Starting a charity or tax-exempt company can be a daunting task. I am going to break it down into two simple, easily digestible steps so that you know exactly how to run a new tax-exempt company.
To start the company you must first have one of the following entities: (1) a corporation, (2) a trust, or (3) an unregistered association. The purpose of this entity must be exclusively for the tax-exempt purpose. Under 501©3, the purposes are charity, religion, and education. Then, you must apply for tax-exempt status with the IRS. With the application you will submit your startup documents, such as articles of organization, EIN, and bylaws or trust documents. You will also submit financial statements for the last 3 years. Most companies must apply for tax-exempt status by the end of the 27th month from the date they are legally formed. You must also include the filing fee which is typically $275 for a 501©3 company. Once you submit the application, you can operate the company as a tax-exempt company until the IRS processes the application and approves or denies the application.
Maintaining your tax-exempt status is all about tax filings, wages, and conduct. The 501©3 tax return is IRS form 990. If your company receives business income unrelated to the exempt purpose, you must also file form 990-T. If you have any employees, you will have to pay employment taxes.
You can pay employees and yourself as long as the payments are reasonable. The rule is that you cannot pay unreasonable or excessive salaries because the charity must not be used for a private interest. You can, however, pay those who do work for the charity including yourself.
Conduct simply refers to doing what your company is intended to do. If your company is a charity, only do charitable work through the company. Don’t start selling products or consulting for profit.
By following these guidelines you can start and maintain a tax-exempt company in no time. If you want help starting your 501©3 company, contact me using the information below. I start companies for clients and am happy to help you start yours.
“Video” answers to “Frequently Asked Questions”
“Video” answers to “Frequently Asked Questions”
The worst part of buying and selling property is the out-of-pocket expenses. After agreeing to take on hundreds of thousands of dollars of debt and pay the majority of your income every month to a mortgage, you still get stuck with a few thousand dollars in closing costs, a down payment, and the realtor commission. When we decide to purchase a house, we’ve already wrapped our heads around the debt and monthly mortgage payment. Our biggest barriers become these expenses. There are a few ways to reduce closing costs such as certain grants, financing options, and splitting the fees with the buyer or seller. You can even reduce the down payment with certain loan programs or by having a great credit profile. But what about these realtor commissions . . . How much are they and how do we reduce them?
A realtor is paid a commission of a percentage of the total sales price. The percentage is typically 5-6%. For property that’s selling for $250,000, the commission comes out to $12,500 – $15,000. That’s a huge expense to pay out-of-pocket. The good news is that it can be reduced significantly.
A realtor handles the marketing of a house, finding either prospective buyers or sellers, showing the house, and filling out the paperwork. To reduce the charges of a realtor, you have to be willing to do some of these jobs yourself. However, most people don’t know how to legally transfer property and don’t have quality forms to protect their legal interests. These are tasks that you still want someone to help you with. The good news is that you don’t need a realtor for these. A real estate lawyer can help you legally transfer property and provide quality forms to protect your interests.
How do you replace a realtor for the other tasks? If you are a seller, you may already know someone who is interested in buying your property. If not, you can post information about the property on online sites like Zillow. Buyers can find prospective houses for sale on these sites as well. To conduct a walkthrough, simply make a list of all the rooms in your house and then list all of the important features in those rooms. These features include appliances, electrical work, flooring, and aesthetics. When you finish your list, you can use it as the itinerary for your walkthrough with the prospect.
There are three major benefits of choosing a real estate agent over a realtor. First, you don’t pay a commission. This means that you don’t have that massive out-of-pocket expense to deal with. Second, the real estate attorney will likely charge flat fees. This lets you know exactly what you are paying at all times, and allows you to keep any profits made from negotiating a better price. Third, you will build a relationship with an attorney. This is useful for many different reasons including future property transactions or a future issue with the property you are currently buying or selling.
You can receive these benefits today and easily get in touch with a real estate attorney. Simply contact me today. I am here to help.
Operating agreements are the governing documents of an LLC. They set rules for various issues a business faces during its life cycle. LLCs have become the most popular business structure, making it more important than ever for business owners to understand what operating agreements are and to take advantage of their value. Although operating agreements are optional, every LLC should have them and here are 4 reasons why:
1. Predetermines Business & Legal Issues
Businesses face many issues during their life cycle, such as:
- Adding new owners/investors
- Daily operations and management
- Fundamental changes
- Transferring/selling shares
- Owners leaving by choice
- Death or incapacity of owners
- Dissolving/selling the business
The operating agreement can determine how these issues are handled before they occur. This predetermination is valuable because it brings peace of mind to the owners that a specific outcome is certain to result. The agreement also ensures that the certain result will be easier and faster to achieve because a dispute over an issue properly addressed in the agreement will not go far. For those who need some financial incentive, the operating agreement saves more money than it costs every time a dispute is deterred or disposed of by the agreement. Lawsuits that go to trial can easily cost over $10,000 so a good operating agreement can save you this amount for each lawsuit that it prevents.
2. Bolsters the Corporate Veil
The corporate veil is the legal protection given by a business to its owners. That legal protection does not exist automatically just because you own a business. There is a five factor test to determine if your corporate veil can be “pierced”, meaning that a person can hold you personally liable for something you did through your business. Two of these factors are the existence of governing documents and following the rules and procedures set by the governing documents. Since 40% of the test revolves around the governing documents, it is highly beneficial to actually have these documents (aka an operating agreement for LLC’s).
3. Creates a Will for the Business
A will determines which one of your inheritors gets certain parts of your estate when you die. The operating agreement can do this for a business and its owners. The agreement does this by determining how shares can be transferred. This includes whether shares can be transferred to inheritors upon the death of an owner, whether an owner can unilaterally decide to sell their shares to a third party, and whether the company has the right to buy back any shares that owners seek to transfer. These provisions allow the owners to know where the company shares are going and prevent unwanted people from becoming owners.
4. Gives Solo Owners More Control
Solo owners can write an operating agreement before others join the company and start fighting for their own interests. If you plan on growing your business, you may have to part ways with some equity. It is also extremely common for a spouse to want to share ownership of a business with their SO. If you are a solo owner and think you might not need an operating agreement, consider this example:
You make distributions from your business to yourself in the amount of your personal tax bill and keep the rest in the business to grow it. You then take on an investor to grow your business even more. He splits his equity with his wife because they own everything together. Then, your spouse wants to split your shares. Now, you have to convince 3 people that you should require distributions in at least the amount of everyone’s tax bill. If you fail, you won’t have any money to pay your taxes.
By writing the operating agreement before any of these new owners join, you can require the tax distributions and the new owners will be forced to accept that fact when they take their shares.
An operating agreement is a valuable document that every LLC should have. If you have any questions or if you are ready to improve your LLC with an operating agreement, contact me today.
Different taxes that apply to a Columbus citizen:
Any person who makes money is potentially liable for 4 different phases of income tax. These phases are federal, state, school district, and city taxes. I will be using the example of a Columbus, Ohio citizen to explain these taxes but if you do not live in Columbus simply follow the steps laid out in this post and find your city/school district rates using the tools and methods below.
What if I don’t need to file tax returns?
If you don’t need to file a tax return because your income falls below the required amount, you will need to file them anyway if you have a job. If you were hired and signed the tax form (W-9) without making any changes, then your employer is withholding your taxes. This essentially means that you are pre paying your estimated taxes. If you do not make enough money to pay taxes at all, then you need to get that money back. Thus, if you owe money in taxes or if you have a job you need to file your tax returns.
Where to start
I’ve already mentioned that the order you should fill out your returns in is federal, state, school district, then city. This is because the state and school district returns use the same instructions form in Ohio and these tax returns depend on numbers from other returns. Now you need to know specifically what forms to fill out for each return and what forms you need to send with your return to validate it. I am not including how to fill out the forms in detail because each form has a matching “instructions” form that explains how to fill out the return.
Your federal income tax return is the first phase because the other tax returns use your calculations from your federal return. In the past there were 3 different 1040 forms: 1040EZ, 1040A, and 1040. This year, the IRS has revised their approach by replacing these forms with a single 1040 form and multiple supplemental forms called schedules. The cheat sheet at the bottom of this post will help you determine which forms you need and will also link you to these forms. The general idea for the federal returns in the past was if you earned all your money through wages as an employee, then you could use the 1040EZ, which is the shortest and simplest form. If you earned any money through investments, rental properties, or you are not paid through an employer (self-employed), then you would need to fill out a 1040A and a Schedule C. If you own a business, partnership, or an LLC then you are self-employed and needed to fill out the 1040A/Schedule C. If you own shares or interest in a business that you do not manage or provide work for, then money received from that interest is a dividend and also requires the 1040A/Schedule C. The idea today is similar; the easy form and the extensive form have been removed and everyone fills out a basic 1040 form. Now, the different ways of earning income and certain types of deductions are reflected in the 6 schedules. The link in the cheat sheet takes you to the list of schedules and each schedule has a description of when to use it. For now, just know that Schedule 1 seems to be for alternative income such as investments and unemployment income, and Schedule 4 seems to be similar to the old Schedule C for reporting self-employment.
Now that you know the forms you need to fill out, you need paperwork to show your earnings and expenses. The idea here is that if you are going to write a number on your tax return, you need a piece of paper that shows how you got that number. For wages earned from employment, your employer is required by law to send you a W-2 form that looks like this:
Make a copy of this form, submit the copy with your tax return, and keep the original. If you lost your W-2 or threw it away, you can request another copy from your employer.
For dividend income, the business should send you a form showing what you received in payment throughout the year. Again, make a copy and submit it with your return while keeping the original.
Self-employment income is a little different to show because you are not given a form by someone else showing your income. Instead, you either need to use receipts from your transactions, pictures of checks that you deposited, or pictures of bank statements. If you have the receipts or pictures of checks, use them. If you are reading this for the first time right before filing your tax returns, you probably did not save an entire year’s worth of receipts from your business. In that case, it is going to be annoying but you will have to go back through your bank statements online for every month of the previous year, identify any transaction that is either you receiving money from self-employment or you paying an expense related to self-employment, adding up these numbers to fill out the tax return, and taking a screenshot of the monthly statements to submit with your return.
Now you have all the supporting paperwork and the numbers you need to fill out those tax return forms from before. Simply follow the instructions form step by step and your federal return will be completed. Don’t send it off yet though. Keep all your returns until they are all completed, and send them off together.
State income tax
With a completed federal return, we move on to the state return. Go to this site to find the Ohio state tax return. This form is a bit simpler than the federal form and is mainly based on 1 number from the federal form: federal adjusted gross income on line 6 of the federal return. The state return also has instructions to help you fill it out. A significant difference here is that you do not include income earned in other states from wages or self-employment. So if you worked or did business in another state during the year, the money earned in that state will be taken out of your taxable income that was calculated on the federal return. If you are filing a joint return and your spouse earned money out of state, the principle is the same.
You may be wondering if you earned money in another state, say Michigan, and you don’t claim that money in your Ohio taxes, do you have to file a Michigan state tax return? The answer is that you don’t have to file the return if you did not meet their income requirement for filing, but you may want to anyway. Every tax return for individuals at the federal and state levels are not required to be filed if you didn’t earn enough money. For example, an individual filing alone that earns less than $10,000 does not need to file a federal tax return. The principle is the same for state returns, but the numbers may vary. So if Michigan requires everyone who earns $10,000 to file a tax return and you only earned $5,000 in that state, you are not required to fill out the Michigan tax return. The reason why you might want to is due to employment tax with holdings. If you worked for an employer in Michigan and they withheld money from your wages that were allocated to state taxes, then you can get that money back by filing the state tax return. If you earned self-employment income in Michigan, then you probably did not withhold money from yourself and give it to the Michigan state government so there would be no benefit in filing the return.
School district tax
The next phase of taxes is the school district tax. This tax has a similar exception to the city income tax; if you do not own the property in the school district you reside in, you do not owe school district taxes. If you do own the property, you will need to pay the district taxes. Each school district has been assigned a code and has an independent tax rate. Use this form for the return, and click here to find your school district information (on page 40). You will need to put the code for your district on your return and use your Ohio income tax base, found on the state return (Ohio IT 1040 line 3 – line 4) to complete this form.
City income tax
City tax returns are independent of previous returns so they do not require the use of figures from those returns. Find your city’s department of taxation and fill out the form according to the instructions. The Columbus city tax return form can be found here. If you’re like me, you may not live in the city you work in and you may be wondering if all those Columbus tax withholdings are coming back into your pockets when you fill out the Columbus city return. The unfortunate answer is no, those withholdings were proper and you will not be seeing that money again. Although you may not live in the city, if you work there you are accepting the benefit of government such as the use of their roads and emergency response teams like police and EMTs. Because you’ve accepted these benefits by working there, the city can tax you.
At this point you may be thinking that you have to pay taxes both where you live and where you work, and you’re probably not happy about it. However, there is good news for renters. People who do not own property in a city do not need to pay the city tax because they do not “live” in the city. This means that if you rent a place in Dublin and work in Columbus, you only pay the Columbus city taxes.
Once you have completed this final tax form you have completed your tax returns for the year. You can now submit them all and await your refund checks. I would advise submitting your forms online because you will get your refunds much faster than if you submit by mail. If you made it this far and don’t want to go through this process yourself or want to make sure you are saving as much money as possible, contact a Columbus Tax Attorney and we will do your taxes for you. We charge less than the average tax preparer; that way you know you are making the most out of your money this tax season.
Instructions for 1040
Ohio online tax filing
Ohio state tax return for individuals
Ohio School district tax return
Instructions for Ohio state and school district tax returns
-The City of Columbus tax return code for the school district is 2503
Tool to find tax rates and your location for tax purposes
-First time filers must file manually. After your first year, you can use online here. Contact a Columbus Tax Preparer
There are 2 reasons to start a business: (1) saving money on taxes from income producing activity, and (2) protecting your personal assets from creditor liability. This post concerns protecting your personal assets from creditor liability.
You protect your personal assets by doing business under a separate legal entity. Certain business formations are separate legal entities from their owners and creditors can only pursue the assets of the legal entity that is liable on the debt. Separate legal entities include partnerships, corporations, and LLCs. A sole proprietorship is not a legal entity and does not offer liability protection. An LLC is the easiest to form and offers owners the choice of what type of legal entity they would like the LLC to be taxed as.
Doing business under a separate legal entity would be the only necessary step for asset protection if it wasn’t for piercing the corporate veil. The corporate veil is liability shield for the owners created by the separate entity. Piercing the veil refers to creditors being able to pursue the personal assets of the business owners for the business’ debts. This may seem illogical considering that the business entity is formed for the liability protection, but it actually makes sense considering how the veil is pierced.
The underlying theme behind piercing the veil is that the owner(s) of the business use the business as if it is not a separate entity. The theory used to pierce the veil is that the business is the alter ego of the owners. Basically, a court will look at about 5 factors to determine whether the business is really an alter ego, and if they find that it is then the owners are personally liable to the creditors. These factors are (1) the failure to observe corporate formalities, (2) shareholders holding themselves out as personally liable for certain corporate obligations, (3) diversion of funds or other property of the company for personal use, (4) absence of corporate records, and (5) the fact that the corporation was a mere facade for the operations of the dominant shareholders.
All of this means that protecting your personal assets while doing business is a 2 step process: (1) create a separate legal entity, and (2) use the 5 factors to show that your business is not your alter ego. The good news is that the factors are not complicated and can be complied with efficiently. For starters, factors (1) and (4) rely on company records. Company records include the bylaws, which are the rules governing the company. Failing to draft bylaws creates an absence of company records (factor 4) and a company cannot follow company formalities if it never creates company formalities by drafting bylaws. Therefore, drafting and following the bylaws can protect against 2 of the 5 factors, which is 40% of the goal.
The discussion of bylaws deserves a special note to single member LLC’s. A single member LLC offers no tax advantage because it will be treated as a “disregarded entity” for tax purposes and will receive the tax status of a sole proprietorship. This means that the only reason a person would create a single member LLC is for the liability protection. A person would not normally draft a document of rules for only themselves to abide by. However, if bylaws affect 40% of the factors used to pierce the veil, then a single member LLC needs to draft bylaws or they could have their personal assets at risk. Without the liability protection, a single member LLC is completely worthless so even these companies need bylaws.
As far as the other factors are concerned, the discussion is simple. To prevent holding yourself out as personally liable for company obligations don’t sign deals with your personal name, don’t guarantee that any payments or contracts will be completed using your personal name, and don’t tell people any of these things even if they aren’t in writing. To prevent diversion of funds, don’t use the company card to pay for your personal expenses, and don’t use your personal account to pay for company expenses. Transfer money from one account to the other before using it in the proper account, and write a receipt for the transaction. All transfers from your account to the business are loans, and all transfers from the business account to yours are either distributions of income related to your ownership or they are repayments of the loans you have been recording. The final factor mainly concerns using the business for fraud, so don’t run away with people’s money and you should be good.
Between the tax consequences of the business structure, the liability consequences of company actions, and the drafting of bylaws, there is a lot to consider when starting or operating a new business. If you have any questions along the way, or just want the process to go a bit smoother, please contact me. I’m here to help.
There are 2 reasons to start a business: (1) saving money on taxes from income producing activity, and (2) protecting your personal assets from creditor liability. This post concerns saving money on taxes.
Saving money on taxes
All money earned is subject to a Social Security tax and a Medicare tax. The Social Security tax is 12.4% and the Medicare tax is 2.9%. When you are doing business on your own, you pay this entire tax on your own. This is known self-employment tax. However, when you do business under certain types of business structures, the taxes are split equally between an employer and employee. This is known as payroll tax.
The owners of sole proprietorships are considered self-employed and will be liable for the full 15.3% self employment tax. Owners of corporations and partnerships are not considered self employed, except for general partners of partnerships. A general partner is a partner that is personally liable for partnership debts and is not commonly found anymore, especially since the introduction of LLCs. Corporations and partnerships pay payroll taxes on the wages of employees. Thus, owners of these entities can pay Social Security and Medicare taxes at half the rate of a sole proprietor. This, however, does not consider the corporate tax structure. A corporation is taxed twice; once as money is earned by the corporation, and again as the money is distributed to individuals whom file income tax returns. This means that, while a corporation may save money on Social Security and Medicare taxes, the total tax bill may be higher.
This analysis poses a problem for sole proprietors. Is a sole proprietor doomed to pay 7.65% more in taxes than a partnership? Not necessarily, under the business structure of an LLC.
An LLC is special in that it can choose how it wants to be taxed. In theory, a single member LLC could elect to be taxed as a partnership and lower its tax bill by 7.65% immediately. However, there is a rule that a single member LLC can only elect corporate tax status, or else the tax status of the LLC will be disregarded and the IRS will consider it a sole proprietorship. Fortunately, there are two types of corporations: the C corporation and the S corporation. The C corporation is the double-taxed entity discussed previously that pays taxes at the corporate level and the shareholder level. An S corporation is a special type of corporation that is also a pass through entity. S corporations have special formation rules, but can be owned by a single member. Remember, however, that the business of the single member is still an LLC whom is simply electing to be taxed as an S corporation, so they will not have to comply with some of the formation rules and complexities. They simply have to file an S corporation tax return in addition to their individual tax return.
There is 1 catch: the member of the S corporation must pay himself a “reasonable salary”. Remember that payroll taxes are the same as self-employment taxes, just split between the employer and employee. Income treated as a shareholder distribution avoids this, but wages trigger the payroll tax. Since you will be both the employer and the employee in this situation, you will be paying the self employment tax on whatever amount a “reasonable salary” is. Some people find it difficult to come up with a figure for what a reasonable salary is. I would simply search employment sites such as Glassdoor and Indeed to see what other people in that industry, job title, and experience are being paid. The lowest number you find and the highest number create the range, and obviously you should choose the lower number to reduce your taxes. Also, save or print a screenshot of the salary and information you are basing your reasonable salary on, in case of an audit.
With the knowledge of what a reasonable salary is, you will know at what point your taxes are going to be reduced. If your reasonable salary is $50,000 then all income you earn up to that amount is subject to self-employment tax rates. All income earned above that amount can be treated as a distribution and will not be subject to the 15.3% tax.
Choosing your business structure has a major effect on how much your earnings will be reduced by taxes. Deciding on the right structure, complying with formalities to create your business entity, and filling out a tax return that you’ve never seen before can add unnecessary stress to your already busy schedule. If you have any questions along the way, or just want to lighten your work load, please contact me. I’m here to help.
You can write an enforceable will without hiring a professional. To write a valid will in Ohio you must be at least 18 years old, legally competent, the will must be in writing, signed at the end by yourself and 2 disinterested witnesses (not receiving a gift from the will), and you must actually intend to make the transfers of assets listed in your will.
The Witness Problem
The biggest threat to self-written wills is the witness requirement. If you write a will for yourself and save it in your filing cabinet or on your computer without taking further action, your will is not enforceable. This is what’s known as a “holographic will” and is enforceable in some states, but not Ohio. You must find two witnesses to sign your will. The witnesses can be anybody meeting the requirements of disinterest and competency (no age requirement for witnesses), and do not have to actually see you sign your name to the will. However, you do have to identify yourself, state that the document is your will, identify the signature and claim it as your own. At that point, the witnesses sign the will and it becomes enforceable.
Just Once isn’t Enough
This note is especially important when it comes to creating a new will or amending your existing will because you have to satisfy the requirements again. If you have something to change about your existing will or have new assets that need to be addressed, you’ll want to make a new will or amend your existing will. Why is this important? Because throughout your life your will and your assets are likely to misalign. Whether it’s the car you gifted to your son that was totaled, or the new house you bought that is not given to anyone in your will, your assets will change and your will can be inaccurate. This causes one of two problems.
First, the recipients of your gifts won’t receive what you wanted them to. If a gift made under will is no longer part of your estate, the recipient loses the gift. That gift is not replaced with other gifts or money value, so the recipient is out of luck. If you portioned out your assets and that person’s portion is given through the value of specific property, that person will not get the portion you intended to give.
Second, a change in assets will affect the “residue” of your estate. Residue is a catch-all term for the remainder of your estate that is not being given by other means under the will. When you acquire more assets and do not reflect that change in your will, the person receiving the residue will receive the new assets. This will lead to the residue recipient receiving a greater portion of your estate than you may have anticipated. If you do not have a residue recipient, or if the residue recipient dies before you, intestacy will decide where the new assets will go and that could lead to any of the issues discussed previously. Remember, you’re writing a will to avoid intestacy distribution, and to continue avoiding intestacy you may have to update your will.
How to Get Started
There are many templates available online, which are a good place to start. Some templates are free, but provide no information about how a will works or how to fill out the template. You can also purchase a template that walks you through the process of filling it out. Unfortunately, these are one-time purchases and you will have to purchase another template to create a new will or amend the previous one. To make things simple, we have put together a package that includes an informational guide about how Ohio wills work, a template for writing your own will, a template for writing your own codicil (amendment to a will), and instructions to help you fill out each template. This is everything you need to write your own will and keep it up to date all in one place. If you would like more information, click here, or contact me. Regardless of how you choose to proceed, remember to keeps those wills up to date and don’t forget the signatures.