With recent executive orders issued by the Trump administration threatening federal aid cuts, Michigan nonprofits considering strategic consolidations to strengthen their financial future should understand the intricate steps involved in nonprofit mergers before taking action, according to attorney Zana Tomich, co-founder of Detroit-based business and land use law firm Dalton & Tomich who has worked extensively with nonprofit entities.
“Small to midsize nonprofits and their board members, executive directors, and other leaders supporting Michigan’s nonprofit community need to explore the key considerations, legal requirements, and practical steps involved in nonprofit mergers within Michigan’s regulatory environment, whether actively considering a consolidation or simply planning for contingencies,” Tomich said.
In uncertain funding environments, mergers offer nonprofits several strategic advantages - in addition to mere survival. Tomich explains the three key advantages:
1. Financial resilience and operational efficiency. Combining administrative functions such as accounting, HR, marketing and IT, can significantly reduce overhead costs, creating efficiencies that free up financial resources for mission-driven work.
2. Enhanced services and geographic reach. Mergers can enable nonprofits to expand their geographic footprint, combine complementary programs, and create more comprehensive service models. This integration often leads to improved outcomes for beneficiaries who can access multiple services through a single point of contact.
3. Competitive advantage in fundraising and grants. Larger organizations with broader impact metrics and more sophisticated infrastructure may have advantages in competitive grant processes, both with private foundations and remaining federal opportunities.
“These strategic advantages make mergers attractive in theory, but the implementation requires planning and execution,” Tomich said. “Organizations must understand that successful consolidation involves a structured process with distinct phases, each requiring thoughtful attention to both organizational and legal considerations.”
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The merger process
When two nonprofits decide to explore whether merging makes sense, legal counsel with experience guiding organizations through a consolidation process helps identify potential obstacles early and ensures compliance with Michigan’s nonprofit regulations.
“The exploration phase should begin with discussions between executive leadership and board representatives focusing on mission compatibility, strategic benefits, and potential challenges,” Tomich said. “Organizations should examine how their programs might complement each other, whether their organizational cultures align, and how combined operations could better serve communities in light of the potential for reduced federal support.”
Following a positive exploratory phase, next level due diligence begins, with both organizations opening their books, contracts, and operational details for thorough examination, including a structured review process covering assets and liabilities, finances, legal obligations, and employment matters.
Following successful due diligence, organizations can negotiate specific merger terms through designated representatives and legal counsel, addressing practical questions about governance structure, leadership roles, branding decisions, and integration timelines. The resulting agreement requires formal approval as determined by organizational bylaws.
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Legal and regulatory considerations
The Michigan Nonprofit Corporation Act establishes the primary legal framework for nonprofit mergers and requires formal board approval of a written merger plan, proper documentation of that approval, and filing of Articles of Merger with the Department of Licensing and Regulatory Affairs (LARA). Organizations with voting members must also secure appropriate membership approval according to their bylaws before proceeding with state filings.
Asset transfer and employment are other critical legal considerations. Regarding the former, Michigan’s charitable trust doctrine, enforced by the Attorney General’s Charitable Trust Division, requires that assets dedicated to specific charitable purposes continue serving those purposes after consolidation. Organizations holding restricted funds, endowments, or property designated for particular programs must develop plans to maintain these restrictions post-merger. Regarding employment matters, nonprofits need to consider compensation packages, contracts, and personnel policies while ensuring compliance with state employment laws.
Federal tax compliance is another critical issue. The merged entity must understand and fulfill requirements for maintaining 501(c)(3) status. In addition, grant and contract obligations may present practical legal challenges that directly impact operations. Certain grants—particularly federal grants—may include specific provisions regarding organizational changes that require advance notification and formal amendment processes.
“As Michigan’s nonprofit sector navigates potential reductions in federal funding, mergers may offer one pathway to sustainability and continued impact; but legal considerations make nonprofit mergers a complex, multifaceted process,” Tomich said.
“Small to midsize nonprofits and their board members, executive directors, and other leaders supporting Michigan’s nonprofit community need to explore the key considerations, legal requirements, and practical steps involved in nonprofit mergers within Michigan’s regulatory environment, whether actively considering a consolidation or simply planning for contingencies,” Tomich said.
In uncertain funding environments, mergers offer nonprofits several strategic advantages - in addition to mere survival. Tomich explains the three key advantages:
1. Financial resilience and operational efficiency. Combining administrative functions such as accounting, HR, marketing and IT, can significantly reduce overhead costs, creating efficiencies that free up financial resources for mission-driven work.
2. Enhanced services and geographic reach. Mergers can enable nonprofits to expand their geographic footprint, combine complementary programs, and create more comprehensive service models. This integration often leads to improved outcomes for beneficiaries who can access multiple services through a single point of contact.
3. Competitive advantage in fundraising and grants. Larger organizations with broader impact metrics and more sophisticated infrastructure may have advantages in competitive grant processes, both with private foundations and remaining federal opportunities.
“These strategic advantages make mergers attractive in theory, but the implementation requires planning and execution,” Tomich said. “Organizations must understand that successful consolidation involves a structured process with distinct phases, each requiring thoughtful attention to both organizational and legal considerations.”
—————
When two nonprofits decide to explore whether merging makes sense, legal counsel with experience guiding organizations through a consolidation process helps identify potential obstacles early and ensures compliance with Michigan’s nonprofit regulations.
“The exploration phase should begin with discussions between executive leadership and board representatives focusing on mission compatibility, strategic benefits, and potential challenges,” Tomich said. “Organizations should examine how their programs might complement each other, whether their organizational cultures align, and how combined operations could better serve communities in light of the potential for reduced federal support.”
Following a positive exploratory phase, next level due diligence begins, with both organizations opening their books, contracts, and operational details for thorough examination, including a structured review process covering assets and liabilities, finances, legal obligations, and employment matters.
Following successful due diligence, organizations can negotiate specific merger terms through designated representatives and legal counsel, addressing practical questions about governance structure, leadership roles, branding decisions, and integration timelines. The resulting agreement requires formal approval as determined by organizational bylaws.
—————
The Michigan Nonprofit Corporation Act establishes the primary legal framework for nonprofit mergers and requires formal board approval of a written merger plan, proper documentation of that approval, and filing of Articles of Merger with the Department of Licensing and Regulatory Affairs (LARA). Organizations with voting members must also secure appropriate membership approval according to their bylaws before proceeding with state filings.
Asset transfer and employment are other critical legal considerations. Regarding the former, Michigan’s charitable trust doctrine, enforced by the Attorney General’s Charitable Trust Division, requires that assets dedicated to specific charitable purposes continue serving those purposes after consolidation. Organizations holding restricted funds, endowments, or property designated for particular programs must develop plans to maintain these restrictions post-merger. Regarding employment matters, nonprofits need to consider compensation packages, contracts, and personnel policies while ensuring compliance with state employment laws.
Federal tax compliance is another critical issue. The merged entity must understand and fulfill requirements for maintaining 501(c)(3) status. In addition, grant and contract obligations may present practical legal challenges that directly impact operations. Certain grants—particularly federal grants—may include specific provisions regarding organizational changes that require advance notification and formal amendment processes.
“As Michigan’s nonprofit sector navigates potential reductions in federal funding, mergers may offer one pathway to sustainability and continued impact; but legal considerations make nonprofit mergers a complex, multifaceted process,” Tomich said.
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