Most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs.

A private foundation is any domestic or foreign organization described in section 501(c)(3) of the Internal Revenue Code except for an organization referred to in section 509(a)(1), (2), (3), or (4). In effect, the definition divides section 501(c)(3) organizations into two classes: private foundations and public charities.

Forming a Charitable Organization

Incorporating -- Articles of Incorporation

Those that wish to incorporate must file articles of incorporation with the Corporation Division, located within the Michigan Department of Labor and Economic Growth, 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 to the original articles, and assumed names for the corporation.

Below are links directly to the forms that nonprofit corporations need to file, along with a brief explanation of each. (NOTE: If you wish to review all the forms provided on the website to ensure you have covered all requirements, look at the entire list of corporation forms.)

FEES: Filing fee amounts are provided on each form. Please 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 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 on this website 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 corporation's 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 prefers 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. This is a very important filing to enable the Corporation Division to communicate with the organization.

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.

Unincorporated Association

It is possible to form a charity by forming an unincorporated association. This is sometimes appropriate for a short-term project. However, here are some disadvantages in forming and being a part of an unincorporated association:

Members, officers and directors of an unincorporated association can be held liable for any acts of the organization. There is no liability protection as can be provided by a nonprofit corporation. In other words, if the association was sued, the assets belonging to the individuals involved could be jeopardized.
An unincorporated association cannot enter into contracts or be named on titles to property. Any business transactions must be signed by an individual who would be personally liable for any contractual obligations.
There is no official record that the organization exists. The name is not on file in any state agency. The individuals involved can file a "doing business as" with the county clerk, but this is limited to use within that particular county.

If the choice is made to form an unincorporated association, then a constitution and/or bylaws should be written and adopted to form the association. See below for elements that should be included in bylaws.

Bylaws

There are no legal requirements for what should be included in bylaws. However, there are two issues to consider when writing bylaws where there are legal implications:

If the organization is incorporated under Michigan's Nonprofit Corporation Act, then there are certain governance issues that can be legally modified by the bylaws. In other words, there are provisions that mandate how the organization must operate, unless the bylaws prescribe alternate procedures.
When the organization applies to the IRS for tax exempt status, the IRS will review the bylaws to ensure that rules are in place to properly manage charitable assets and to carry out the charitable mission of the organization.

Federal Tax ID 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 via the IRS website or by telephone (1-800-829-4933), or you may apply for the number by mail by submitting IRS Form SS-4. If you apply by telephone or online, print out Form SS-4 and complete it before making the telephone call or beginning the online process. This will allow you to reflect on your answers to the questions and retain a copy of the form for your records. 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.

Tax Exempt Status

MYTH: Forming a nonprofit organization makes the organization automatically exempt from paying taxes.

FACT: Even though an organization has a nonprofit charitable purpose, it is not exempt from paying taxes unless it has applied to the IRS and received approval or recognition that it qualifies as a tax exempt organization.

Nonprofit organizations must apply to the IRS for 501(c)(3) charitable tax exempt status by completing and filing IRS Form 1023, along with all required documents and a filing fee. Here is a direct link to Form 1023 and to the Instructions. It is important to note that certain documents and documentation must be filed with the 1023, including the articles of incorporation, bylaws, constitution, or other documents that create the organization.

There are two exceptions to this rule:

Churches, associations of churches and church auxiliaries that are an integral part of a church are not required to file an application for tax exempt status but may operate as a 501(c)(3) organization without making application for such recognition from the IRS.
Organizations that have less than $5,000 in gross receipts in a typical year are also exempt from the application process.

When should you apply?

You can apply to the IRS for tax exempt status as soon as you have taken the initial steps to form the charity as a legal entity. Before you apply to the IRS, the creating documents must be written and adopted and filed (if necessary) with the appropriate state agency (articles of incorporation, constitution and/or bylaws); the board of directors and officers must be chosen; the organization must have the EIN; and a business plan must be adopted, including projected budgets. 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) to find out exactly what information will be required.

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

Charitable Solicitation License

Charitable Organizations and Solicitations Act Requirements

This law requires charities that either solicit or receive charitable contributions in Michigan to obtain a charitable solicitation license from the Department of Attorney General�s Charitable Trust Section. Some organizations, such as schools, churches and religious organizations, are exempt from this requirement. For a list of exemptions, go to the Charitable Solicitation License section of the State Laws page of this website. The Charitable Trust Section will assist organizations with a determination of whether the organization needs a charitable solicitation license or if an exemption applies.

New Organizations and First-Time Filers

All new filers should complete and submit the Charitable Trust Section's Initial Charitable Trust/Charitable Solicitation Questionnaire (Questionnaire) along with the documents listed below. This will allow the Charitable Trust Section staff to create a file and make a determination of whether the organization needs a charitable solicitation license.

Documents to accompany the Questionnaire:

A copy of the creating documents for the organization (articles of incorporation showing that they have been properly filed with the Corporation Division; constitution and/or bylaws; articles of association if the organization is not incorporated; charter; or any other creating document);
A copy of the financial report for the most recent fiscal year if the organization has been in existence long enough to have passed the end of its first fiscal period;
A copy of the IRS determination letter regarding tax exempt status, if the organization has obtained such a letter.

The Charitable Trust Section will review the Questionnaire and accompanying documents and will send you a determination letter letting you know if the organizations needs a charitable solicitation license.

If you want to do some preliminary work on your own, keep reading.

If you already know your organization will need a charitable solicitation license, you may submit the Application for License to Solicit Donations, along with the Questionnaire to expedite processing. Included with the form are detailed instructions for completion of the application and explanations of documentation that must accompany the form.

To do some preliminary assessment of whether licensing is required, you may wish to review the law and specifically look at two sections � the definition of a charitable organization found in Section 2 and the exemptions found in Section 13 of the Charitable Organizations and Solicitations Act. You should also visit the Charitable Giving Section of the Attorney General's website for a discussion of Procedures and Requirements.

Annual Renewal of the Charitable Solicitation License

The charitable solicitation license expires each year approximately seven months following the end of the organization's fiscal year. You will be notified of the expiration date when you receive notice that the Charitable Trust Section has approved the license application. Make a note of this date.

The renewal application must be submitted to the Charitable Trust Section 30 days prior to the expiration of the license. The renewal form is the same as the initial application form, the Application for License to Solicit Donations.

Professional Fundraisers

The Charitable Organization and Solicitations Act also requires licensing of professional fundraisers. For a more comprehensive discussion of this license and bond requirements, go to State Laws.

Charitable Trust Registration

Michigan's Supervision of Trustees for Charitable Purposes Act Requirements

Michigan's Attorney General, through the Charitable Trust Section, administers the requirements of this law, commonly called "the charitable trust act." Under the provisions of the law, every charity that holds charitable 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, they 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 amount for registration, 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 at http://www.mi.gov/ag/0,1607,7-164-17334_18095-45038--,00.html.

Registering a Charitable Trust

Charitable trust registration requires the filing of two forms, the Charitable Trust Registration Statement and the Charitable Trust Inventory. To enable the Charitable Trust Section to create an accurate and complete file and to document any possible exemptions that may apply, you should also file the Charitable Trust/Charitable Solicitation Questionnaire, along with all required attachments. You will find links to all forms and a more complete description of the forms and procedures at the Charities section of the Attorney General's website. There are also direct links to the Charitable Trust Registration Statement and the Charitable Trust Inventory.

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.

To maintain the registration file, the charity must file a financial accounting with the Charitable Trust Section six months following the end of each financial year. The reporting requirement may be fulfilled by submitting a copy of the organization's IRS 990, 990-EZ, 990-PF, a bank trust accounting, or a treasurer's report that includes a statement of income and expenses and a balance sheet. Very small organizations that have less than $25,000 in annual gross receipts AND hold less than $100,000 in assets may request a waiver of the annual reporting by calling the Charitable Trust Section at 517-373-1152 and requesting a waiver form. The waiver may be requested only after the organization has completed registration and filed at least one financial report.

Churches and Religious Organizations

Churches

Incorporating a church -- Ecclesiastical Corporations

While most nonprofit organizations incorporate under the Nonprofit Corporation Act, churches must incorporate under the General Corporations Act, Sections 450.178 through 450.186 of the Michigan Compiled Laws (MCL). The following special requirements apply to ecclesiastical corporations:

The purpose must be the teaching and spreading of religious beliefs and principles;
There must be 3 incorporators; and
It must be a membership corporation.

Because an ecclesiastical corporation must be formed under a different statute and the requirements are not the same as for a nonprofit corporation, different forms are required.

To form the ecclesiastical corporation, file Form # 503.

To amend the articles of incorporation, file Form #516.

To restate the articles of incorporation of an ecclesiastical corporation, file Form # 512.

Some forms remain the same for ecclesiastical corporations, such as the certificate of correction and the change of address or resident agent.

Religious Organizations

If the organization has religious purposes, such as distributing religious publications or operating a homeless shelter as a mission, but does not intend to operate as a church, then it may be incorporated as other nonprofit corporations under the Michigan Nonprofit Corporation Act, as described above.

Schools / Educational Institutions

Educational Corporations

To form a corporation that will operate a school, seminary, academy, college, vocational school, or other institution of learning or training, the articles of incorporation must be filed under provisions of the General Corporations Act. There are specific requirements for such educational corporations. Even though the form to incorporate a school is Form 502, the same as for other nonprofit corporations, schools must comply with applicable provisions of the General Corporation Act (Sections 170 - 177). Prior to filing the articles of incorporation, the proposed school must obtain approval from either the

Michigan Department of Education for K-12 schools or

Office of Career, Education & Workplace Programs (in the Department of Labor and Economic Growth) for vocational/proprietary schools or other schools of higher education, such as colleges and universities.

Because the rules applying to schools are extensive and are specific to the type of educational services offered, this site will provide only a link to the locations within the State of Michigan website where specific rules, requirements and resources can be found.

Educational Corporations

To learn about obtaining approval for the articles of incorporation for a K-12 nonpublic school, go to the Department of Education website. For information on filing articles of incorporation for schools of higher education, vocational or proprietary schools go to the Department of Labor and Economic Growth, Office of Career, Education & Workplace Programs.

Preschools

Licensing of preschools takes place within the same agency that licenses daycares, the Michigan Department of Health and Human Services. Licensing Rules can also be found at the website.

Elementary and High Schools (k-12), including charter schools and home schools

Information about forming a private (non-public) or home school can be obtained by calling the Michigan Department of Education at 517-373-0796 or going to the Department of Education website.

Charter Schools

The Michigan Department of Education website offers information on forming a charter school.

For a brief tutorial on starting a charter school, go to "So you want to start a charter school?" offered by the Michigan Department of Education.

Nonpublic colleges and universities:

To locate rules and forms to form a nonpublic college or university go to the Department of Labor and Economic Growth, Office of Career, Education & Workplace Programs. The State of Michigan website also offers a Policies and Procedures document.

Proprietary schools

The Michigan Proprietary Schools website offered by the Department of Labor and Economic Growth provides links to information and forms required to form the school. Or go to the Department of Labor and Economic Growth, Office of Career, Education & Workplace Programs for links.

For specific provisions of the IRS Code that apply to educational organizations and private schools, refer to IRS Publication 557.

Maintaining a Charity

Corporate Filings & Requirements

Filings

Every Michigan nonprofit corporation must file an Annual Information Update by October 1 each year. In August, the Corporation Division sends the form to each nonprofit corporation at the mailing address the Corporation Division currently has on file for the organization. The form must be completed and returned by October 1, along with a filing fee. This form asks if there are any changes in information (resident agent, registered address, board members). 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 the form can be sent to the appropriate person or office.

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 and filing fees, plus a penalty for each late filing.

Nonprofit Corporation Requirements

Michigan's Nonprofit Corporation Act provides for the creation of nonprofit corporations and prescribes standards under which they must operate. For a more complete discussion of requirements for corporations, go to the Michigan Corporations page of this website.

Annual IRS Filings

Even though a charity has been exempted by the IRS from taxes, the charity must still file annually with the IRS. Here are the filing thresholds and the forms that must be filed, with links to each form or information about the form.

NOTE: Because the IRS is phasing in a newly revised Form 990, the filing thresholds will change each year until the new form is fully implemented in 2010. The thresholds below are for fiscal years with beginning dates after December 31, 2006 and before January 1, 2008. For filing thresholds for the 2008, 2009 and 2010 fiscal years, go to the IRS website.

Gross receipts for the fiscal year:	File Form:
Less than $25,000	990-N (E-Postcard)*
$25,000 or more, but less than $100,000	990-EZ (Instructions), Schedule A (Instructions ), other Schedules, as required
Gross receipts $100,000 or more	Form 990 (Instructions), Schedule A (Instructions) , and other Schedules, as required

*VERY IMPORTANT FOR SMALL CHARITIES: The e-Postcard for small organizations is a new requirement starting with fiscal years that have beginning dates after December 31, 2006. Information on filing the 990-N is found on the IRS website. If a charity fails to file this new form for three years, it will lose its tax exempt status.

To learn about how to file the following forms electronically, go to the e-file for Charities and Non-Profits page on the IRS website.

Form 990, Return of Organization Exempt from Income Tax
Form 990-EZ, Short Return of Organization Exempt from Income Tax
Form 990-PF, Return of Private Foundation
Form 8868, Application for Extension of Time To File an Exempt Organization Return

Charitable Solicitation License Renewal

If your financial information is delayed, so that the organization will not be prepared to file a timely renewal application (30 days prior to the expiration date), send a request for an extension to the Charitable Trust Section either by mail or fax. A 90-day extension will be granted. There is no form for the extension request; a simple letter is sufficient.

You may request a second extension if necessary. With a request for a second extension, send a copy of Form 8283 that was filed with the IRS providing a reason for the late filing or explain the reason for delay in the letter requesting the extension.

Annual Charitable Trust Filings

While charitable trust registration under Michigan's Supervision of Trustees for Charitable Purposes Act with the Michigan Attorney General's Charitable Trust Section (CTS) is a one-time filing, there is an annual reporting requirement to maintain an up-to-date registration. Six months following the end of each fiscal year, the registered charity 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.

If the charity has a charitable solicitation license, the annual renewal of the license that includes a financial report will provide the CTS with the necessary filing to also keep the organization's registration file up to date. No separate filing is required.

Very small organizations that are exempt from the charitable solicitation license requirement 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.

IRS Rules

Jeopardizing Tax Exempt Status

For IRS information on how NOT to jeopardize the tax exempt status of a public charity, go to the IRS website, Life Cycle of a Public Charity -- Jeopardizing Tax Exemption. The issues discussed include:

political activity & lobbying
private benefit
engaging in commercial activities
filing requirements
intermediate sanctions

Intermediate sanctions are penalties (excise taxes) imposed on charities and individuals when there has been some excess benefit provided to a "disqualified person." Because the rules governing these IRS rules are extremely complex, be sure you obtain the advice of a tax consultant and/or attorney who is familiar with nonprofit accounting and IRS requirements.

Intermediate Sanctions

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 990s, 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: Schedule B, Schedule of Contributors, submitted by public charities is exempt from the disclosure requirement.

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

Scholarship Programs

Under Construction

General Information

Common Myths Debunked

For a list of common myths and mistakes that are made when forming and operating a charity, go to the Common Myths Debunked page of this website.

Document Retention & Destruction

State Law

There are no state laws that specifically provide for how long charity records must be retained. There may be requirements in specific laws that apply to programs and activities. Charities should implement policies for how long documents will be kept. A chart in The Michigan Nonprofit Management Manual, 4th Edition, available through MNA's online bookstore, provides some guidelines for charities.

Federal Law
The Sarbanes-Oxley Act makes it a federal crime to destroy, conceal or alter documents that are, or may be, the subject of a federal investigation or litigation. This provision makes it extremely important for charities to implement document retention and destruction policies. Such a policy that is consistently followed will help protect a charity from charges that documents were indiscriminately destroyed, or destroyed to prevent disclosure.

For more information, the following articles and/or websites discuss the provisions of Sarbanes-Oxley:

Independent Sector and Boardsource, The Sarbanes-Oxley act and Implications for Nonprofit Organizations
National Council of Nonprofit Associations (NCNA)
Alliance for Nonprofit Management

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.

State Benefits of Charity Status

Charitable organizations that obtain 501(c)(3) tax exempt status can enjoy not only tax exemptions in Michigan, but also permissions to conduct activities that are unavailable to for-profit organizations. The benefits for charitable organizations include:

Exemption from state income and business taxes. (Because the Legislature continues to amend business tax law in Michigan, it is important to stay informed about how these changes might affect nonprofits.)
Exemption from sales and use taxes when purchasing items to use in carrying out the charity's programs.
Ability to conduct games of chance as fundraising activities, such as raffles, Bingo and Las Vegas nights.
Ability to obtain special liquor licenses for special events and fundraisers.

Other Resources

Web Resources

IRS website