Wednesday, March 28, 2012
Exemption Requirements for Non-Profit Public Benefit Corporations
A public benefit corporation is a type of non-profit organization (NPO) dedicated to tax-exempt purposes set forth in section 501(c)(3) of the Internal Revenue Code which covers: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. Public benefit NPOs may not distribute surplus funds to members, owners, shareholders; rather, these funds must be used to pursue the organization’s mission. If all requirements are met, the NPO will be exempt from paying corporate income tax, although informational tax returns must be filed.
Under the rules governing public benefit NPOs, “charitable” purposes is broadly defined, and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency. These NPOs are typically referred to as “charitable organizations,” and eligible to receive tax-deductible contributions from donors.
To be organized for a charitable purpose and qualify for tax exemption, the NPO must be a corporation, association, community chest, fund or foundation; individuals do not qualify. The NPO’s organizing documents must restrict the organization’s purposes exclusively to exempt purposes. A charitable organization must not be organized or operated for the benefit of any private interests, and absolutely no part of the net earnings may inure to the benefit of any private shareholder or individual.
Additionally, the NPO may not attempt to influence legislation as a substantial part of its activities, and it may not participate in any campaign activity for or against political candidates.
All assets of a public benefit non-profit organization must be permanently and irrevocably dedicated to an exempt purpose. If the charitable organization dissolves, its assets must be distributed for an exempt purpose, to the federal, state or local government, or another charitable organization. To establish that the NPO’s assets will be permanently dedicated to an exempt purpose, the organizing documents should contain a provision ensuring their distribution for an exempt purpose in the event of dissolution. If a specific organization is designated to receive the NPO’s assets upon dissolution, the organizing document must state that the named organization must be a section 501(c)(3) organization at the time the assets are distributed.
If a charitable organization engages in an excess benefit transaction with someone who has substantial influence over the NPO, an excise tax may be imposed on the person and any NPO managers who agreed to the transaction. An excess benefit transaction occurs when an economic benefit is provided by the NPO to a disqualified person, and the value of that benefit is greater than the consideration received by the NPO.
To apply for tax exemption under section 501(c)(3), the NPO must file Form 1023 with the IRS, along with supporting documentation, including organizational documents, details regarding proposed activities and who will carry them out, how funds will be raised, who will receive compensation from the NPO, and financial projections. If approved, the IRS will issue a Letter of Determination. Public charities must also apply for exemption from state taxing authorities, a process which varies from state to state.
Wednesday, February 22, 2012
Overview: Buy-Sell Agreements and Your Small Business
If you co-own a business, you need a buy-sell agreement. Also called a buyout agreement, this document is essentially the business world’s equivalent of a prenup. An effective buy-sell agreement helps prevent conflict between the company’s owners, while also preserving the company’s closely held status. Any business with more than one owner should address this issue upfront, before problems arise.
With a proper buy-sell agreement, all business owners are protected in the event one of the owners wishes to leave the company. The buy-sell agreement establishes clear procedures that must be followed if an owner retires, sells his or her shares, divorces his or her spouse, becomes disabled, or dies. The agreement will establish the price and terms of a buyout, ensuring the company continues in the absence of the departing owner.
A properly drafted buy-sell agreement takes into consideration exactly what the owners wish to happen if one owner departs, whether voluntarily or involuntarily. Do the owners want to permit a new, unknown partner, should the departing owner wish to sell to an uninvolved third party? What happens if an owner’s spouse is involved in the business and that owner gets a divorce or passes away? How are interests valued when a triggering event occurs?
In crafting your buy-sell agreement, consider the following issues:
Triggering Events - What events trigger the provisions of the agreement? These normally include death, disability, bankruptcy, divorce and retirement.
Business Valuation - How will the value of shares being transferred be determined? Owners may determine the value of shares annually, by agreement, appraisal or formula. The agreement may require that the appraisal be performed by a business valuation expert at the time of the triggering event. Some agreements may also include a “shotgun provision” in which one party proposes a price, giving the other party the obligation to accept or counter with a new offer.
Funding - How will the departing owner be paid? Many business owners will obtain insurance coverage, including life, disability, or business continuation insurance on the life or disability of the other owners. With respect to life insurance, the agreement may provide that the company redeem the departing owner’s shares (“redemption”). Alternatively, each of the owners may purchase life insurance on the lives of the other owners to provide the liquidity needed to purchase the departing owner’s shares (“cross purchase agreement”). The agreement may also authorize the company to use it’s cash reserves to buy-out the departing owners.
Tuesday, February 14, 2012
Family Business: Preserving Your Legacy for Generations to Come
Your family-owned business is not just one of your most significant assets, it is also your legacy. Both must be protected by implementing a transition plan to arrange for transfer to your children or other loved ones upon your retirement or death.
More than 70 percent of family businesses do not survive the transition to the next generation. Ensuring your family does not fall victim to the same fate requires a unique combination of proper estate and tax planning, business acumen and common-sense communication with those closest to you. Below are some steps you can take today to make sure your family business continues from generation to generation.
Meet with an estate planning attorney to develop a comprehensive plan that includes a will and/or living trust. Your estate plan should account for issues related to both the transfer of your assets, including the family business and estate taxes.
Communicate with all family members about their wishes concerning the business. Enlist their involvement in establishing a business succession plan to transfer ownership and control to the younger generation. Include in-laws or other non-blood relatives in these discussions. They offer a fresh perspective and may have talents and skills that will help the company.
Make sure your succession plan includes: preserving and enhancing “institutional memory”, who will own the company, advisors who can aid the transition team and ensure continuity, who will oversee day-to-day operations, provisions for heirs who are not directly involved in the business, tax saving strategies, education and training of family members who will take over the company and key employees.
Discuss your estate plan and business succession plan with your family members and key employees. Make sure everyone shares the same basic understanding.
Plan for liquidity. Establish measures to ensure the business has enough cash flow to pay taxes or buy out a deceased owner’s share of the company. Estate taxes are based on the full value of your estate. If your estate is asset-rich and cash-poor, your heirs may be forced to liquidate assets in order to cover the taxes, thus removing your “family” from the business.
Implement a family employment plan to establish policies and procedures regarding when and how family members will be hired, who will supervise them, and how compensation will be determined.
Have a buy-sell agreement in place to govern the future sale or transfer of shares of stock held by employees or family members.
Add independent professionals to your board of directors.
You have worked very hard over your lifetime to build your family-owned enterprise. However, you should resist the temptation to retain total control of your business well into your golden years. There comes a time to retire and focus your priorities on ensuring a smooth transition that preserves your legacy – and your investment – for generations to come.
Happy Valentine's Day! A great way to show someone you love them is by taking the steps to plan for your future!
Wednesday, July 06, 2011
Choosing A Business Entity
When an entrepreneur begins a for-profit business, one of the key early questions he or she needs to answer is, “What kind of business structure will serve me best?”
How should the business owner decide on the correct entity?
Making the final choice with regard to business entity usually involves weighing the answers to the following questions:
Which kind of entity allows me to operate most efficiently?
What entity choice will provide me maximum protection from the liabilities I am worried about?
Which choice is the smartest from a tax perspective?
Here is a quick overview of the most popular types of business entities, and how they stack up based on those three factors:
A Proprietorship, sometimes called a sole proprietorship, is simple to operate and its tax results are reported on the personal tax return. Its owner is responsible for all debts of the business.
A Partnership involves more than one business owner. While there are more hands available to do the work than a proprietorship, it is more complicated to operate because there need to be rules about how decisions are to be made and how finances are to be handled. All the partners are liable for all the partnership debts. The business’s tax results are reported on a separate tax return, but the results are passed through to the partners personally.
A Limited Liability Company (LLC) provides its owner(s) better liability protection than a proprietorship or partnership. It also needs written rules about how it will be operated. An LLC can have the tax characteristics of any one of the other entities listed here, depending on the choice the owner(s) make.
An S-Corporation offers the tried-and-true liability protection of a corporation with pass-through tax results similar to those offered by a partnership. Corporations need a set of rules – called by-laws – on how it will operate.
A C-Corporation is a more traditional corporate structure, offering the same kind of liability protection as an S-Corporation. It differs from most of the entities listed here, in that it has a separate tax identity from its owner(s). In some cases, the separate tax entity offers certain kinds of tax management advantages. Also, certain kinds of employee benefit plans create more favorable tax results in a C-Corporation.
If you are considering starting a business, you will need to get advice about your situation from an attorney and CPA. If you do not already have an attorney, I will be glad to counsel you on the legal elements involved.
If you are already operating a business entity, you should check with a CPA and an attorney to make sure your entity choice is still right for you. Also, feel welcome to call on our office to make sure that you are taking full advantage of the tax breaks offered to owners of a business of your type.
The Fitzgerald Law Office assists clients with Estate Planning, Advanced Estate Planning, Asset Protection, Business Succession Planning, Planning for Children, Guardianships, Probate and Estate Administration and Pet Trusts in St. Charles, Illinois, all of Kane and DuPage Counties and throughout the Fox Valley.