Business Formation and Non-Profit Organizations

Business Formation and Non-Profit Organizations

Steps in Forming a Business

  • Step One:

    • Choose a name for the business.

    • Register for a domain name if a web presence is desired.

    • Decide on an office location, if necessary, and make arrangements to rent or purchase.

    • Acquire a phone number for the business.

    • Register the business on Google, Maps, and other relevant platforms.

  • Step Two:

    • Choose a type of business entity.

    • If forming a Limited Liability Company (LLC), corporation, or another limited liability entity, file the appropriate formation documents with the Secretary of State.

    • Depending on the chosen entity type, create a partnership agreement (for partnerships), operating agreement (for LLCs), or bylaws and shareholder agreement (for corporations).

  • Step Three:

    • Apply for an Employer Identification Number (EIN) for the business.

    • Note: An EIN is not always necessary for sole proprietorships, as the owner often uses their Social Security number; however, it is required if hiring employees or setting up certain retirement plans.

  • Step Four:

    • Apply for a Business Tax License along with any other required licenses or permits.

  • Step Five:

    • Other Set-Up Tasks:

    • Obtain all necessary or desired insurance.

    • Open a bank account in the business name.

    • Determine processes/procedures for the business including whether to use contracts/agreements and whether to purchase software for accounting, workflow, management, etc.

    • Apply for any desired trademark, copyright, or patent protections (optional).

Business Succession Planning

  • Definition:

    • Determining the “exit strategy” for the owners of the business and business partners.

  • Events Necessitating Business Succession Planning:

    • Sale of the business in whole or an individual owner’s interest.

    • Retirement of an owner.

    • Death or incapacity of any business owner.

    • Involuntary transfer of an owner’s interest (e.g., bankruptcy, transfer to a creditor, due to divorce).

  • Considerations:

    • Restrictions on transfer of ownership (buy/sell agreements, rights of first refusal).

    • Valuation methods to determine the value of interests.

    • Naming successors to take ownership or operational roles of the business upon a designated event.

    • Non-financial factors that may influence transfers and designating successors, such as family relationships.

    • Consider whether the business should continue or should be sold or dissolved upon occurrence of specified events.

Nonprofit Organizations

  • How to Form a Nonprofit Corporation:

    • Step 1: Form a nonprofit corporation following state laws by filing Articles of Incorporation with the Secretary of State.

    • Step 2: Hold an organizational meeting with the initial board of directors to adopt bylaws.

    • Step 3: Apply for 501(c)(3) status with the IRS (using Form 1023 or 1023-EZ).

    • The organization must be established for one or more exempt purposes (i.e., charitable, scientific, educational, religious).

    • Cannot empower officers or directors to carry out activities not in furtherance of the exempt purpose.

    • Assets must be permanently dedicated to exempt purposes, and upon dissolution must be distributed to another 501(c)(3) organization or federal/state government, not to individuals.

    • No political campaigning or lobbying that constitutes a substantial portion of activities.

    • No private inurement: net earnings must not benefit private interests.

    • Excess Benefit Rule: benefits to disqualified persons exceeding consideration require attention (e.g., overpayment).

    • Must adopt a conflict-of-interest policy which requires disclosure of private interests.

    • Step 4: Apply for state-level tax exemptions and a state-level charitable solicitation license.

Nonprofit Organizations (continued)

  • Differences from For-Profit Corporations:

    • No shareholders present; no owners, no stocks issued, and no dividends or distributions are paid out.

    • Organized not for profit-making but for charitable, scientific, educational, or religious purposes.

    • Must operate solely within exempt purposes.

    • Have strict conflict-of-interest rules and must file for IRS 501(c)(3) status.

  • Similarities to For-Profit Corporations:

    • Governed by a board of directors, managed by officers, may employ staff.

    • Can compensate directors, officers, and employees reasonably.

    • Directors and officers owe duties of care and loyalty as in for-profit corporations.

    • Subject to corporate formalities such as meetings, minutes, voting procedures, and annual reporting.

    • Rights for inspection, meeting participation, and indemnification exist parallel to those of for-profit entities.

    • Liability protection similar to that of for-profit corporations.

Types of Nonprofit Corporations

  • Public Charities:

    • Include churches, hospitals, qualifying medical research organizations, schools, colleges, universities, or organizations functioning in support of existing public charities.

    • Must actively engage in fundraising and receive contributions from a range of sources including the public, governmental agencies, and corporations.

  • Private Foundation:

    • A nonprofit organization that does not qualify as a public charity; usually funded by contributions from a single family, focusing on grants to other nonprofits.

  • Membership vs. Non-Membership:

    • Nonprofit may have members whose rights and obligations are defined in the bylaws, including voting rights to elect the board of directors.

Remedies Available to Creditor

  • Lien:

    • A creditor’s claim against a debtor’s property, granting the creditor rights to ensure debt repayment.

    • Mechanic’s Lien:

    • A lien filed against real property by providers of labor, services, or materials for improvements if not paid.

    • Filing process governed by statute.

    • Artisan’s Lien:

    • A lien on personal property by service providers retaining possession until payment.

    • Judicial Lien:

    • Result of a court judgment against the debtor's property.

    • Writ of Attachment:

    • Seizure of property before judgment is rendered to secure potential debts (includes filing affidavit and posting bond).

    • Writ of Execution:

    • Property is seized and sold after a favorable judgment.

    • Exempt Property:

    • Some debtor property is exempt from attachment/execution (homestead exemption, personal possessions, etc.).

Remedies Available to Creditor (continued)

  • Garnishment:

    • Court order allowing creditors to collect debts by seizing property held by third parties.

    • Maximum wage garnishment is federally regulated, with state laws potentially offering additional debtor protections.

    • Federal law prohibits firing employees solely due to wage garnishment.

Suretyship and Guaranty Agreements

  • Suretyship:

    • A third party's promise to assume responsibility for a debtor's obligation, resulting in joint liability.

  • Guaranty:

    • A third-party promise to take secondary liability, only activated upon debtor default.

  • Actions That Release Surety or Guarantor:

    • Ineffective modifications of original contract terms without consent.

    • Creditor’s return of collateral or actions that reduce its value.

    • Payment or tender of payment by debtor.

  • Defenses of Surety or Guarantor:

    • All defenses available to the debtor, with specific rules regarding incapacity, bankruptcy, statute of limitations, and fraud.

  • Rights of Surety or Guarantor:

    • Right of Subrogation:

    • Rights held by the creditor against the debtor are transferred to the surety or guarantor post-payment.

    • Right of Reimbursement:

    • It includes amounts paid and incurred expenses by the surety or guarantor.

    • Right of Contribution:

    • From co-sureties or co-guarantors for amounts paid to satisfy the obligation.

Mortgages

  • Mortgage:

    • A written instrument that offers the creditor a lien on real property as security for debt repayment.

    • Notable Types:

    • Fixed-rate

    • Adjustable-rate

  • Provisions in Mortgages:

    • Terms outlining loan amount, repayment term, interest rate, and calculation methods for interest.

    • Prepayment penalty clauses, maintenance obligations, homeowner’s insurance, and other non-loan financial obligations of the borrower.

  • Foreclosure:

    • The legal process allowing lenders to repossess and sell property securing loans.

    • Forbearance:

    • Delay of part or all loan payments.

    • Workout Agreement:

    • Contract detailing borrower-lender rights and responsibilities addressing default situations.

    • Short Sale:

    • Sale of property for less than the remaining mortgage balance.

Sample Questions

  • Sample Question 1:

    - Allison wants to start a nonprofit corporation and serve as the sole owner, director, and President.

    • Possible Answers:

    • Yes, as long as the nonprofit is organized for an exempt purpose.

    • No, because the formation of a corporation requires at least three directors.

    • Yes, as long as she does not spend nonprofit funds for personal benefit.

    • No, because the nonprofit would be her alter ego.

  • Sample Question 2:

    - Ben contracts with Molly’s Contracting Service to build an addition to his house. After making the first payment, he refuses further payments. What should Molly do?

    • Possible Answers:

    • Follow statutory procedures to obtain a mechanic’s lien on the house.

    • Follow statutory procedures to obtain an artisan’s lien on the materials.

    • Follow statutory procedures to obtain a mortgage on the house.

    • Follow statutory procedures to obtain a suretyship agreement on the materials.

  • Sample Question 3:

    • A nonprofit organization must have members.

    • Responses:

      • True.

      • False.