Non-Profit Organizations
Do I need a legally recognized form of business?
The first questions that someone should ask themselves, of course, after they come up with an idea and have some idea of what it is that they want to do for a business, is whether or not they should have a legally recognized or a legally separate business. And when individuals come to me and ask this question, I tend to look at a lot of the factors that would assist them in making that decision, for instance, whether or not they have a vision for the company that shows growth. Obviously, massive growth or the ability to attract investors or other partners or people is one thing that would come into it. What their tax concerns were would be another. The size - whether or not they were going to be hiring employees. If they were going to operate their business in more than one state or territory, and probably what their taste for liability was. If they were a little more risky or if they're a little bit more risk-averse. I think initially those are the really big factors that I like to hammer down with someone who is trying to make that decision.
What legal factors should I consider when starting a business?
Legal factors in starting a business: The number one that I always am concerned about when I'm advising individuals is liability. I take a look at what their business is. Someone who is, for instance, baking cookies out of their oven, they have a different risk than someone who is developing a chemical that's going to be spread on tomatoes or something like that. You take a look at all the risks and all the liability and what can come from it, and that's one really large factor. Additionally, whether or not they want to take in outside investment capital. If you were planning on taking in outside investment capital from a passive investor, or a venture capitalist, or what people call an angel investor, then a legally recognized business is going to definitely benefit you, and it's going to give you a little bit more legitimacy. It also allows for passive ownership, which some of the other ones don't. There is, though, the concept of having a legitimate business. When someone goes through the steps of forming a corporation or a limited liability company, other people can take a look at that and think that person might even be more serious or that might be that thing they really want to do. So those are the really main factors that I look at. Additionally, you think of taxes, like I said whether or not they would hire any employees, and the size of their business, some of the things that they're planning on doing with it, and, for instance, the biggest one to me, also, might be just what their goals are. Do they want to keep a small, little mom-and-pop shop, or do they want to grow this into a massive business that is going to be name-known everywhere?
What is a "non-profit corporation"?
A non-profit corporation is, again, another type of a corporation. In general, when you file a non-profit corporation or you file to organize a non-profit corporation there are some formalities that are different in most states when you actually form it. Most states would actually require you to state what your purpose is. In many states there has to be more than just one director. Many states require three. Some states even require that some of the directors are not actively involved in running the business, and that keeps it more on the level, in a sense. Now just because you have a non-profit corporation or file one, it doesn't always mean that you're going to have non-profit status with the IRS. That is a completely separate filing that we should talk about, called a 51 filing, and there are many different ways that you can file to get tax-exempt status. The most common one is 51C3, which is a charity that a lot of people are very familiar with. There can be just dozens of different types of non-profit corporations; they can be political, aspirational, educational, scienctific, religious, mutually beneficial etc. Obviously every state is a little bit different, but overall, the difference between a profit corporation and a non-profit corporation is that profit corporations are there for one thing: profit. Non-profit corporation is there for something different, and it's typically for improving society, making the world a better place or some other type of charitable or higher purpose rather than just putting money into people's pockets.
What are the pros and cons of forming a non-profit corporation?
The biggest pro of all is that you can receive and you can be eligible to apply for tax exempt status with the IRS. That means that everything that you do and earn doesn't actually get taxed. So that's amazing and obviously that's a huge windfall, but that's the reason why the IRS has put that out there and allowed for it is because they want to encourage charities, companies, and corporations that are for the benefit of something other than lining your pockets. Some of the draw backs is the cost. Filing and upkeeping a 501 filing or a tax free filing requires a lot more time, and a lot more disclosure. There are many legal requirements and the application is quite laborious as well. There are some people that can help you out with those small business requirements. You can always go and see an attorney, and there are some online companies that can help you as well. In general you need to know what your appetite for upkeep on a corporation is. Additionally, even if you have a non-profit and you do a really good job of starting it, you've got to maintain it, and if you don't you could actually blow your tax free status. Doing something silly like taking a certain amount of money and using it more like a profit or keeping money in there can ruin the whole thing for everyone. So it takes very tight controls and you should have someone who understands accounting and someone who really understand how to run a non-profit organisation helping you. I think additionally, one of the pros is that you can take donations from people and you can market it. They will get a tax break so if you host a charity dinner and it's $100 a plate and the dinners were only $30, someone can get a $70 tax write off. Or for instance if you accept a donation of $100 the whole entire $100 can be a write off to the individual person, and obviously that has good tax ramifications for them.
What are the major attributes that establish a corporation as non-profit?
The first one usually is the purpose of the company. Just like a general corporation where there is a C or an S corporation, where its goal is to maximize profits and make a return for its shareholders. That's kind of the complete opposite for a non-profit corporation. The goals and aspirations of a non-profit corporation are typically charitable in nature. They would be to help other people out or for the betterment of society, for education, for religion, for politics. There are a lot of reasons you can start a non-profit corporation, but the only reason you can't start one is to make money. Essentially, the only way that non-profits actually take in money, they usually do it through donations or through charitable giving. And then all of the money that they use is really earmarked to be spent out whether it's on salaries for the people who are on its staff or to do some of the good that it's doing. For instance, a medical research non-profit might take a good chunk of its money and put it towards cancer research or towards a hospital that was conducting cancer research.
What is an "Employer Identification Number"?
With small business basics, an "Employer Identification Number" is also called an EIN, Tax ID or Federal Tax ID. An EIN is essentially a Social Security Number for a business. So, if your business wants to open up a bank account, hire employees or file its taxes separately, it's going to need an Employer Identification Number or a Tax ID number. You can get that by filing out a simple form SS4 with the IRS. There just has to be an individual who is responsible for taking care of the taxes and making sure everything's done. You can usually get an EIN almost the same day if you file it.
Do I need an Employer Identification Number?
Whether or not you need an Employer Identification Number depends on a few factors. Not everyone does need an Employer Identification Number. In my opinion, I think it's always better if you are running a business to have an Employer identification number than to not have one. There's a few reasons for that, even though if I'm a sole proprietor and I'm running a small little business out of my home, I don't care if it's a doing web design or it's baking pretzels, I don't necessarily need a separate Employer Identification Number; I can do everything under my personal bank account, under my own name, and under my own Social Security number. However, if you have any aspirations of growing your business or you like to keep things separate and not commingle your funds, I think it's good to have a separate Employer Identification Number because you can open up a separate bank account for the business and it allows you to keep separate records and I think doing that legitimizes the business, and so for most people I recommend that if you're serious about your business you should probably get an Employer Identification Number.
