Sterling Law Office attorneys recently worked on articles of incorporation and other state and federal documentation for a local friends of the library organization. The following article gives an excellent summary of why formal incorporation is very important for library friends. This article is reprinted with kind permission of the State Library of Michigan, originally posted on their website www.michigan.gov/libraryofmichigan.
FRIENDS OF THE LIBRARY – PART I: INCORPORATION
There are a number of legal issues that a group of hard-working, helpful volunteers must consider prior to establishing themselves as the official Friends of the Library. Two articles (below) focus on the legal requirements of establishing and operating Friends of the Library groups to help them work effectively and efficiently with public libraries across Michigan. The first article focuses on the establishment options of the group. The second article focuses on legal requirements tied to fundraising and gaining 501(c)(3) status.
One of the most important goals a Friends of the Library group must achieve is to establish a proper relationship with the public library with which it is associated. Each party should understand the legal status of the other, as well as respect each other’s powers and duties. This relationship can either make or break the Friends of the Library. Care should be taken to establish a reporting structure, a policy on gifts to the library and authorization for any activities undertaken in the name of or on behalf of the library.
In Michigan, as in most other states, there are two basic organizational structures to be considered when establishing a Friends of the Library group: unincorporated association or corporation. The choice of one or the other depends on an analysis of factors such as cost, liability and certainty.
A) Unincorporated Associations. Many associations made up of volunteers, especially those organized for short-term projects, are unincorporated associations. Generally, the personal liability of members of unincorporated associations on contracts made by, for and on behalf of the association is “joint and several.” This means that all the members, collectively, or any one member may be liable for the entire value of the contracts of the association. The remaining members, for instance, may be liable for payment on a contract for printing costs if the association itself fails or is unable to pay off the debt of the group. Members of unincorporated associations may also be liable for any civil wrongs in which they participate, authorize or even to which they simply assent by vote or otherwise. These acts may include, but are not limited to, undertakings that amount to discrimination, wrongful hiring or termination, negligence, and lack of supervision.
Even unincorporated associations should be carefully organized with appropriate articles and bylaws. Since the potential for liability for members is omnipresent, the unincorporated group should always seek the advice of legal counsel to ensure that the documentation is complete and proper.
B) Michigan Nonprofit Corporations. In general, the officers, directors and members of nonprofit corporations are not personally liable for the acts of the corporation or each other. Any liability is generally limited to the assets of the corporation. The Michigan Nonprofit Corporation Act, MCL §450.2101 – §450.3192, allows nonprofit corporations to assume much of the liability of their directors and to indemnify their officers and directors for certain acts.
This is accomplished through the proper drafting of the corporation’s articles of incorporation and bylaws. The costs associated with drafting these documents are comparable to those for the unincorporated association. There is a nominal cost for filing the articles of incorporation with the Corporation, Securities and Land Development Bureau of the Michigan Department of Consumer and Industry Services.
In comparison with an unincorporated association, however, the legal results of establishing a Friends of the Library group as a Michigan Nonprofit Corporation are very certain. The Michigan Nonprofit Corporation Act is quite extensive and very specific in its regulation of the operation of covered entities. Additionally, there is a great deal of case law. Legal counsel will be able to predict with more certitude the outcome of different situations and the implications of different options in establishment and operation. Most Friends of the Library groups in Michigan have chosen to become incorporated under the Michigan Nonprofit Corporations Act.
C) Filing to Become a Michigan Nonprofit Corporation. Becoming a Michigan nonprofit corporation is neither difficult nor expensive. The questions asked on the application will prompt the organizers of a Friends of the Library group to ask all the important questions about the purpose and structure of the organization. The statement of purpose is extremely important and should be drafted with the advice of legal counsel in order to avoid unwanted results or implications.
It is at this stage in the process that a decision must be made between a membership corporation or a directorship corporation. A membership corporation is one in which each member generally has the right of one vote on all matters brought before the corporation. While this may seem to embody the democratic ideal, it often becomes cumbersome as nonprofit corporations grow and decisions need to be made in a more efficient manner. Most nonprofit corporations that expect to involve numerous members in their activities choose the directorship form of organization. Legal counsel for the Friends of the Library will be able to explain the fine points of the options as well as draft the appropriate articles of incorporation and bylaws.
FRIENDS OF THE LIBRARY PART II: FUNDRAISING
A) Fundraising. Friends of the Library should also become knowledgeable about the state laws governing all the activities of the group. Most Friends of the Library are engaged in fundraising for the library. With few exceptions, all organizations must apply for and obtain a license to solicit charitable contributions. This license is obtained from the Michigan Department of Attorney General, Charitable Trust Section. Friends of the Library who do not receive contributions in excess of $8,000 during a 12-month period of any year and who use all volunteers and make a financial statement available to the public may be exempt from the requirement. However, as soon as the organization exceeds the $8,000 threshold, an application for a license must be filed within 30 days with the Attorney General’s Charitable Trust Section. They are also a helpful source of information if the Friends are thinking of hiring a professional fundraiser.
Many other laws govern the typical fundraising activities of Friends of the Library. For example, if a group holds a raffle or conducts bingo or similar games of chance, it must obtain a license from the Michigan Bureau of Lottery, Charitable Gaming Division. If the Friends are engaged in the sale of goods, even used books, at retail, a sales tax license and the collection and remittance of sales tax is generally required.
B) 501(c)(3) Status. There are two basic reasons why a Friends of the Library might seek tax-exempt status under Section 501(c)(3) of the Internal Revenue Code: a recognized organization is not subject to federal income tax and donations to the organization are tax deductible as provided by the code. Other advantages of acquiring federal tax-exempt status may occur on the state level. Although recognition as a tax-exempt organization by the IRS does not automatically mean exemption from Michigan taxes, there are various exemptions from income, property or sales and use taxes. For instance, 501(c)(3) organizations whose retail sales do not exceed $5,000 in a calendar year may be exempt from sales tax. Legal counsel will be able to advise Friends of the Library in regard to other advantageous provisions.
501(c)(3) status does not come free of restrictions and requirements. An annual report is required under most circumstances. Tax-exempt organizations are somewhat restricted in their ability to lobby and influence legislation. Income taxes may be imposed on “unrelated business activities.” Friends of the Library should be especially careful about participating in any election campaigns, including ballot questions, without first consulting legal counsel. All of these matters should be discussed on a regular basis with legal and financial professionals.
Although the process of applying for 501(c)(3) status requires care and attention to detail, the advantages far outweigh any difficulties associated with the process. The first step is to obtain the proper forms. Publication 557, “Tax-Exempt Status for Your Organization,” published by the Internal Revenue Service, is a good place to start. This booklet describes the application and approval process, which forms must be used and the types of information required. There is an extremely helpful discussion of which organizations must apply for recognition and which are not required to file.
The application itself must be submitted by Form 1023 and Form 872-C. There is a one-time filing fee. The form may be long, but it is not mysterious. The Friends of the Library, in anticipation of an appointment, can gather much of the information requested through legal counsel. The forms are available free of charge from the Internal Revenue Service.
One of the most important reasons for incorporating a Friends of the Library as a Michigan nonprofit corporation, as well as obtaining 501(c)(3) status, is the assurance provided to library donors that the organization is being operated in accordance with law and with a certain measure of accountability to the public. This assurance can assist in immeasurable ways with any fundraising activities the Friends of the Library may choose.
(Originally published on the Library of Michigan website, www.michigan.gov/libraryofmichigan. Reproduced with permission by the Library of Michigan.)
Posted by Mary Wreford; Approved by Lea Ann Sterling, Esq., November 15, 2007.
The information presented in this article is for general information only and should not be construed to be legal advice.