malpractice actions against the other owners.
Nonprofit Corporation
A Nonprofit Corporation is an organization whose purpose is something other than making a profit. A Nonprofit Corporation donates its revenue to achieve a specific goal that benefits the public instead of distributing it to shareholders. Being a nonprofit does not mean the organization will not make a profit. Nonprofits can make money but all of the money must go back to the organization by paying employee salaries, administrative expenses, and other overhead costs. No one person or group owns a nonprofit. While anyone can incorporate as a nonprofit, only those who pass the stringent standards set forth by the government can achieve tax exempt status.
Nonprofit Corporations are established for a specific noncommercial purpose, which usually includes churches, schools and universities, hospitals, museums, and shelters. There are four main types of nonprofits and each contains the ability to achieve tax exempt status despite their slightly different goals and corporate structure. They include:
Public Charities: Typically, a charity provides low cost or free services to the public using funds received from the public. Funds can be obtained through private donations or fundraising events.
Social Advocacy Organizations: This type of group is member based and sets out to achieve specific goals without achieving a profit. Funds are generated through member dues.
Foundations: This type of organization works to better the community, whether contributing financially or as local charities holding events to benefit residents. Funds usually come from for-profit companies.
Trade and Professional Organizations: People in the same organization can benefit from the activities of this type of nonprofit. Funds are primarily obtained through membership dues.
What Factors Should I Consider Before Choosing a Business Structure?
When deciding to set up a new entity for your startup, you should consider your startup's financial needs, risk, and the ability to grow. Here are some factors to consider when choosing the legal structure for your business, and always consult with your accountant, as these structures have very different tax implications:
Complexity: How complex is your business and what entity best addresses your needs? When it comes to startup and operational complexity, nothing is simpler than a Sole Proprietorship. You simply register your company name, start doing business, report the profits, and pay taxes. However, you are personally liable for all debts of your company and it can be very difficult to procure outside funding in case you need money to purchase equipment or grow your business. Partnerships, however, require a signed agreement to define the roles and percentages of profits, but partners are still personally liable for the partnership debts. Corporations and LLCs have various reporting requirements with state and federal governments, but they offer limited liability protection for the shareholders and members.
Liability: Is the entity you are forming protecting your personal assets from your business assets? A Corporation carries the least amount of personal liability since the law holds that it is its own entity. This means, generally, creditors can sue the Corporation but they cannot sue you personally to obtain access to your personal assets. An LLC offers the same limited liability protection but with the tax benefits of a Sole Proprietorship. If the business tax is lower than your personal tax bracket, forming an LLC is not always the best option. However, in some situations, an LLC may elect to be taxed as a Corporation. Partnerships share the liability between the partners as defined by their partnership agreement.
Flexibility: Where is your company headed and which type of legal structure allows for the growth you envision? It is recommended that before you start your business, you should invest some time drafting a business plan. The benefits of a business plan are discussed at length in Chapter 7. Turn to your business plan to review your goals and see which structure best aligns with those objectives. Your entity should support the possibility for growth and change.
Taxes: Will this entity provide the best tax benefits for your business? An owner of an LLC pays taxes just as a sole proprietor, whereby all the profit is considered personal income and taxed accordingly at the end of the year, unless you elect to be taxed as a corporation. As a small business owner, you want to avoid double taxation in the early stages and an LLC structure prevents that along with an S Corporation. Individuals in a partnership also claim their share of profits as personal income. Both C Corporations and and S Corporations file their own tax returns each year, paying taxes on profits after expenses, including payroll.
Control: Who will have control over your business, and how do you maintain the majority control? If you want sole or primary control of the business and its activities, a Sole Proprietorship or an LLC might be the best choice; however, you are opening yourself up to personal liability. A Corporation has a board of directors that makes the major decisions that guide the company. It also has shareholders who have voting power. A single person can control a corporation, especially at its inception, by being the majority shareholder, but control of a company is shared with the board of directors.
Capital Investment: Will you need outside investment money to start and run your business? If you need to obtain outside funding, such as from an investor, venture capitalist, or a bank, you may be better off establishing a Corporation. Corporations have an easier time obtaining outside funding than a Sole Proprietorship. Corporations can sell shares of stock and secure additional funding for growth, while sole proprietors can only obtain funds through their personal accounts using their personal credit or taking on partners.
Licenses, Permits and Regulations: Will the licenses and permits be held in the name of your business? In addition to legally registering your business entity, you may need specific licenses and permits to operate. Depending on the type of business and its activities, it may need to be licensed at the local, state, and federal levels.
Changing a Sole Proprietorship: Changing a Sole Proprietorship or a General or Limited Partnership to a Corporation or a Limited Liability Company can offer a range of advantages. Most notable is asset protection: An S or C Corporation or an LLC protects the owner's personal assets in case debts or legal judgments are claimed against the business.
What Are Some Advantages of Incorporating?
Owning a small business can be a risky venture. One way to limit your personal liability is by incorporating your business. While incorporation requires more paperwork and expense than a Sole Proprietorship or a Partnership, it offers important legal and tax advantages. Either way, incorporating is a good decision for most businesses, and despite popular belief, it is not just reserved for those that are wealthy businesses and well established. There are multiple benefits of incorporating, all of which you should fully understand before you decide to make your move.
Some of the most popular reasons why incorporating your business should be a priority are:
Protect your personal assets from creditors: There is no doubt that starting your business is exciting, but with that excitement comes the reality that accidents happen and unfortunately businesses sometimes fail. This is where one of the best benefits of incorporating comes into play. By incorporating your business, albeit as a C or S Corporation, or an LLC, you are protecting your personal assets from business debts. If your business falls on hard times, your personal property is off limits to collection agencies. For example, if you cannot pay your business loan any longer, generally, the bank will not be able to come after your home to satisfy the loan. If you have not yet incorporated your business,
