The Dos and Don'ts of Starting a Nonprofit

It begins with the size, the board, the name and the mission

By Taylor Kuether | September 18, 2020

The first step when forming a nonprofit or charitable organization, says Stacey DiDomenico, an attorney at Couzens, Lansky, Fealk, Ellis, Roeder & Lazar in Farmington Hills, is to envision its size.

“If it’s going to be a very small venture or one-time thing, like a GoFundMe campaign, you don’t necessarily need to register yourself as a business and get tax-exempt status from the IRS,” she says. 

But if you’re thinking of an ongoing organization, she adds, “You need to look at it like you’re starting a business.”

A common example, says Jeffrey D. Moss, an attorney at Dawda, Mann, Mulcahy & Sadler in Bloomfield Hills, is following a funeral, some friends will want to set up a scholarship for the children of the deceased. “A lot of times, we wind up creating a small private foundation or advise them to park their money at an existing institution,” he says. “But if somebody wants to have an annual golf outing to raise money so kids can get scholarships at a particular school, then we have to set up a foundation for them.” 

Nonprofit organizations in Michigan must have a board of directors, too; private foundations need at least one director, while all other nonprofit organizations need a minimum of three. “Usually there’s one founder that has the idea and what’s best is if you can get another couple [of] people on board. It’s good to get those people in from the ground up so you can allocate responsibility and share the workload,” DiDomenico says. “There’s a lot of work involved, so they need to be passionate about the cause.”

Then comes a name and a mission. “It doesn’t need to be fully fleshed out, but it’s so the organization and the initial directors can have an idea about what they want to do, who they want to help, and how they want to do it,” DiDomenico says. “We need that information before we can get started with any of the actual documents.” 

Michigan requires articles of incorporation, the initial filing document with the state. If the organization will hold charitable assets and/or fundraise, it also needs to register with the state attorney general’s office, and that registration needs to be certified if any fundraising will be done.

There are three annual filings: one with the attorney general’s office, one with the state for the corporation, and one for tax returns. “Failure to file any of those can really lead to bad results for your organization,” DiDomenico says, “so stay on top of those.”

Moss notes that when applying to the IRS for tax exemption, nonprofits must share their fundraising plans and methods for doing so. “Some types of solicitations require additional communications with the attorney general,” he says. “Having a bingo game or poker or raffle requires specific licenses, and they have to apply for those licenses in advance from the state.” 

Another issue Moss says he encounters frequently is private inurement. “You can’t benefit people that you’re related to, unless you’re offering the same types of benefits to the public. Like, I can’t open the Jeff Moss Scholarship Fund and only give scholarships to my kids,” he says.

When soliciting and raising funds, organizations are required to provide substantiation stating how much was received and what donors got in return. “For example, if somebody donates $100 to a nonprofit and gets back a T-shirt that is valued at $12, their donation is supposed to be a net of $88 and the organization has to say that,” Moss says 

Larger nonprofits often need workers, and while some treat them like contractors, DiDomenico says they may not be, under the law. “Misclassification issues sometimes happen, so make sure that any workers are truly independent contractors, or they need to be treated as employees,” she says.

Both attorneys have advised a variety of nonprofits, from family foundations and public charities to sports leagues and religious institutions. “I’ve also set up several foundations that support medical research when someone has a particular condition and they would like to raise funds to support people with those conditions,” Moss says.

Regardless of the type, nonprofits have one thing in common, DiDomenico says: “I love my nonprofit clients. They’re some of my absolute favorites and they’re always an absolute pleasure to work with.”