What is a nonprofit?
Nonprofit, not-for-profit, and charity are all general terms for organizations that exist to serve the public good rather than make money for their owners. They can take a wide variety of forms, including places of worship, private schools, homeowners’ associations, amateur sports leagues, public welfare organizations, community development programs, and many more.
In Michigan, nonprofit organizations typically begin by forming a Michigan nonprofit corporation. This is an entity created with the approval of the state. The state imposes some restrictions on the activities of nonprofit corporations, but forming a nonprofit corporation helps protect the individuals involved in the organization. By contrast, groups of people acting without forming a nonprofit corporation (or operating only under a D/B/A or Doing Business As) have unintentionally formed an unincorporated association, and individuals can be personally liable for the actions of others in the unincorporated association.
Who runs a nonprofit corporation?
Some nonprofit corporations primarily (or only) serve their members, who also control the governance and operations of the nonprofit. Others serve larger segments of the public, and these are typically governed by a board of directors (sometimes called trustees). The board of directors or the members may then designate responsibility to paid or unpaid officers, who might hire other employees or be helped by volunteers.
What is a 501(c)(3)?
501(c)(3) is a section of the tax code that exempts nonprofit organizations from paying income tax. Most Michigan nonprofit corporations still have to pay taxes unless they also apply to the IRS to receive formal recognition of tax-exempt status. After their tax-exempt status is recognized, donations to the nonprofit tax deductible for the donor.
How long does it take to receive recognition of tax-exempt status?
Smaller nonprofits typically receive recognition of tax-exempt status from the IRS within 3 months of filing. Larger nonprofits, or those with other complicating factors, can take up to six months. If the IRS needs additional information, it may take longer.
Can a nonprofit make money?
Yes! Nonprofits can make money, but that money has to be used for the public good, not to benefit individuals. Nonprofits aren’t simply a way to get your business out of paying taxes, but they can be a powerful tool for accomplishing charitable purposes.
If you’re interested in starting a non-profit, or are currently serving a non-profit in any capacity, Smith Haughey’s attorneys are a great resource for your tax exempt and operations questions.
This article is general in nature and should not be construed as legal advice or creating an attorney-client relationship.
Consultation with legal counsel is recommended for specific situations.