Lions and Kiwanis and Rotary, Oh My!


Frequently asked questions about becoming a 501(c)(3) foundation

 

Why Should Our Club Become a 501(c)(3) foundation?

 

I have recently had the pleasure of both incorporating and applying for 501(c)(3) non-profit status for a New York Lions and a New York Kiwanis Club.  One club had been in existence for more than 50 years but had just recently chosen to apply for not-for-profit status. The Club realized that in order to attract large donations and grants, it would need to create a foundation and apply for 501(c)(3) status.

But Our Club Already is a Non-Profit, Isn’t it?


When a New York Lions or Kiwanis or Rotary Club receives its charter from the parent organization, it is granted 501(c)(4) status under the parent clubs’ group exemption.  All 501(c)(4) organizations are also non-profits.

 

What is the difference between a 501(c)(3) and a 501(c)(4)?

 

Both kinds of 501(c) entities are tax exempt, which means that they are exempt from paying federal and New York (and even local Long Island) taxes.  However, 501(C)(4) organizations do not allow for tax deductible donations.  When people give money to charity, while they love being charitable, they also love taking the donations as deductions on their tax returns.  Unless your Kiwanis or Rotary or Lions Club has applied for 501(c)(3) status, donors cannot deduct their donations to your organization.

 

What is the next step?

 

Once a New York Kiwanis or Lions or Rotary Club decides to establish its club as a charitable entity, it must do so by creating a foundation, then incorporating in New York as a not-for-profit corporation, then applying to the IRS for a determination letter by filing Form 1023.

 

 

 

New York Religious Corporations Law

It makes sense for religious organizations such as churches, temples, synagogues and other religious nonprofits to form corporations. Incorporating enables the religious organization to enjoy the benefits of limited liability and other attributes of corporate entities. In New York, religious corporations are controlled by both the Religious Corporations Law (RCL) and the New York Not-for-Profit Corporations Law (NPL).  This interplay between the two laws can be complex.  Any church or synagogue considering incorporating should consult an attorney familiar with both the RCL and the NPL.

Because of the separation of church and state, the requirements for becoming a religious corporation can be less onerous than other corporation law.  The New York Religious Corporation Law has general statutes that apply to all religious corporations and numerous denomination-specific articles.

For example, the articles of incorporation for religious organizations that maintain a place of worship are filed in the county with the county clerk where the religious organization is located, instead of with the Secretary of State as are other corporations.

Churches and other religious corporations who wish to dissolve do not have to get the attorney general’s permission, unlike other nonprofits.  Although religious corporations do need to get the attorney general’s permission to sell property, if that sale is pursuant to dissolution, only the Supreme Court needs to give permission.   However, if an issue is not addressed in the RCL, then the New York Not-for-Profit law must be followed.

Because the Religious Corporations Law is such an unknown part of New York non-profit law, affecting how to sell property and dissolve the church, you should contact an attorney knowledgeable in this law before forming or dissolving a church or other religious corporation, or selling property.

Using an Online LLC Incorporation Service

This past month, I have had numerous Long Island clients calling me and asking me to fix their corporations and LLC’s that they ordered and paid for online.  It seems that these online documents come complete with any number of their forms left blank.  I have seen two this week where the first page of the bylaws or the operating agreement still reads “Sample.”

I can tell why people are accessing my blog, what search terms they use when they find me.  The biggest “hits” to my blog are the ones looking for Long Island publications to fulfill the LLC publication requirement.  So, I know many of you are attempting to do this on your own.

And then you get sued.  Or you apply for non-profit status.  Or you just read something that advises you that if you don’t do proper recordkeeping, your personal assets are not protected from your business liability.  And then I get called and you need me to amend your Articles of Incorporation, or help piece together all your corporate actions since you incorporated five years ago.   Now how much money have you saved by incorporating online?

If you are looking for the convenience of online incorporation or LLC formation and don’t have the time to meet a lawyer at their office, many of us, myself included, can do your incorporation by phone, and fax and e-mail.

It angers me when small business owners like myself are paying for services that they are not receiving.  And then having to pay again to do it correctly.

If you have corporate books that have been sitting on your shelf, and many of the pages are still blank, or you have never updated that book by having annual meetings, adding resolutions about opening bank accounts, taking out leases, contracting with employees or vendors or any other of a number of corporate acts, please call to schedule an appointment to ensure you will get the protection you originally sought for your personal assets.

Overpromising? “Limited” Liability and Small Business

If you are just starting a small business or have a sole proprietorship, you have probably thought about and received advice about either incorporating or forming a limited liability company (LLC).

What protections do these business entities actually offer to the small business owner?

The Promise

You have probably heard that by incorporating or forming an LLC,  you, as the owner, will be protected from personal liability, whether  through contract (from creditors) or tort (from intentional or negligent wrongful act, injury or damage other than breach of contract).

This is true to a great extent.  However, as a small business owner you are probably not totally shielded from personal liability even if you do incorporate or form an LLC.

The Reality

Leases

Commercial landlords will often demand a personal guarantee from the principals or owners of the small business despite business entity status.  A lease is a contract between a landlord and a tenant.  If you have not been in business for very long or your business assets are limited, you can expect to be asked to personally guarantee a lease.  Your spouse may also be asked for a personal guarantee.  Depending on how long you have been in business or how in demand the property is, this may be a negotiable point. You might want to contact a business attorney to review and negotiate your commercial lease.

Loans

Bank loans. Whether you need a loan to finance inventory or to expand, a lender may require you  put up your personal property as collateral.  Even  if your business were to dissolve, you would remain personally liable for paying back the loan.  However, depending on the business’ creditworthiness, this too is open to negotiation.

Small Business Administration loans.  The SBA requires that all loans they guarantee must be collateralized with both the business assets and a personal guarantee.  Often you may need to take out a second (or third) mortgage on your home.  Nevertheless, SBA loans often have excellent terms.

Credit Cards

Most business credit card issuers will not approve a business application unless the owner personally agrees to be liable for any debt incurred.  Take note that any default on your business card will impact your personal credit.  After several years of being established, you may want to ask the issuer to allow you to separate your business and personal liability.

Torts

Your own acts.  Corporate/LLC formation provides protection for corporate acts;  it may not provide protection for your own acts.  Even if you are acting for the corporation, if you are negligent you are potentially personally liable. You can’t commit intentional wrongdoing even in the guise of your corporate self.  You can’t embezzle, defraud or assault someone.

Your employees’ acts.  Although in theory, the corporation or LLC should shield your personal assets from your employees’ bad acts, in reality, if the act is egregious enough you are likely to be brought into the lawsuit.  Negligent hiring, failure to ensure the person you sent on an errand has a clean driving record, or negligently maintaining your property are just some of the ways you personally can be brought into litigation, even though you’re incorporated.  This doesn’t necessarily mean you will lose the lawsuit, however, even good defenses cost money.

Taxes

You can be held personally liable if  the corporation neglects to pay over to the IRS  the employees’ share of withholding and social security taxes.  Many states also will hold corporations personally liable for failure to turn over retail sales taxes due from the corporation.

The Solution

Despite some pitfalls and incomplete protection, it is still worthwhile to either incorporate or form an LLC.  Business formation will protect your personal assets to a great extent.  The longer your business exists,  the more creditworthiness your business can show, the better your bargaining power will be with landlords, credit card companies and lenders.

Insurance

It is a good idea to ensure you have sufficient personal insurance coverage on your assets to cover any business liability.  Consider buying an umbrella policy for your cars and home.  Insuring your business is also a necessity.  Should you get sued, the insurance company will defend you, pay for your attorney and pay up to policy limits.

How to Incorporate Your Sole Proprietorship

Although the plethora of inexpensive online incorporation and LLC formation services would have you believe that all you need to do to incorporate your small business is  fill out a simple form, pay a few dollars, and voila! your business is incorporated, this is even less true if you have already been running your business as a sole proprietor.

The mere act of incorporation does not transfer the existing business assets and liabilities to the new corporation.  And while it is almost always a good idea to either incorporate or form a limited liability company (LLC) in order to reduce your personal liability and protect your personal assets, there are some administrative tasks and potential tax liability associated with changing the form you use for your small business entity.

You’ve Incorporated–Now What?

Let’s assume you’ve already incorporated. You’ve determined that the name you chose is acceptable under the New York Business Corporation Law. You’ve run a search on your company name (or had an experienced lawyer run one for you) to ensure you haven’t violated another company’s trademark under state or federal trademark law.  If you formed an LLC, you’ve published notice of the formation in two newspapers.  Here on Long Island, Newsday is a good choice for a daily paper, and Nassau and Suffolk Counties have many options for weekly local newspapers.

That’s All, Right?

Not quite yet.  There are numerous administrative tasks, including:

Obtain a new Employer Identification Number (EIN). You can learn how to do this here at the IRS website.  If you are forming a one-member Limited Liability Company (LLC), you can choose to be a “disregarded entity” for tax purposes, and continue to use your own Social Security number. However, I would strongly encourage the use of a separate EIN so you don’t  share your personal number with employees or vendors.  You want to protect your Social Security number against identity theft.

Your assets must be transferred from your name as sole proprietor to your new company’s name.  This must be done formally.  In exchange for the assets, you will receive shares (corporate stock)  of your new corporation.

Your small business bank accounts must be closed, and new ones opened in your new corporate or LLC name.  Insurance companies need to be notified.  Any permits or licenses that have been issued to you need to be formally transferred.  Inform your employees, customers or suppliers.  Should your small business own any intellectual property  registered with the United States Patent and Transfer Office,  it may need to be assigned to the new owner.  If your business owns a car or truck, you need to change the title and pay fees to the New York Department of Vehicles.  Any transfer of real property must be reported to the clerk’s office in Nassau or Suffolk Counties.

Additionally, corporations must have formal meetings, take minutes and prepare and ratify resolutions for all the changes.

Are You Done Yet?

There may be both state and federal tax consequences from transferring assets and liabilities from a sole proprietorship to either a corporation or an LLC.  If you are transferring real property, New York State may assess a transfer tax on any mortgage still owing.

If you have previously taken deductions on your income tax returns for your small business assets (i.e. furniture, computers), depending on how you transfer those assets to the new corporation or LLC, you may create a taxable event.  There are two ways an item that has already been depreciated by the sole proprietor can be transferred.  You can make either a capital contribution or  a sale in your capacity as sole proprietor to your new corporation or LLC.

The mechanics of choosing the method of transfer for tax purposes is beyond the scope of this article.  It is best before you make any transfers to speak to a qualified CPA as well as an attorney.

Should You Just Forget the Whole Thing?

Absolutely not.  Despite some expense, paperwork, time and energy there are numerous reasons you should incorporate your small business or form an LLC.  To list just a few:  Protection of your personal assets should your business fail or get sued; savings on employment tax and deductions for insurance; protection of your business assets should you get personally sued; ease of raising funds to expand your small business.

When you are ready to take your Long Island small business to the next level, contact a small business lawyer in your area.