Linda has just formed an LLC. She has a great new idea for a business. She has no money as she has no clients yet, but her friends love her and want to volunteer their services. She has vaguely promised them some sort of eventual profit or ownership percentage when the company becomes more successful. Or even better, she has found a college student who wouldn’t mind “interning” (otherwise known as working without pay) who will help her run her errands in return for a line on a resume or a referral letter.
(Photo credit: CollegeDegrees360)
Linda has a problem. Most unpaid internships are illegal and violate the minimum wage and overtime laws. The United States Department of Labor has put out a fact sheet that delineates the test for unpaid interns. Here are two particularly sticky tests for Linda:
- The intern does not displace regular employees, but works under close supervision of existing staff;
- The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded.
In other words, Linda should be paying her intern at least minimum wage. She’s getting all the benefit. By having an intern, she is able to not hire an employee, and she’s certainly getting an advantage.
The same thing is true for her friends that she has offered some eventual piece of the profits. First, the terms of the deal should be in writing so that everyone understands exactly what they are giving and what they can expect to get in the end when the business is successful. Second, without an agreement, this is just another form of unpaid labor that is likely to lead to violations.
How will this end up being a huge problem for Linda? One of the unpaid workers files a claim against Linda, for unemployment benefits; for worker’s compensation if they get hurt on the job; for another employee harassing them. Linda is facing huge fines for not properly paying her employees and for not paying the proper taxes.
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.
I confess, I only incorporated my business this past year. For a solo attorney such as myself, there aren’t as many reasons to incorporate as there are for other businesses. I have malpractice insurance that covers most of my liability, and a corporation or LLC formation would offer little in the way of additional protection. So, I was quite surprised when my accountant sent me a form and invoice for the MTA tax.
The tax is formally known as the Metropolitan Commuter Transportation Mobility Tax (MCTMT). Besides the cost of paying the tax, there is no simple way of tacking on the tax to your other tax filings. Aside from the usual federal and New York state tax forms, these additional forms must be filed quarterly.
This tax is imposed on certain employers and self-employed individuals engaging in business within the Metropolitan Commuter Transportation District (MCTD). Specifically, the tax applies to (1) employers required to withhold New York state income tax from employee wages and whose payroll expense exceeds $2,500 in any calendar quarter, and (2) individuals with net earnings from self-employment allocated to the MCTD that exceed $10,000 for the tax year (according to the Department of Taxation and Finance, this includes partners in partnerships and members of a limited liability company (LLC) treated as a partnership).
The small business owner cannot withhold any of the tax from the employee’s compensation.
The recently elected Governor Cuomo has come out in opposition to this tax, calling it “onerous.”
Small businesses on Long Island pay $3.40 for every $1,000 of payroll. If you are a small Long Island business, you are probably not using the LIRR to commute, and your customers are probably not taking the MTA to see you.
This tax is burdensome to Long Island small businesses and is not proportional to their use of the MTA.