Myths and Facts -- A to Z

Well actually, for now it's A to H, but stay tuned!

 

TOPICS INCLUDED ON THIS PAGE:

 

What is a charity?

Should I form a charity?

Can I just use the tax exemption that was granted to another charity?

I'll form a nonprofit, and then I'll be a charity, right?

Until the charity gets bigger, can I just keep the funds in my own account?

Is every nonprofit automatically exempt from taxes?

If I start a charity, do I own it and control it?

Is it a religious charity if members of a religion start a charity to help their neighbors?

 

 

A.

MYTH:

A charity is any nonprofit organization; or a charity is any group of people doing some kind or good act.

 

FACT:

A charity must fit the definitions of charity contained in federal and Michigan law.  If your purpose is to help some particular individual or family, or small group of named people, then it’s not a charitable purpose.  Helping a person get money for a lung transplant, or chemotherapy, or helping a family rebuild after a fire, are wonderful and kind things to do, but under federal and state law they are very likely not charitable projects.  Under the law, a charity must provide a public benefit.  The benefit may be for a specific portion of the public, such as those suffering from a disease or those that need housing, but it must not be for named individuals.

 

 

B.

MYTH: 

Forming a charity is always good for the community.

FACT: 

Sometimes good intentions are better served by NOT forming a new charity. There may be a much better, more efficient way to accomplish the same mission. Here are reasons a new charity may be a bad idea:

 

• 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 what you want to do could be done more efficiently by forming a program within an already-established charity.
  Example: 
  The idea is to provide clothing to a certain ethnic group or group of refugee families, and a charity 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 the already-established charity is broad, such as “Our mission is to provide services to refugees to help them adapt to life in the United States.”  The already-established organization may be interested in setting up a restricted fund and instituting a new program to provide clothing to this group of people.  They could add this program to the services they already offer, likely decreasing the overall administrative and program costs that would be associated with carrying out this service.
• 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 short-term. 
   

C.
MYTH: 

Tax exempt status, licenses or the permissions granted to one organization can be "used" or "transferred" to another organization.

FACT: 

Almost every legal requirement or permission is specific to one legal entity (organization) and cannot be transferred to another. Whether it's a 501(c)(3) exemption, sales tax exemption, vehicle dealer's license, day care license, or some other license or permission, each charity must comply with the laws and document its status on its own.  (There may be some limited exceptions to this rule when a fiscal agency relationship or fiduciary relationship is established with another charity.  You should seek legal counsel before entering into contractual agreements for the operations or fiscal management of a charity.) 

 

D.

MYTH:

All nonprofit organizations are charities.

 

FACT:

All charities are nonprofits, but there are many nonprofits that are NOT charities.  For example, labor unions, political organizations, homeowners’ associations, and clubs that form for recreational purposes are nonprofits, but they do not operate for charitable purposes.  For more information on the definition of a charitable organization, go to Forming a Charity.

 

 

E.

MYTH:

An individual, such as the founder or incorporator of the charity, can simply put the organization’s money in their own account and hold it for the organization.  A related misconception is that a person can open an account in the name of the charity using their own personal Social Security number.

 

FACT:

The charity’s funds must always be kept separate from the funds of other organizations and individuals.  Charity funds must not be mingled with personal funds or assets. THE CHARITY’S FUNDS MUST ALWAYS BE KEPT SEPARATE FROM THE FUNDS OF OTHER ORGANIZATIONS AND FROM THE FUNDS OF PRIVATE INDIVIDUALS, WHETHER THEY ARE FOUNDERS, INCORPORATORS, OFFICERS OR BOARD MEMBERS.

 

A possible consequence of holding an organization’s funds in one's own private account is that interest may be reported to the IRS by the bank, meaning the account holder could be called upon to count those funds as private income or assets, and any interest that accrues will be reported to the IRS as your own private income. It is important for the charity to obtain its own tax ID number and open accounts using that number, rather than any individual's Social Security number.

 

 

F.

MYTH:  

Simply forming a nonprofit entity makes the organization exempt from federal taxes.

 

FACT:

To be exempt from federal taxation, the organization must qualify by meeting certain specific requirements of Section 501(c) of the Internal Revenue Code (IRC).  More specifically, nearly all charities must qualify under Section 501(c)(3) of the IRC.  Under federal tax law, there are only 2 categories of legal entities:  those that must pay taxes and those that are exempt from taxation.  Any charity that has income will want to be exempt from paying taxes on that income.

 

G. 

MYTH:

The founder of the organization owns the charity and can do whatever he/she wants with the organization and its assets.

 

FACT:

No one owns a charity. The board of directors or membership of an organization (if it's a membership corporation or association) has the responsibility of directing the activities of the charity and ensuring that the charitable purpose is carried out, but no one has complete control over what is done because there are so many limitations placed on a charity by state and federal law. The IRS, if the organization is tax exempt, has power to ensure that assets are used for the tax exempt purpose. The Michigan Attorney General has the power to ensure that charities in Michigan use their resources appropriately as trustees of charitable assets.

 

 

H.

MYTH:

A charity is religious in nature and qualifies for exemption from the charitable solicitation license and reporting to the IRS if it is a group of religious people, or church members, trying to live by the beliefs of their religion by helping others.

 

FACT:

A charity is only considered a religious charity if it is carrying out an evangelical purpose: spreading the word of their religion through teaching, preaching, prayer or other religious acts. It is not sufficient to be a group of religious people carrying out a charitable purpose to help others, even though one of the beliefs of the religion may be to help others.