Starting a nonprofit in Michigan can make a meaningful impact in your community. However,  establishing a nonprofit requires careful planning, a clear mission, and adhering to specific legal steps. At Fausone & Grysko, PLC, we have assisted many clients in forming and incorporating their nonprofit corporations; here are some important steps in building a successful nonprofit.

Research

To establish a successful nonprofit, start by researching and defining your mission. Assess the market to ensure your concept is distinct from existing organizations, thereby minimizing competition for funding. If your nonprofit offers unique advantages over competitors, focus on identifying your target audience. 

When targeting specific demographics, consider their preferred donation methods. Younger audiences may favor digital contributions, while older generations might mail a check. Offering both options for a diverse age range can optimize your organization’s funding potential.

Financial Sponsorship

Once your research is complete, you must decide whether the entity will operate independently, from a fiscal sponsorship, or a donor-advised fund. Fiscal sponsors act as the administrative “home” for a cause, accepting charitable contributions and distributing funds accordingly. The sponsor must retain control over the use of these contributions to maintain the nonprofit’s eligibility for IRS tax-exempt status. Sponsors often handle functions like financial transactions and administrative tasks, leading some to remain under sponsorship for years.

While sponsors typically charge a fee, this arrangement fulfills IRS tax-exempt requirements, which many consider a worthwhile trade-off. Additionally, fiscal sponsorship offers valuable insight into the nonprofit sector, serving as a proving ground for new organizations to test market viability and public interest.

Building the Foundation

Establishing a strong foundation can set you up for years of success. Start with a detailed business plan that transforms your mission into actionable steps, outlining your objectives, funding strategies, and potential challenges.

Next, establish legal foundations with bylaws and an Employer Identification Number (EIN). Bylaws serve as a guiding framework, defining the roles of the board, officers, directors, decision-making processes, and financial management. EIN is like a social security number for your organization, this will be used for tax-exempt status, nonprofit returns (Form 990), employment, and and setting up a bank account.

Lastly, consider engaging community members as board members, particularly those with specialized skills, such as legal expertise or strong local connections, to enhance your nonprofit’s effectiveness and reach.

State Forms

File the Articles of Incorporation with the Michigan Department of Licensing & Regulatory Affairs, Corporations Division, to secure all necessary forms and confirm your organization’s name. Next, request an Application for Recognition of Exemption (Form 1023) from the IRS. The Michigan Department of Treasury no longer processes exemption applications from Michigan Sales and Use Tax for nonprofits. Instead, organizations automatically qualiy if they are exempt under IRS section 501(c)(3), 501(c)(4), or have a prior exemption letter. Submit a copy of your federal exemption letter with a completed Michigan Sales and Use Tax Certificate of Exemption (Form 3372). Lastly, most charitable organizations must file with the Attorney General’s Charitable Trust Section.

Federal Forms

The federal forms process is complex and detailed, speaking with an attorney is advisable prior to beginning. To achieve tax-exempt status, you must file Form 1023 for Section 501(c)(3), Form 1024-A for Section 501(c)(4), or Form 1024 for other sections of 501(c)(3). This designation allows donor contributions to be tax-deductible and exempts your nonprofit from certain taxes.

The IRS provides an online guide for the application process. It determines whether your entity is a trust, organization, or association, and requires your EIN, a statement of exempt purpose, and essential documents like your organization document and financial information spanning past, present, and future.

If you wish to be represented by a third party, note the IRS’s guidelines: to authorize representation, complete Form 2848, Power of Attorney and Declaration of Representative. For authorizing discussion without representation, use Form 8821, Tax Information Authorization.

Legal Team

A skilled attorney or legal team (depending on size) is vital in guiding you through incorporation. They ensure accurate drafting and filing of critical documents such as articles of incorporation and bylaws, anchoring your organization’s legal structure. Moreover, they adeptly manage the application for tax-exempt status, preparing the essential IRS forms enabling you to receive tax-deductible donations.

Attorneys can also provide strategic legal advice, draft and review contracts, or help protect intellectual property. Should disputes arise, they act as your advocate, aiming to resolve issues swiftly to minimize disruption. This comprehensive legal support empowers you to confidently pursue its objectives with integrity and compliance.

Raising Money

Once your nonprofit is established, the question is fundraising. There are various methods, each suited to different types of organizations. Galas are capable of raising substantial amounts – sometimes exceeding a million dollars – but can be costly to host, making them less ideal for new nonprofits with limited budgets.

Grants offer a promising alternative, providing tax-free funds that don’t require repayment. They are typically awareded by public sectors or charitable foundations and often prefer organizations with charitable status and less established cash reserves. However, grants usually come with conditions tied to specific milestones and outcomes.

Trading is another viable method, exemplified by the success of Girl Scout Cookie sales. Selling goods or services to raise funds, targeting the public, nonprofit members, or other entities.

Unlike trading, fundraising involves receiving voluntary donations without providing goods or services in return. Effective fundraising relies on spreading the word, utilizing social media and word-of-mouth to maximize reach and avoid potential losses.

It’s crucial to adhere to legal and ethical standards in fundraising, such as the Institute of Fundraising’s Codes of Practice. Compliance with data protection laws and regulations on professional fundraisers, collections, and lotteries ensures the safety and legality of the fundraising process.

Conclusion

Nonprofit corporations are incredibly rewarding practices and can do a lot of good for your community. However, they can be complicated and costly. If you’re considering starting a nonprofit in Michigan, contact Fausone & Grysko, PLC for guidance! Schedule a free consultation online or call our office at (248) 380-0000.