Nonprofits: Clearing up the confusion

There are both state and federal requirements in order to qualify as a nonprofit.

The National Council of Nonprofits released a report titled: “2014 Nonprofit trends to watch. What are the implications for nonprofit staff, board members, donors, and community leaders? There is a section at the bottom of the document with a heading that reads “What is a ‘nonprofit’ – new financing structures add confusion”. There is already unfortunate confusion about what a “nonprofit” is – and is not. Some people continue to think that a charitable nonprofit may not show a profit at the end of its fiscal year! Others think that everyone involved with a nonprofit is a volunteer (unaware that approximately ten percent of the US workforce is employed by nonprofits).

A review of what is and is not a nonprofit can help provide some clarity to the confusion highlighted above. First, it is important to remember that there is a distinction made by the IRS. Nonprofit status may make an organization eligible for certain benefits, such as state sales, property, and income tax exemptions. Although most federal tax-exempt organizations are nonprofit organizations, organizing as a nonprofit organization at the state level does not automatically grant the organization exemption from federal income tax. To qualify as exempt from federal income tax, an organization must meet requirements set forth in the Internal Revenue Code. The Work Group for Community Health and Development at the University of Kansas explains that “a first important distinction to make is that granting nonprofit status is done by the state, while applying for tax-exempt designation (such as 501(c)(3), the charitable tax-exemption) is granted by the federal government in the form of the IRS.” Considering reviewing Types of Tax-Exempt Organizations and Tax-Exempt Status for your Organization for more information from the IRS.

Cornell University Law School outlines the definition of a nonprofit ”as a group organized for purposes other than generating profit and in which no part of the organization’s income is distributed to its members, directors, or officers.” Nonprofit corporations are often termed “non-stock corporations.” They can take the form of a corporation, an individual enterprise, unincorporated association, partnership, foundation, or condominium.

Non-profit organizations must be designated as nonprofit when created and may only pursue purposes permitted by statutes for non-profit organizations. Non-profit organizations include churches, public schools, public charities, public clinics and hospitals, political organizations, legal aid societies, volunteer services organizations, labor unions, professional associations, research institutes, museums, and some governmental agencies.

The Michigan Nonprofit Corporation Act 162 of 1982 highlights laws relating to the organization and regulation of certain nonprofit corporations, including prescribing their duties, rights, powers, immunities, and liabilities. Additionally, The Michigan Nonprofit Association has developed a website titled Staying Legal for Michigan Nonprofits to help new and already-established charitable organizations comply with federal and state laws and regulations.

The Michigan State University Extension Leadership and Community Engagement team offers professional development training, including volunteer board development, communicating through conflict, meeting management and facilitation skills development, and organizational strategic visioning and planning. To contact an expert in your area, visit the MSU Extension find an expert page or call 888-MSUE-4MI.

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