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Define Your Charitable Purpose

We receive many calls from people thinking about starting a nonprofit organization to help solve a particular problem or address a particular issue.  The idea is that a nonprofit will allow people to raise money to fund a defined need.  Sometimes, though, the very real problem or issue to be addressed isn’t one that can be funded with a charitable organization.  For example:

  • Something that will benefit a single individual, like a wheelchair ramp to provide easy access to the individual’s home, or
  • Expenses that are someone’s personal or parental obligation, like fees for sports or other extracurricular activities.

hatinhandWhen considering the need for a new nonprofit organization, keep in mind that the charitable purpose must be broad and the organization’s work must benefit a whole community, not just the members of the nonprofit or a specific individual.

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Happy Hour

BauerGriffith and Independence Leads Group

Happy Hour Event

Where Doing Good is Good for Business

The principals of BauerGriffth, and the members of the Independence Leads Group, invite our non-profit and for-profit clients, associates and colleagues for spirits and libations, and good networking opportunities.

When:              May 8, 2014, 5:30 – 7:30

Where:             Winking Lizard Tavern, 25200 Miles Road, Bedford Heights, Ohio

Cash bar, hors d’oevres provided

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Help From the IRS

irspubsDid the title of this post catch your attention?  Yes, the IRS really can be helpful to nonprofits with many commonly asked compliance questions.  The IRS publishes tons of material each year, much of it very technical and very much geared toward tax professionals.  But they also publish some very clearly written, plain language documents that can help us as nonprofit board members and staff leaders.  These documents are referred to as IRS Publications (as opposed to Forms, Technical Advice Memoranda, Opinions, etc.), and are easily accessible by searching the IRS website.  You can enter the publication number if you know it, or just search by keywords.

Some of the most common issues and questions for charitable organizations are addressed by the following:

  • Publication 526, for rules regarding charitable contributions.
  • Publication 557, for information on how to obtain and keep your tax exempt status.
  • Publication 1771, for rules on receipts and acknowledgements of gifts and contributions.
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The Importance of a Business Plan

According to Dun & Bradstreet statistics, poor planning is the number one cause for the failure of a small business.  A business plan is both your company’s resume as well as its growth strategy.  Your business plan, especially for a start-up or early stage company, should outline the plans, strategies and goals for your business.

When writing your business plan, remember that you cannot foresee everything that will happen to your company, so be prepared to revise it as conditions change.  In addition, be realistic with your assumptions, take into consideration the difficulties in growing your business, take your competitors into consideration, and discuss the risks to your business.

Your business plan should be concise and easy to read and comprehend.  It should express the market opportunities for your business, and the strength and depth of your management team.

Keep in mind that youruntitled business plan serves three key functions, namely a planning tool for the growth of your business, a document to convey information to prospective investors, and a base to measure and monitor your company’s performance over time.

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What is a Partnership?

A general partnership consists of two or more partners.  There are no statutory formalities, however it is prudent to have a partnership agreement that sets forth the partners’ rights and obligtations.  A general partnership is thus easy to establish and can be  more informal than other business entities.

There is a huge downside to a general partneship; each partner may be liable for all of the partnership’s debts and liabilities.  This personal liability is the rationale behind a detailed partnership agreement.

A limited partnership, on the other hand, consists of one or more general partners and one or more limited partners.  The general partners typically make all of the business decisions, while the limited partners are typically passive investors.

Unlike a general partnership, a limited partnership requires an organizational document to be filed with the Secretary of State.  In addition, a limited partnership agreement should be drafted setting forth the rights and obligations of the general partner and the limited partners.  Typically only the general partners bear the liability for the partnership’s debts and liabilities, while the limited partners have limited exposure.

Limited partnerships have their place, and can be a good structure for certain enterprises, such as real estate holdings, venture capital funds and so on, but limited liability companies and corporations are typically better for operating a business.

Determining the correct structure for your enterprise is a critical first step and should not be decided lightly.

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Creating a New Non-Profit

orgThere are a lot of issues to consider when you’re thinking about starting a new non-profit organization to run your community or charitable activities.  One of the first is, are you prepared to run a business?  When you start a new organization, keep in mind there are lots of filing and compliance requirements, both with the IRS and with your state, that will apply no matter how small you are, and that last for the life of the organization.  To avoid trouble, you’ll need to take your new organization seriously, and run it like a small business.

Speaking of small business, also keep in mind that your non-profit status is a tax election.  Successful non-profits are still run like a business.  And they make money, too!  A non-profit organization simply can’t distribute its proceeds to individuals such as shareholders or partners.  All of a non-profit’s proceeds must to be used for its charitable purposes.

The form of your non-profit business organization matters, too.  While the IRS does allow various forms of organizations, such as partnerships or LLC’s, to achieve non-profit status, choosing this type of form will create lots of complications and add lots of time to the process of achieving your tax exempt status with the federal government.  So when you form your organization at the start, choose the basic corporate form in your state.  It will save time and aggravation, and allow you to run and grow your charitable business over time.

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Your Child is 18!

Consider this scenario:  Your daughter is a freshman in college three states away, is involved in an accident, but the doctors won’t give you any information.

It is important to remember that once your child turned 18, she became an adult for health care purposes.  Her doctors are no longer permitted to discuss her needs with you, including in the unfortunate case of an accident.

One way to eliminate this problem is to have your child execute a medical power of attorney, naming you as his or her agent.  In this way, should anything happen to your son or daughter, not only will the doctors be authorized to speak directly to you, you will also be empowered to make medical decisions for him or her.

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Corporate Basics

Corporate shareholders are the owners of the company, their most important function being to elect the board of directors.  The board has overall responsibility for the company’s business, and elects the company’s officers.  Officers manage the day to day business of the company.

Directors must act in the best interests of the company and its shareholders.  They are fiduciaries, a relationship based on trust and confidence.  The board should not be so large as to be unwieldy, and should preferably be an odd number to avoid deadlocks. The board meets annually, but should meet more frequently to provide advice and guidance to the company.

Certain corporate actions require shareholder approval.  The corporation generally holds an annual shareholder meeting, but can hold special meetings as needed.  In addition, shareholders can approve corporate actions by their unanimous consent without a meeting.

A corporation’s minute book holds important corporate records, and should be kept current.  For instance, the minute book holds the company’s articles of incorporation, bylaws, and minutes and written consents of meetings or other actions of the company’s directors and shareholders.

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What is an S Corporation?

An S corporation (sometimes referred to as an S Corp) is a special type of corporation created through an IRS tax election. An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation.

To be considered an S corp, you must first charter a business as a corporation in the state where it is headquartered. According to the IRS, S corporations are “considered by law to be a unique entity, separate and apart from those who own it.” This limits the financial liability for which you (the owner, or shareholder) are responsible.

What makes the S corp different from a traditional corporation (C corp) is that profits and losses can pass through to your personal tax return. Consequently, the business is not taxed itself. Only the shareholders are taxed. There is an important caveat, however: any shareholder who works for the company must pay him or herself reasonable compensation. Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as wages.

Before you form an S Corporation, determine if your business will qualify under the IRS stipulations, eg domestic corporation, no more than 100 shareholders, shareholders must be individuals, certain trusts, or estates, and a shareholder cannot be a partnership, corporation or non-resident alien..

To file as an S Corporation, you must first file as a corporation. After you are considered a corporation, all shareholders must sign and file Form 2553 to elect your corporation to become an S Corporation.

Once your business is registered, you must obtain business licenses and permits. Regulations vary by industry, state and locality.

There is always the possibility of requesting S Corp status for a limited liability company, even a sole owner LLC. You’ll have to make a special election with the IRS to have the LLC taxed as an S corp using Form 2553. And you must file it before the first two months and fifteen days of the beginning of the tax year in which the election is to take effect.

The LLC remains a limited liability company from a legal standpoint, but for tax purposes it’s treated as an S corp.

Most businesses need to register with the IRS, register with state and local revenue agencies, and obtain a tax ID number or permit.

All states do not tax S corps equally.

Your corporation must file the Form 2553 to elect “S” status within two months and 15 days after the beginning of the tax year or any time before the tax year for the status to be in effect.