Friends of the Library-Part II: Fundraising

by Dragomir Cosanici, Library Law Specialist
Library of Michigan
October 2003

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 group. Last month, Trustees Corner focused on the establishment options of Friends of the Library groups. This month's article focuses on legal requirements tied to fundraising and gaining 501(c)(3) status.

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 form 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.

Updated 4/27/2006