Guest Blog Spot: Kelvin L. Spragley, Ph.D., M.Ed., B.S., A.A.
I get a lot of questions about non-profit businesses. So, I decided to turn to an expert. I’ve known Dr. Spragley for several years and he’s my go-to guy when it comes to questions about non-profits, education, programs, and advocacy groups. I’ve asked, and he generously agreed, to provide some thoughts on the topic of starting a non-profit. Enjoy!
So you want to start a “Non-Profit” business?
During the 15 years I have been involved with managing and/or providing services to non-profit organizations, there have been numerous encounters with individuals who have voiced an interest in establishing a non-profit. While there is great work to be done in the United States in areas such as eradicating poverty, tutoring at-risk, ending cancer, and a variety of other well-intentioned endeavors, there are a few items that non-profit entrepreneurs should keep in mind.
The first step in pursuing non-profit status is the task associated with completing the appropriate paperwork. While each state has its respective documents to complete, in order to achieve federal 501 (c) (3), non-profit status, individuals will need to complete IRS Form 1023. The application is approximately 30 pages in length and requires one to create bylaws, list board members, and outline program activities (amongst numerous other requirements). A major problem that many applicants experience is not making clear potential conflicts-of-interests between the organization, board members, program recipients, and vendors. In order to insure that no business or individual is benefiting unfairly, applicants should strongly consider that an attorney review the document prior to submitting it to the IRS.
Consider also the rules surrounding how a non-profit accrues revenue and the guidelines that dictate proper expenditures. As an example, individuals who operate a non-profit organization must make clear to the IRS if funds are being raised by a separate business or if gaming (Bingo, etc.) is a method of increasing revenue that will be used by the company. Note also that non-profit owners cannot spend funds on items that do not help them in meeting their organization’s objective. I have seen too many applications that do not make clear these distinctions. Consulting with an attorney and accountant, during and after the non-profit set-up process, is the best way to make sure an organization’s internal processes meet IRS regulation standards for revenue and expenditures.
Arguably, the most important issue owners of non-profits must be mindful of is the act of reporting. At the conclusion of each fiscal (financial) year, managers of non-profit organizations must submit a financial report outlining their revenue, expenditures, program/policy changes, or any change impacting the operation of the organization as reported to the IRS in the previous 12 months. Failure to submit this report can have severe consequences, from making it difficult to receive funds from donors or losing non-profit status completely. In 2011, the IRS noted that more than 300,000 non-profits lost their 501 (c) (3) status as a result of failing to file a report over a 3 year period.
To conclude, I would recommend anyone seeking to setup a non-profit business to consult with an attorney or someone with experience in the 501 (c) (3) arena. This will save you time (and heartache) in the long run.
Dr. Spragley and his associates can be contacted at The Spragley Group at http://www.spragleygroup.com
- Former IRS Director on Shadowy NonProfits: Investigate and Prosecute Them (crooksandliars.com)
- To Profit or Not to Profit? (coffeewithkath.wordpress.com)
- Group Challenges Different Treatment By IRS of Religious and Non-Religious Groups (jonathanturley.org)
- TurboTax – Charitable Contributions You Think You Can Claim but Can’t (turbotax.intuit.com)
- Non-Profit or For-Profit: The Social Entrepreneurs Dilemma (triplepundit.com)
Wait, no. I mean intentionally a non-profit organization? I’m sure there are plenty of brewer/owners out there that would readily admit that their business is currently a “non-profit.” I mean, in the legal, tax-status sense.
And the answer is: maybe.
Classic lawyer-speak, “maybe.” What I really mean is that maybe you could, but I don’t think you would want to. But here’s what goes into the analysis:
In order to be a non-profit organization, you have a “charitable purpose.” You can fill out your state paperwork to incorporate as a non-profit corporation (for example, in NC) and be an “entity.” But then, to get the tax benefits, you need to apply for tax exempt status at the IRS. NC, like many states, simply follows the Federal decision on whether your company is tax exempt or not. And, here’s the kicker, a main goal of your company cannot be “to make money.”
If I can’t make money, why would I start a company? – I hear you ask. Well, the answer to that is, generally, you wouldn’t.
But, there are those that want to give back to the community, help out the less advantaged, etc, without assuming all the personal liability or to go after serious fundraising. I work with several non-profits that focus on everything from providing job training to at-risk youth to providing a home for abandoned children. That’s what the non-profit business structure is made for and where it works best.
Well, can’t I make a little money? – Aha! Sure enough, there’s an entity called an L3C or Low-profit Limited Liability Company.
Many states allow L3Cs, such as NC, but many states do not, so you need to be sure of what your state does and doesn’t allow. L3Cs, generally, are sort of a hybrid between non-profits and for-profits. For an L3C, the state expects you to (1) have a business that makes money and (2) have a “charitable purpose” that uses the money that the business makes. A good example might be a church or community thrift store. No one opens a church thrift store thinking they’ll retire to the bahamas in a few years. It’s meant to be low-profit. An L3C, just like a non-profit, can pay employees and raise funds. What it can’t do is “intend” to make money for the sake of making money or for the sake of the owner(s).
But what about breweries?
So, how does all that relate to a brewery? Well, as a start-up, a brewery (at least typically) has a long, tough slog to get to being profitable. Could a brewery be a non-profit during that time to ease the expenses (especially the taxes). Answer: No.
The State, and especially the IRS, are going to say that you don’t have a charitable purpose as the goal of the business – so you won’t get your tax-exempt status. Even if you did get your tax-exempt status, you’d lose it eventually as you paid the owners more and more over time, then the IRS might come after your for tax fraud (remember, it brought down Capone!).
Could a brewery be an L3C? Well, yes, actually.
Let’s take the Trappist Abbey of St. Sixtus of Westvlateren as an example (assuming that Westvleteren was in North Carolina – aside: wouldn’t that be AWESOME?!?). The monks at the Abbey have often been asked if they’re going to increase production. They’ve replied (I’m paraphrasing here) “We brew beer so we can afford to run the Abbey and be monks, not the other way around.” This attitude and set-up would be a perfect model for an L3C: a business tightly linked to a charitable purpose where there is little or no excess profit.
But, Westvleteren is a special situation. After all there are only 7 Trappist breweries in the world. It would take a very special set of circumstances for a brewery to want to be an L3C organization and for an L3C to fit the business plan/model.
So, I’ll end this the way I started, I think a brewery could be a non-profit or an L3C, but I’m not sure that a brewery would want to.
- TurboTax – Are 501C3 Stock Investment Profits Tax-Exempt? (turbotax.intuit.com)
- Roald Smeets – Westvleteren Brewery (roaldsmeetsbeerinbelgium.wordpress.com)
- IRS Announces that 501(c)(3) Non-profit Organizations which Lost their Tax Exempt Status Are Now Eligible to Apply for Reinstatement (prweb.com)
- Heightened Scrutiny on Non-profits by IRS (getirshelp.com)
- IRS workshops help nonprofits retain tax-exempt status (jsonline.com)
- An Open Invitation for Heart-Centered Entrepreneurs:July 9th Launch of Special Q&A Sessions to answer questions on Non-Profit,501©(3),Tax Exempt and Funding processes (prweb.com)
- Ann Arbor-area brewer helps craft new state rules for small breweries (annarbor.com)
PC, PA, LLC, LLP, Inc, LLLP, huh? There are so many acronyms and they’re thrown around all willy-nilly. What’s an aspiring entrepreneur to do?
So, here’s the thing. Each of these denotes a form of business, how a business is structured and who the “owner” is. Each is also relates to two special topics: (1) taxes and (2) liability.
I’m not an accountant nor a tax attorney, so I’m not going to give too much advice on taxes, but I’ll give you some basics. I’ll spend most of this post on the liability question. But first, the tax basics…
Generally speaking (and almost universally before 1987), if you formed a corporation (think companies like IBM, Inc., Coca-Cola, Inc., etc) the profits of the corporation were taxed as income to the corporation AND they were taxed again as income to the individuals that owned the company – the so-called double tax problem. However, in the last 20-30+ years the IRS has allowed the profits for certain kinds of companies to be taxed only once – when the owners claim it as income. Who wants to get taxed twice? Or even once, if we can avoid it? Get with your accountant or tax attorney for the details.
So, back to the liability stuff. One of the main reasons someone creates a corporation is to establish a liability shield between the business and themselves. Example: a customer gets hurt by your product. They sue the company. If you’re a sole proprietorship (i.e. no corporation), they can take everything the company owns AND everything you personally own. If you’re a corporation (and follow certain rules), they can take everything the company owns but they CAN’T get to you personally. That’s big. Limiting liability encourages business owners to take risks and drive the economy without being terrified that they’ll lose everything they’ve ever had or will ever have.
All those acronyms at the beginning identify the type or corporate structure, how it’s used, and what you can expect liability-wise.
- PC – Professional Corporation
- PA – Professional Association
- LP – Limited Partnership
- (P)LLP –(Professional) Limited Liability Partnership
- (P)LLC – (Professional) Limited Liability Company
- LLLP – Limited Liability Limited Partnership (only available in certain states, right now)
- Inc – Incorporated (a traditional corporation), also seen as Limited or LTD
To figure out which acronym (and, therefore which business form) is right for you, contact your business attorney. Or stay tuned here.
In the meantime, check out our website at www.jslawcenter.com
- LLC Advantages and Disadvantages (minnesotaattorney.com)
- Choosing a Business Entity (arkansassmallbusinesslawblog.barberlawfirm.com)
- Limited Liability Company Taxes (turbotax.intuit.com)
- How to Form an LLC (answers.com)
- Legal Structure: The Difference Between LLCs And LLPs (smallbiztrends.com)