There are many legal and practical considerations for nonprofit organizations (NPOs). ONEplace has how-to guides, services, resources, and more to help start or improve an existing nonprofit.
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What is a nonprofit organization?
NPOs are owned by the public
NPOs are owned by the public, not their founder or board of directors. Unlike for-profit companies (sole proprietorships, partnerships, or corporations) established NPOs are not privately owned and controlled. Their purpose is to make a positive difference in the world through their mission-driven activities, not make a profit for owners or stockholders.
The board is responsible for governing
A board of directors has legal, governance and stewardship responsibilities for the nonprofit organization. It develops the mission and governance policies; hires/supervises the lead staff person (if there is employed staff); secures the funds needed to carry out the mission; and, assures financial integrity, accountability, and transparency throughout the organization. Michigan nonprofit corporations require three-person boards, while the IRS requires five-person board in order to qualify for 501 (c)+ tax-exempt status.
If the founder is hired as executive director, they act as an employee of the nonprofit corporation, not as the “owner” of their enterprise (a for-profit concept). The founder may be the executive director or chair of the board, but not both. The executive director may or may not be a member of the board.
License required to solicit donations
To solicit donations, Michigan NPOs must submit an annual License to Solicit application and receive approval.
Michigan nonprofit corporations are not automatically tax-exempt
Only the IRS may approve tax-exempt status following submission of Form 1023, an extensive document outlining the mission and activities of the NPO for the public good.
There are a number of different kinds of nonprofit organizations, each with slightly different roles and responsibilities. The main differences relate to the type of IRS tax-exempt category obtained.
Once tax-exemption is approved, any changes to the NPO’s mission or activities must be submitted to the IRS for approval. Tax-exemption applies to income and sales taxes, not employment taxes, which are treated exactly the same as for-profit companies.
Recently adopted laws increase transparency and accountability
Filing of an annual 990 (990-N, 990-EZ) is required. Recently adopted laws increase transparency and accountability of NPO operations and relationships.
How are nonprofits established?
There are many practical and legal steps to take in establishing and maintaining a nonprofit tax-exempt organization. Two excellent resources and checklists from the Michigan Nonprofit Association (MNA):
The MNA steps you through filing Articles of Incorporation (MI Form 502), License to Solicit, and IRS Form 1023 to apply for federal tax-exempt status.
Helping new and already-established charitable organizations comply with federal and state laws and regulations.
How are nonprofits funded?
Nonprofits secure funds to operate from a number of sources:
- Individual donors
- Foundation, corporate, and government grants
- Fundraising activities
- Fees for services
- Unrelated business income (UBI is the sale of products/services used to support mission-related work and has very specific regulations.)
Donations are tax-exempt to the donor only if the organization has 501(c)+ status, and follows the IRS Public Charity Rules and Regulations.
How are nonprofits maintained?
Once established, nonprofit tax-exempt organizations must remain in compliance with state and federal laws, and their governing mission, or risk losing their NP and exempt status.
In addition to regular legal MI and IRS filings, issues of risk management, fiduciary oversight, accountability, and transparency must be maintained and open to the public.
Still thinking of starting a NPO?
In addition to what you’ve learned above, please take the following steps:
- Commit to writing what you want to do and why: the “difference you want to make in the world” statement of purpose.
- Research, research, research. What organizations are already working with the same target audiences? Doing the same types of services and programs? Seeking funds from the same sources? Making the “same difference?”
- Talk with organizations and community leaders to learn if/how your idea may fit into already established organizations or programs, saving infrastructure, overhead, and scarce funds and resources.
- If you’re convinced your initiative is not being addressed locally, and you decide to move ahead on establishing a new NPO, write a “business” plan that defines the who, what, when, where, and how of accomplishing your mission.
- Honestly assess the skills you personally bring to the potential organization and which skills will need to be found by engaging other people into the process or purchasing services.
- Define the financial assets and resources you can contribute during the start-up phase and beyond.
- It often takes a year or more to go through the processes required to obtain NP/tax-exempt status and begin requesting donations or grants, so plan finances carefully.
- Make an appointment to meet with ONEplace staff to review and assess your research, business plan, and plan of action by contacting ONEplace.