Nuts and Bolts of Forming For-Profit and Nonprofit Entities in Virginia

PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060Phone: 804-205-5162Email: [email protected]

USTA/VIRGINIA TENNISAREA LEAGUE COORDINATOR WORKSHOP

February 13, 2010

NUTS AND BOLTS OF ENTITY FORMATIONS IN VIRGINIA

Eric C. Perkins, Esq.

mailto:[email protected]


STATUS OF USTA LEAGUE COORDINATORS

HOBBY: Labor of love

BUSINESS: Profit motive

What’s the Difference? Business income is subject to self-employment tax. Income from a hobby is not. Business losses can be used to offset income from other sources, but losses from a hobby cannot. Self-employment tax is the Social Security and Medicare tax that gets paid by people who work for themselves, and is paid on a self-employed person’s net earnings.


Reasons to Conduct Business Activity Through a Separate Legal Entity

• Limited Liability Protection• Tax Efficiency• Perpetual Life• Professionalism/Sophistication



Choice of Entity

• Too many available choices under Virginia law

• Corporation or LLC most common choices for small business

• Creatures of State Law



WHY LLCs?

• Simplicity and Flexibility• Less Paperwork• Lower Annual Fee ($50)• Single-Member LLCs are disregarded entities

for federal income tax purposes (no separate tax returns)



Forming a Virginia LLC

• Articles of Organization– Distinctive Name– Registered Agent/Office– Principal Office– $100 Filing Fee




• Operating Agreement– Management– Operation– Economics– Voting– Dissolution




• Form SS-4 (Federal EIN)– Not legally required for SMLLCs– Often required by banks when opening bank

account for the LLC– Recommended if LLC will have employees– Apply online at:

http://www.irs.gov/businesses/small/article/0,,id=102767,00.html


http://www.irs.gov/businesses/small/article/0,,id=102767,00.html



• Virginia Form R-1– State Taxpayer Registration– Apply online at: www.tax.virginia.gov

•Local Business License (City or County)•Home Office? Check local zoning and HOA requirements


http://www.tax.virginia.gov/


Respect Your LLC

• No commingling of personal and business assets

• Maintain good standing with SCC (pay annual fee on time)

• Observe proper entity formalities (signature blocks)




• Articles of Organization– Distinctive Name– Registered Agent/Office– Principal Office– Filing Fee is $100



TERMINOLOGY

• Nonprofit—A state law concept usually defined by statute in reference to the formation of nonprofit or nonstock entities. Surplus funds not distributed to owners.

• Tax Exempt—An Internal Revenue Code concept relating to an entity’s status (recognized by the IRS) as exempt from the requirement to pay income tax.

POINT: Not all nonprofits are tax exempt.



Categories of Tax-Exempt Status

• Over two dozen types of exempt organizations under Section 501(c) of Internal Revenue Code.

• Section 501(c)(3) is most popular

Charitable, educational, religious, literary, scientific, fosters national or international amateur sports, prevention of cruelty to animals or children.



Benefits of 501(c)(3) Status

• Exempt from income tax (possibly eligible for sales and property tax exemptions too)

• Donations are tax-deductible by donors• Eligibility for foundation grants• USPS postage discounts



POP QUIZ

TRUE OR FALSE

The USTA is a Section 501(c)(3) organization.

FALSE

The USTA is a Section 501(c)(6) trade association.



POP QUIZ

TRUE OR FALSE

The USTA/Mid-Atlantic Section is a

Section 501(c)(3) organization.FALSE

USTA/MAS is a Section 501(c)(4) social welfare organization.



Structuring Options for New Nonprofits

• Fiscal Agent/Sponsorship Relationship• Unincorporated Association• Charitable Trust• Nonstock Corporation



Advantages of a Nonstock Corporation

• Limited liability protection• Perpetual life• Statutory and Judicial Guidance• Most common



Benefits of Working with an Existing Entity

• Avoid start-up costs• Greater efficiencies/synergy from a

combined effort• Opportunity to gain experience and

expertise• Leveraging existing goodwill and networks



What is Fiscal Sponsorship?

• Contractual relationship between an existing 501(c)(3) entity and an individual or group that lacks tax-exempt status but wants to pursue an project or program consistent with a tax-exempt purpose.

• Allows one to piggy back on another’s tax-exempt status, usually in exchange for an administrative fee.



Example of a Fiscal Sponsorship Relationship

Fiscal sponsor: Community Tennis Association with 501(c)(3) status

Sponsored group: Local tennis league coordinators

Benefit: League activities would fall under the CTA’s umbrella, but coordinators could maintain day-to-day control over their leagues.



Form 1023

• About 75,000 are filed each year• Filing Fee: $400 or $850 (tied to $10,000 gross

proceeds threshhold)• Needs to be filed within 15 months of formation (an extra

12-month grace period is generally allowed)• Generally takes 2-3 months to get a response• Cyber Assistant Scheduled to Debut in 2010!



Key Form 1023 Questions• Describe your past, present, and planned activities in narrative form.• List names, titles, addresses, and compensation of all directors, officers, five

highest compensated employees and independent contractors (if over $50,000 per year).

• Explain different relationships that could present conflicts of interest or risk of private inurement/private benefit.

• Fundraising plans.• Current financials and proposed budget (4 years for new organizations)• Copies of formation documents, conflict of interest policy, etc.



IRS Determination Letter

• What does it mean? The determination letter means that the IRS has concluded that your Form 1023 application and supporting documents meet the applicable exemption requirements of the section under which it is claiming exemption.

• What do I do with it? Make about a dozen copies of the letter and keep them with your corporate records. Scan and save an electronic copy as well. Government agencies, grant makers, and significant donors often will ask to see a copy of a nonprofit organization’s determination letter.

• What is IRS Publication 78? Publication 78 is an official IRS list of

organizations to which charitable contributions are deductible for tax purposes. The list is updated quarterly and can be viewed online at www.irs.gov.



State Charitable Solicitation Compliance

• Virginia regulates the solicitation of charitable contributions by nonprofits and paid fundraising solicitors

• Annual registration requirement (or exemption filing), fee requirement, and project-specific permit requirements (e.g., for charitable gaming activities like bingo and raffles).

• Good Resource: National Association of State Charity Officials

www.nasconet.org


http://www.nasconet.org/


Annual IRS Reporting

Form 990• Annual gross revenue of at least $500,000• Total assets of at least $1,250,000

Form 990-EZ• Annual gross revenue between $25,000 and $500,000• Total assets less than $1,250,000

Form 990N (the ePostcard)(online filing)• Annual gross revenue less than $25,000

NOTE: These numbers adjust annually



You Are Now a Virginia Business and Nonprofit Entity Guru!



Nuts and Bolts of Forming For-Profit and Nonprofit Entities in Virginia

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Transcript of Nuts and Bolts of Forming For-Profit and Nonprofit Entities in Virginia