In our first article on entrepreneurship I listed some of the many decisions you must confront in starting your business in 2020. Now for some of you this is just a business. But today I’d like to suggest to you that it’s really your purpose. You’re not really an entrepreneur if you’re not making a difference in the community or being a blessing in the lives of others. But even purpose requires structure and order. So, what corporate structure should your purpose have? Should it be a non-profit, partnership, corporation, sole proprietorship or limited liability company? Let’s look at a few of these structures as you plan and help you fulfill your purpose.
If you intend to start a non profit there are several steps and key factions to consider. The first consideration is whether your non profit will take the form of a corporation, non profit trust, unincorporated association or some other structure. If you choose to be a corporation, then you will need to incorporate or register with the state by filing some form of articles of incorporation.
Having decided to form a corporation, if you are seeking tax exempt status, where your donors’ contributions can be deductible under section 501(c)(3) of the internal revenue code, then the organization will need to be operated and organized exclusively for charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sport competition, or prevention of cruelty to children or animals. It simply means that your purpose must fall into one of those designated categories to qualify for special tax exempt treatment.
What else would you have to consider? You will need to understand that simply because you have become incorporated in your state as a non profit does not mean that contributions received are tax deductible for your donors. In order to complete the non profit process you will be required to file Internal Revenue Service (IRS) Form 1023 with the Service in order to qualify for tax exempt status. There are two versions of the form. There is IRS Form 1023EZ for small non profits and the regular IRS Form 1023 for large or regular organizations.
Finally, you will have to decide whether your non profit is a public charity or a private foundation. One simple distinction between the two is, with a public charity donors can deduct up to 50% of their contributions not exceeding their adjusted gross income. However, with a private foundation donors can only deduct up to 30% of their adjusted gross income. Simply put, your donors can deduct a greater amount of their contributions, if the organization is a public charity as opposed to a private foundation.
This form of structure is the simplest to create. You do not need to register or file any documents with the state in which you live. To begin, all you have to do is create a name for your business, use your home address as your business address and use your social security number to open a bank account and start transactions with customers. While it is the easiest to create and to get started, simple does not always means the most prudent. Your social security number will be on all of your business papers and you will be more exposed to identity theft. Furthermore, you will be exposed to personal liability because your business is not registered or incorporated with the state. Think twice about this option.
The corporate structure is a business model which has been in existence for a very long time. If you are thinking of operating as a corporation, you will first need to incorporate or register in your state or some other jurisdiction. Some organizations choose not to register in their state but in the state of Delaware. In Delaware, the court system, judges and other professionals are experts in corporate law as opposed to judges and lawyers in other jurisdictions.
In most states, a corporation will need at least two persons. Generally, one person may hold more than one position, but in all circumstances a corporation requires a board of directors and a variety of shareholders. The corporation is viewed as a separate person or entity and thus you will need to operate under some by-laws and other governance documents. The down side of this structure is that there is double taxation.
Finally, under the corporation designation, you can elect to become a sub-chapter S corporation. This may be one way to avoid double taxation. This corporate structure will allow profit or losses to pass directly to the owners.
Knowing what structure best fits your purpose or calling is important as an entrepreneur. If your structure is flawed, it is just like trying to fit a square peg into a round hole. Choose wisely!