Having a strong legal foundation is central to any corporation’s effective management, especially in the case of a nonprofit entity. Charitable entities must adhere to specific organizational standards if they wish to secure and maintain tax-exempt status. And keeping that tax-exempt status is the name of the game when it comes to nonprofits. Without that status, your ability to further your mission is significantly reduced. Your corporate standards are critical to this. These standards include the implementation of strong conflict of interest, whistleblower, decision-making, and membership selection provisions, such that the IRS can be assured that tax-exempt funds are being used in a lawful manner.
While a nonprofit corporation is not concerned with generating value for shareholders, it nonetheless must adhere to traditional corporate formalities for the directors and officers to enjoy corporate liability protection and to maintain its effective status as a tax-exempt. If such formalities, such as the maintenance of minutes at board and committee meetings, annual meeting requirements, quorum presence rules, and others, are not established and followed, the entity runs the risk of losing corporate liability protection and potentially its tax-exempt status.
In addition to certain requirements with respect to the formal organization of a nonprofit corporation, such entities are also required to maintain separate, written policies seeking to ensure that charitable funds are not misappropriate. For instance, nonprofit entities must maintain a conflict-of-interest policy that determines whether certain actions, donations, or solicitations by the organization and its directors are for the benefit of the charitable organization only. Likewise, policies should be established that expressly provide for whistleblower protections, document retention and destruction, use of funds, and similar.
In order to enjoy tax-exempt status, nonprofit entities must file certain documentation with the IRS, as well as the State of Michigan, prior to that exemption being granted. To qualify as a 501(c)(3) organization (or any of the other nonprofit entities in Chapter 501), an IRS Form 1023 must be filed, and a determination must be made in the organization’s favor by the IRS. Similarly, if an entity seeks to solicit charitable donations in Michigan, it must file a solicitation form with the office of the Attorney General. Failure to submit these documents will result in charitable funds being taxed until tax-exempt status is granted.
Lansing Legal Group, PLLC will review your current nonprofit organizational documents, your corporate formalities, IRS and State filings, and internal policies to determine whether they are sufficient to ensure your nonprofit entity remains compliant and enjoys tax-exempt status. If deficiencies are identified, we will draft the appropriate documentation that will establish the necessary criteria for your organization to continue in its mission. Give us a call to get started today!