A reader of my previous articles on non-profit organizations asked, “Why would someone want to form a non-profit organization and not want to become a 501c3?”

What is a Non-Profit?

Simply put, a non-profit — or not for profit — is an organization that does not distribute its profits to shareholders or owners. Instead of distributing taxable wealth to owners (like a for-profit company), a non-profit uses profits in order to fund its programs and services.

A non-profit can hire employees and a management team and do anything else required to operate. After all such expenses are paid, a non-profit business treats its surplus money differently than a for-profit business.

Instead of paying profits to stockholders, the “extra” money is instead used within the organization to pay for and expand its programs and services.

Non-profit is a legal status pertaining to how and why an organization is being run. It doesn’t confer tax-exempt status, nor must such an organization necessarily pursue tax-exempt status.

What is a Tax-Exempt Organization?

Tax-exempt is a taxation status. Tax-exempt means that your organization will not pay regular income taxes on monies left over after expenses are paid.

While you may be running a non-profit organization in terms of how you handle “extra” funds, you might or might not have a need to obtain tax-exempt status.

Your organization will be doing things to raise money to afford the products and services you want to offer, and some of that money will be used to pay your employees or marketing or other operational costs. After those things are paid, you have a profit.

Do you want that profit to be taxed, or do you want that profit to be tax-exempt?

If you want the Internal Revenue Service to exempt your organization from paying the same taxes as other businesses, you must seek approval for one of the many tax-exempt statuses available. The most commonly known tax-exempt status is 501c3.

You apply for 501c3 status with the IRS. If approved, your organization will be tax-exempt. As I explained in Now You’re Ready for Tax-Exempt Status, having a tax-exempt status does not mean that you don’t have to file with the IRS. You will have to file, and you will have paperwork.

Do I Need Both Non-Profit and Tax-Exempt Status?

Again, your organization can be non-profit and tax-exempt, or it can be non-profit and not tax-exempt.

You will have to weigh the costs versus the benefits against the objectives of your organization. These are not decisions to be made lightly. However, these decisions can be changed as your organization grows and perhaps changes some of its objectives.

As we approach the end of the year, we tend to get caught up in thinking about holidays and family and shopping. One thing that we often forget about is tax time.

While planning for taxes is something that business owners should be thinking about all year, it’s especially important as the year comes to a close.

You do still have time to make some important choices for your tax planning.

What to do with Profits

If you have profits, you can use some of the tax-deferred programs available, like retirement funds and annuities. Some programs are not good choices for setting up at the end of the year as they require steady deposits throughout the year, but there are others that you can start at the end of the year.

You can also use profits for things like paying ahead on your business bills. You can possibly pay ahead on office rent, utilities, postage, and other office expenses.

You might also be able to pay bonuses, which is why many businesses pay out Christmas bonuses.

Find an Accountant You Can Trust

With the help of a good accountant and bookkeeper or a good financial planner, you can make good use of the profits from the year and even this last quarter.

A good accountant* will also help you look towards next year and what you can do to lower your overall tax liability.

While a tax preparer knows how to prepare your tax return, he may not be a good choice for your business if you are looking to make smart choices before you get to the preparation part. Once you are at the preparing stage of your taxes, you aren’t able to change anything.

Plan Ahead

Planning ahead can help you and your business take advantage of all of the tax codes and lower your taxes.

Be sure to ask your accountant if he will help you plan ahead. Don’t forget to ask what he charges for consultation in addition to actual tax preparation.

Also look for an accountant who can talk to you in language that you understand. Of course we want our accountant to know all of the technical stuff, but it makes learning really tough when our accountant can’t explain anything to us in layperson lingo.

An accountant who’s willing to talk to you throughout the year and not just at tax time can be an important part of your business team.

*If you don’t have a good consultative CPA to advise you in your tax planning, call NSI to schedule an initial consultation with our tax team.

Individuals often tell us that they have been told by their legal or tax advisor that they are too small to incorporate. After talking with these individuals further we discover that the answer of  “You’re too small”  is really just a way for the advisor to discourage further conversation and discussion because the advisor has no education, experience, knowledge and/or clear understanding of incorporating.

A lot of Business owners, for some reason, believe that every legal and tax advisor has knowledge of every single area of law and taxes. Which is simply incorrect; it’s kind of like saying that a chiropractor could prescribe you medication for a bacterial infection. He’s a doctor, right? All legal and tax advisors specialize in specific areas of practice, so not every legal advisor will be able to give qualified advise about incorporating, as it is a specific area of law. The majority of tax advisors specialize in personal 1040 tax preparation; that does not qualify them to advise you on corporate or LLC taxes.

One of the main reasons why an advisor might say to you “You’re too small” is because stating the truth is like saying, “I will lose the money I am making off your business because I am not qualified or capable to handle your business, if you choose to incorporate.” By stating the truth your advisor would be making your business a priority over their business’s financial benefit and they are not going to do that. Professional advisors do not like admitting lack of experience or knowledge, so they will say what they need to in order to keep your business and feel superior. In addition, most legal advisors do not grasp the tax benefits of incorporating and most tax advisors do not grasp the liability benefits of incorporating. Neither cares about the benefits of the other side, because it isn’t their area of specialization, but you should care as both taxes and liabilities affect you and your business.

The choice to incorporate is yours; the choice is not your legal advisor’s or tax advisors. You should know that there is no such thing as a specific dollar amount in your bank account that triggers the need to incorporate. There isn’t a specific amount of liability that requires you to be incorporated and there is no such thing as too small to incorporate. You should also know that there are benefits to incorporating that you may not receive due to the industry your business operates in. You should be advised to the upkeep needed to ensure the integrity of the incorporated entity. You should understand the risks involved if the incorporated entity is mismanaged. You have the right to be able to make an informed decision. You may just have to replace your current tax and/or legal advisor, and it is ok to do so.

At NexStep Innovations, LLC we don’t believe in providing curious business owners information about incorporating that is self-serving. We don’t believe in bulling business owners to do business with us. We don’t offer “have-to-do-it-now” specials or “first-time caller” discounts. You’ll never have to file a restraining order against us because we don’t specialize in stalking. We do specialize in incorporating, so if you would like to speak with someone, call us today to schedule your consultation.

Question: I formed a Corporation or LLC for my business; do I need to open a Bank Account for it right away?

Answer: Yes, it is important that the LLC maintains its own financial identity. Money made should be deposited into the business bank account and expenses should be paid from the business banking account. Most banks will require a copy of the Articles (some request a charter or documents showing approval to transact business in the state), Banking Resolution, employer identification number (EIN) for the LLC, and your personal social security number.

Co-mingling will get you every time! An LLC has a legal identity of its own, completely separate from its owners. The IRS loves proving the comingling of financial identities as it opens the door for dismissing deductions that will increase the personal and business tax liability, penalties, and interest. If the Courts can combine the two identities financially, they can combine the liability of the identities, putting both the business and personal assets at risk.

Question: What are some of the largest sole proprietorship companies in the United States?

Answer: Oh…. this is a good one. There are no large sole proprietorship companies in the US. All large companies in the US operate as incorporated entities. Incorporated entities provide business the best liability protection for stockholders as well as tax benefits. In fact many major companies have multiple corporate entities that own intellectual property, certain products, even commercial property. A great example of this, Johnson & Johnson, is made up of over 230 subsidiary companies and they produce multiple product brands under the subsidiary companies.

There is no such thing as a Fortune 500 sole proprietorship. Many of you are reading this because you’re trying to determine if you should be incorporated. In your search you will find many people who will advise you that you’re two small to be incorporated. Every Fortune 500 business started out small. Just because you’re small doesn’t mean you can’t play with the big boys. By incorporating your business early you start right away protecting your investment, reducing your liability, and save money with tax benefits.