Real estate is more than just your primary residence. It can include other real estate such as a vacation home or a rental property. Depending upon the type of real estate you own, the ideal form of ownership can vary. Below, we take a look at the different types of real estate and make suggestions about the best form of ownership for each.
Over the last 15 years, the IRS has made life much easier for small nonprofits. The first big change was to create a Form 990-N, which allowed nonprofit organizations with less than $50,000 in gross receipts to file the 990-N “e-postcard.” Unlike the lengthy Form 990 that requires detailed accounting information and disclosure of the highest compensated employees, the e-postcard only
As your side hustle starts to grow, it is important understand how the structure of your business affects you personally. It’s not just about the bonus income — it’s about how you pay taxes and whether you are personally liable for anything that goes wrong. There are benefits and drawbacks to each type of entity, so let’s talk about them.
There are four basic types of business structures:
Sole proprietorship
Partnership
Limited Liability
Corporation
A sole proprietorship is the default setting. If you start selling scarves that you knit out of your home, then you have a sole proprietorship — even if your business doesn’t have a name. The income from your sales should be reported on your income tax return, and the costs of doing business (for example, the cost of the yarn and needles) are deducted. This is as simple as it gets. You don’t even need to register with the State of Washington. But — and this is a big drawback — you are personally liable if something goes wrong. If someone decides to sue you, your loss is not limited to the income and expensive of your scarves. Rather, everything you own — your house, your car, your bank accounts, even if joint with your spouse — are all available to satisfy the person you have wronged.
Partnerships are very similar — two or more people (usually not married to each other — the only person who can co-own a sole proprietorship is a married couple) agree to contribute money, skills, or labor to a business, and each partner shares the profits, loss, and management of the business. Like a sole proprietor, however, each partner is personally liable for any debts. There is also no requirement to file with the Washington State Secretary of State.
There is a partnership variant called a Limited Partnership, where the agreement between the partners also limits their liability to the value of their investment. This kind of partnership must register with the Washington State Secretary of State.
Limited Liability organizations can include Limited Liability Partnerships (LLP) and Limited Liability Companies (LLC). For businesses requiring licensing, such as doctors and lawyers, the Professional Limited Liability Company/Partnership is required (PLLC, for example). These entities protect the investors from neglience on the part of their partners, and additionally limit liability to the value of their investment. All of them must file with the Washington State Secretary of State. Partnerships will always require at least two owners, but an LLC can be owned by one or more people, which makes it an ideal alternative to sole proprietorships — so long as the business is not banking or insurance (which cannot be LLCs). Limited Liability Companies may elect whether to be taxed as a pass-through entity (like a sole proprietor) or like a corporation (and you should talk to your accountant about which tax structure you want, as it depends on your current and projected revenue and expenses).
Corporations are complex business structures. Legally, they exist separate from the people who own them, and they are run by a board of directors on behalf of the owners (who are called shareholders). Corporations file their own taxes, separate from the individuals who own the corporation, and the owners are almost never held responsible for the liabilities and debts of the corporation. You must file with the Washington State Secretary of State to form a corporation.
Nonprofit corporations are just that — corporations. The first step in seeking exempt status is to form a corporation with a nonprofit purpose (as opposed to a for-profit purpose). They are structured in the same way: a board of directors runs the organization on behalf of the… well, public (or membership). Nonprofits are not owned by shareholders, but are considered to be “owned” either by the public or by members of the organization.
Once you have formed your organization, clarified your exempt purpose, and opened your business bank accounts, you are ready to apply for 501(c)(3) status.
Checklist:
Form 1023, all relevant parts filled out completely (the form itself is 28 pages)
Copy of the certificate of incorporation
Copy of your articles of incorporation, and any amendments in chronological order (be sure to include the conflict of interest policy, nondiscrimination clause, and dissolution clause).
Copy of your bylaws, and any amendments in chronological order
List of your founding officers and directors, and their addresses
List of your five highest compensated employees and their compensation
Budget for the current year and last three years, or, if you have a new organization, your projected budget for the current year and the following two years
A narrative description of your activities
A list of all of the organization’s assets and liabilities
Signature of a person authorized by the board of directors to submit the form, and the proper filing fee.
Simple, right? This is a big application with a lot of moving parts, many of which depend on nuance for getting approved. The IRS reports that the primary cause for delay in granting 501(c)(3) status is missing, hard to locate, or incomplete purpose and dissolution clauses. One of the best reasons to hire an attorney to help with this process is the level of detail required to submit an application that can be reviewed and granted on the first pass. My motto is: Do it once. Do it right. When we expect the process of preparing to file Form 1023 to take 6 months, we give ourselves the space to cross-check documents and ensure that what we represent to the IRS is accurate to the mission and operation of the organization.
For more information, make an appointment for a free consultation.
Wait… What did we just get ourselves into?
Most nonprofit organizations begin when someone imagines a solution to an unmet need in our community. The process for forming an nonprofit organization can be confusing, and a good attorney can help substantially. For most of my organizational clients, the process to prepare to file a request for tax-exempt status takes at least 6 months — but only if the application is correct the first time. If you want to become tax-exempt, it is important to keep that goal front and center as you take the first steps.
First Step
The first thing to do is make sure that the mission or purpose of your organization is a qualified exempt purpose. The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. These categories are considered broadly; for example, most nonprofit musical groups fall under the “educational” exempt purpose, while food banks have a “charitable” purpose.
Next, file to incorporate with the Secretary of State. To do this, you will need articles of incorporation (that specifically state your exempt purpose), by-laws, and founding board members. If you later change your purpose, you will need to amend your articles with the Secretary of State — which is why it’s so important to keep your exempt purpose in front of you while you go through this process.
Three other required clauses for your articles of incorporation are:
What happens to your assets should the nonprofit be dissolved (hint: they go to other nonprofit organizations);
Nondiscrimination clause: the organization does not discriminate on the basis of race, national origin, sex, gender, ethnicity, or any other protected class status; and
Conflict of interest: that no director or officer should privately benefit from the business of the nonprofit organization.
The Secretary of State will mail you a certificate of formation, along with a letter that includes your Uniform Business Identification (UBI) number. With your UBI, you can request an Employer Identification Number (EIN) from the IRS. These two numbers can be used to open business bank accounts, which is very important. You never want to mingle your monies with the monies of your organization (the IRS might decide all of the donations are your personal income — eek!). You can also use these numbers to hire employees, but you should have an EIN even if you do not intend to hire anyone in the foreseeable future. You cannot apply for 501(c)(3) status without an EIN.
You are now ready to submit Form 1023 to request tax-exempt status. In the next post, I’ll discuss the items you need line by line.
