Lotzar Law Firm P.C.

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480.905.0300 x103 8687 E. Via de Ventura, Suite 115 Scottsdale, Arizona 85258

What is the Difference Between a Nonprofit Entity and an IRC Section 501(c)(3) Organization?

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While most organizations are started in order to make a profit for owners, some businesses have a different purpose. If an organization does not exist to make a profit, it may be classified as a nonprofit. Nonprofits are generally Tax-Exempt because it does not make sense to tax an entity that does not exist to earn income or make money. 501(C)(3)

Any charities and other organizations that want to be officially classified as a nonprofit, in order to be considered Tax-Exempt, must apply to the Internal Revenue Service Code and provide information on  the purpose of their organization. If the IRS finds that the organization qualifies as a Nonprofit, it will grant the Tax-Exempt Status.

Different sections of the IRS code establish different types of nonprofits or exempt organizations. Many nonprofits that file for Tax-Exempt Status seek to qualify under section 501(c)(3) of the IRS Code. In fact, so many nonprofits are considered 501(c)(3)’s that the term “Nonprofit” has almost become synonymous with the term “501(c)(3) Organization.” In reality, however, there is a difference between a Nonprofit Entity and an IRC Section 501(c)(3) Organization. The experienced Scottsdale Arizona nonprofit lawyers at Lotzar Law Firm, P.C. can assist you in taking care of filings with the IRS so you can get Tax Exempt Status for your organization.

Understanding the Difference Between a Nonprofit Entity and an IRC Section 501(c)(3) Organization

Internal Revenue Code section 501(c)(3) is just one of many sections of the IRS Code that allows for an entity to be classified as a nonprofit and thus to become Tax-Exempt. Any organization or entity that exists for a purpose other than making money can be classified as a nonprofit, but the organization must fall within a specific section of the Internal Revenue Code to be granted Tax-Exempt Status.

Section 501(c)(3) status is available to charitable organizations or nonprofits that are established to serve a religious, literary or scientific purpose. There are numerous other sections that exist for other types of non profits that wish to become Tax-Exempt Organizations. For example:

  • Employee Benefit Associations or Funds may apply for Tax-Exempt Status under IRC section 501(c)(4), 501(c)(9) and 501(c)(17).
  • Fraternal Societies may apply for Tax-Exempt Status under IRC section 501(c)(8) and 501(c)(10).
  • Veterans organizations may apply for Tax-Exempt Status under IRC section 501(c)(10) and 501(c)(23).

The IRS code sections 501(c)(3) to 501(c)27 all list different types of organizations that can be officially recognized as Tax-Exempt Nonprofits and the IRS website provides an overview of these different sections. Unfortunately, understanding how to comply with IRS rules to be officially classified as a nonprofit can still be very complicated. If you want to get Tax-Exempt Status for your business, call Lotzar Law Firm, P.C. today to speak with a Scottsdale Arizona nonprofit startup lawyer for help.

Co-Mingling Funds Affects Your Corporation

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When a Corporation is formed, the Corporation has a separate legal identity from its individual owners. The Corporation must have its own bank accounts and must file its own tax returns with the Internal Revenue Service. Owners of the corporation must maintain their own funds separately and should not mix personal money and assets with business money and assets.

money

Co-Mingling Funds affects your Corporation adversely because you are not maintaining the legal requirements of having a separate Corporation. As a result, you could lose the liability protections that being incorporated provides. You could also lose some of the tax benefits that may be associated with forming a corporation. Before you Co-Mingle your personal funds with your business, you need to consult with an experienced Scottsdale Arizona business law attorney. Lotzar Law Firm, P.C. can advise you on how to follow your obligations for maintaining your Corporation as a separate legal entity so you do not put the benefits of incorporation at risk.

How Co-Mingling Funds Affects Your Corporation

 

Co-Mingling Funds means that you do not maintain entirely separate financial dealings with your business. For example, your business should have a separate bank account and all profits and income from the business should be deposited into that account. Money should be withdrawn from the business account only to provide a paycheck for employees under the terms of an Employment Agreement and to pay reasonable business expenses necessary for the costs of operating your organization. You should have your own separate personal bank account that you deposit money into and withdraw money from for non-business expenditures.

If you Co-Mingle Funds, you fail to maintain a strict separation between your business assets and your personal assets. For example, you might deposit some of your own money into a corporate account to make payroll when your account balance is low, without properly documenting that money as a loan or an investment in the Corporation. If you do this, you have Co-Mingled your Funds and you have put the status of your Corporation as a separate entity at risk.

Co-Mingling Funds can also occur if you take money out of your business and use it for personal expenses. Money should be withdrawn from a company only when it is paid out as part of your paycheck, or as a distribution or a dividend. You cannot just withdraw money from your business bank account because you are running short and then put it back in whenever you feel like it. You must ensure that you keep your personal funds separate and that you treat the business as if it was owned by strangers.

If you have a small privately held company and you Co-Mingle Funds, you could lose the liability protection a corporation provides because the Corporate Veil could be pierced. Essentially, this means that you didn’t keep up the necessary formalities so your corporation wasn’t a real corporation at all. As a result, you could find yourself personally liable for company debts or judgments. You could also lose the tax benefits of incorporating, such as avoiding self-employment taxes on distributions from an S-Corporation. If you work for a company with multiple owners and you treat the business accounts as your own, you could also find yourself facing charges of embezzlement or sued for a breach of your duty to the company.

You need to understand the rules for incorporation and ensure you maintain all formalities necessary to keep your corporate status.  Call Lotzar Law Firm, P.C. today to learn more.

Differences in Taxes for Different Types of Business Organizations

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There are myriad different types of business structures to consider when starting your business. Your organization may be structured as a Corporation, a Limited Liability Company (LLC), a Limited Partnership or a Partnership. If you work alone, it may also be possible to be structured as a Sole Proprietorship.

business tax

When selecting the right structure for your organization, you must consider the differences in taxes for different types of business organizations. An experienced Scottsdale Arizona business startup lawyer at Lotzar Law Firm, P.C. can provide you with the information you need on how taxes are assessed for each business structure. An attorney can also advise you on the pros and cons of each type of business and assist with the requirements associated with getting started.

 

Taxes for Different Types of Business Organizations

 

Taxes must be paid on money that is earned, while deductions may be taken for business losses. Either the business or independent owners cover the tax liability and take all appropriate tax deductions for losses. In some cases, a business and its owners are each taxed on the same profit, which is referred to as double taxation and which most business owners try to avoid. Because there are different rules for taxes for different types of business organizations, the method of taxation must be a consideration when you first begin operating your organization.  The tax structures for common types of businesses include the following:

  • Partnerships and Sole Proprietorships – The business owners are taxed on profits and take deductions for losses on their personal tax returns. The Partnership does not pay separate taxes on income earned. Sole Proprietors are single owners who are considered one-and-the-same as their business. Partnerships are Joint Ventures with multiple owners and taxes and profits are split among the owners. Each owner is taxed based on his share of profits and may take a credit for his share of losses. Self employment taxes (Social Security and Medicaid) must be paid by Sole Proprietors and Partners.
  • Limited Liability Partnerships – Limited Liability Partnerships differ from General Partnerships because the Limited Liability Partners do not take an active role in the business and their potential for loss is limited to their investments. The tax rules for General Partners in a Limited Liability Partnership are the same as the tax rules for standard partnerships. However, a Limited Partner is taxed differently. A Limited Partner does not have to pay self employment taxes on the income earned from the partnership because, by definition, he is not employed in the business.
  • Limited liability Company – A Limited Liability Company can choose to be taxed either as a Partnership or as a Corporation. If taxed as a Partnership, a Limited Liability Company allows for income and losses to be passed through to owners. Profits and losses are divided up among the different owners who then claim the income or take the loss deduction on personal tax returns.
  • Corporation – There are two different types of corporations. C-Corporations pay taxes on profits and owners are then taxed again when distributions are made or dividends are paid. S-Corporations, on the other hand, allow pass through taxation. The S-Corporation pays no taxes at the corporate level and the profits and losses are declared on the tax returns of individual owners.

It is important to understand taxes for different types of business organizations and make a smart choice when starting your business. Call Lotzar Law Firm, P.C. today to schedule your consultation and get help getting your business started.

Free Report: Is It a Good Idea to Have a Buy-Sell Agreement with the People I am Starting My New Business With?

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Is It a Good Idea to Have a Buy-Sell Agreement with the People I am Starting My New Business With?

A Buy-Sell Agreement can allow a business to continue to operate even if an individual owner or group of owners decides to no longer be a part of the organization. It can apply in the event of departure, death, disability or divorce and set the terms both for what a departing owner is entitled to and what the rights of the remaining owners are.

Topics covered in this report include:

  1. Why it is important to have A Buy-Sell Agreement
  2. Creating a Buy-Sell Agreement

Click here to read the whole article or download the PDF.

What is a Charitable Purpose to Qualify as a Nonprofit?

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Certain organizations are started not to make a profit for owners, but instead to serve the public good or to provide a benefit to society. These nonprofit organizations are given special Tax-Exempt Status from the Internal Revenue Service since any income that is earned is generally returned to the nonprofit in order to fulfill the organization’s aims.  There are different sections of the IRS Code that specify when an organization may become Tax-Exempt and the requirements to achieve Tax-Exempt Status. The majority of Nonprofit Organizations will seek Tax-Exempt Status under Internal Revenue Code section 501(c)(3), which provides the exemption for companies organized and operated for charitable purposes.

Non Profit

Before submitting your application to the IRS for Tax-Exempt Status, it is imperative you understand the meaning of Charitable Purpose to qualify as the official IRS definition is specific on this issue. An experienced Scottsdale Arizona nonprofit corporations lawyer at Lotzar Law Firm, P.C. can assist you in determining if your organization meets the criteria. Our attorneys can also help you to complete your application with the IRS for Tax-Exempt Status and to demonstrate that the goal of your organization should qualify you as a “Charity.”

 

What is a Charitable Purpose to Qualify as a Nonprofit?

In order to qualify as a 501(c)(3) Tax-Exempt Organization as a Charitable Purpose your business may include:

  • Relieving the distressed.
  • Promoting health.
  • Reducing the burden of government to provide services to the people.
  • Advancing religion.
  • Advancing education.
  • Advancing science.
  • Promoting social welfare.
  • Promoting the arts.
  • Serving as an instrumentality of government.

In order for your organization to have a Charitable Purpose, in order to qualify as a nonprofit, the organization must specify its specific purpose in its Charter and the Charter must make clear that the goals of the enterprise are to achieve one of the objectives that are considered charitable.

When the IRS receives information from the organization on an Application for Tax-Exempt Status, it will review the Charter to determine if designation as a nonprofit is appropriate. If so, the organization will no longer be taxed on income used to fulfill its charitable goals. Those who make donations to a Nonprofit Charitable Organization may also take deductions for the donations. This can make it easier to raise funds to fulfill your organization’s purpose.

Determining the definition of a charitable organization can be challenging and you may be uncertain as to whether your business should qualify for Tax-Exempt Status under 501(c)(3) of the Internal Revenue Code. It is always advisable to consult with a qualified and experienced nonprofit lawyer at Lotzar law Firm, P.C. for help when applying for Tax-Exempt Status for your organization. Our experienced attorneys can review your Charter and other relevant organization information. Our attorneys can also assist in completing an IRS application and advise you to ensure you comply with all legal requirements necessary to maintain your not-for-profit status. Call today to schedule a consultation and learn more about how our Scottsdale Arizona nonprofit formation lawyers can assist you.

Should I Have a Buy-Sell Agreement When Starting a Business?

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When starting a business entity, there are many steps necessary to ensure that you maximize the chance for the success of the organization. It is also important to protect your investment and your legal interest in the business. This means that if you are working together with others or entering into a Joint Venture, you need to think about what might happen if one or more of the co-owners dies, becomes disabled or decides to leave the business.

business owner

To protect yourself and the other co-owners, it is a good idea to have a Buy-Sell Agreement when starting a business. This is a negotiated, legally-binding Contract between co-owners of the organization that provides essential details on the rights of departing owners as well as the rights of those who continue to operate the organization. Lotzar Law Firm, P.C. can provide assistance with the creation of a comprehensive and enforceable Buy-Sell Agreement.

Why it is Important to Have a Buy-Sell Agreement When Starting a Business

 

Investors or owners in a large publicly-held corporation can easily value and sell their interest in a business on the open market. For smaller businesses and privately held companies, however, it is much more difficult to place a value on an ownership share.  This makes it complicated for a business owner to make an exit from a smaller organization he is involved in while ensuring that he is paid a reasonable sum for the value of his interest in the company.

When the co-owner of a smaller business leaves the organization, there are also myriad challenges for remaining owners. If the share of the business is given, or sold, to someone new, this person could end up with a controlling stake or with a large enough ownership interest to interfere with business operations. The co-owners may not want to work closely with the new person, and there may be significant disagreements about how to operate the business and the direction to take the company. All of this can undermine the success of the enterprise and can, in some cases, cause the organization to become inoperable, unprofitable or defunct.

You may be able to prevent these undesirable outcomes if you have a Buy-Sell Agreement.  The Agreement can specify how a departing owner’s interests in the business should be valued or what the departing owner should receive for his share in the enterprise. The Agreement can also specify limitations or restrictions on who the departing owners may transfer their interest to when leaving a business. For example, a Buy-Sell Agreement may give remaining co-owners the right to purchase a deceased owner’s share or the first Right To Purchase the shares of an owner who is selling.

These types of agreements are generally intended to protect all co-owners of a business in the event of death, disability, departure or divorce. An experienced Scottsdale Arizona business law attorney can assist in determining if you need to have a Buy-Sell Agreement when starting a business and can work with you to create an Agreement that is right for your organization. Call today to schedule a consultation and learn more about the top-notch legal help an attorney can provide.

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