

Incorporating and legalities is not an excuse. - kulpreet
http://kulpreet.com/post/2575535086/incorporating-and-legalities-is-not-an-excuse

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bradleyland
I'd like to offer a correction/clarification. My intention isn't to point out
that you were wrong, but to prevent someone else from getting the wrong idea.

You said that you decided to form this corporation as a not-for-profit
[assuming this was a 501(c)(3)] because: "a project of this sort could only
generate so much revenue," and "since it was my first major project, it only
made sense to start somewhere small and make the organization non-profit."

The revenue generating capability of an organization is not something you
consider when you decide to go not-for-profit. There are non-profit
organizations that receive hundreds of millions of dollars a year in income.
Non-profit organizations can make a little or a lot, it doesn't really matter.

The size of a corporation also has little or nothing to do with whether or not
you should structure your company as a not-for-profit. Examples of some large
non-profits are:

Org (2010 revenue) Mayo Clinic ($7.9 billion) United Way ($3.84 billion)
American Cancer Society ($926 million) National Red Cross ($3.21 billion)

Not-for-profit organizations have many strict limitations on their method of
operation. Everything from funding to salaries are limited in some fashion.
You typically opt to form a not-for-profit corporation when you are forming a
charity that you want to protect from becoming a profit motivated enterprise
once you've moved on.

~~~
kulpreet
You make a really good point. But as I mentioned in the article during my
research process I found that for tax purposes if you keep the gross receipts
of a non-profit below $5,000/year you automatically get 501(c)(3) status and
the process of filing taxes is very straightforward. Before the Pension
Protection Act of 2006 non-profits that made less than $25,000 weren't even
required to file annual tax returns. Regardless, I wasn't expecting to make
more than $5,000/year anyway.

Basically, since it was my first major project and I wasn't expecting to make
more than $5,000/year non-profit seemed to be the way to go.

~~~
enjo
_Heavily edited_

Ok, so my wife is around now. She's a CPA/PhD in accounting and does a lot of
work with small businesses, so I suppose she knows what she's talking about.
While non-profits are not her specific area of study, she does do the
accounting work for a couple of local non-profits. She's never steered me
wrong yet:)

So that said:

The $5000 exemption you reference does not alleviate you of the other
requirements for operating a 501(c)(3). More specifically your company must
operate for a specific "exempt purpose"
([http://www.irs.gov/charities/charitable/article/0,,id=175418...](http://www.irs.gov/charities/charitable/article/0,,id=175418,00.html)).

If I'm following the article correctly, you wrote an iPhone app that does not
fall under any of those exempt purposes. Therefore, even operating under the
$5000 receipts limit, your company is not eligible for 501(c)(3) tax exempt
status.

Any income that you made from the app should be treated as personal income.
You don't even need to form a business entity to do business at all. You can
take that $5000 and declare it as personal income just like any other income
you make throughout the year. That does open you up to increased liability,
which is why LLC's have become a preferred vehicle for proprietorships and
partnerships. In most states it's nothing more than a very short form and
$25-$100. It grants you some protection for your brand as well as limiting
your liability in certain situations (for instance, it provides a shield to
your personal assets for lawsuits around copyright infringement).

~~~
kulpreet
Thanks for asking your wife :). I'll keep that in mind next June because 2010
was our first "profitable" year.

We have a tax-exempt purpose— it's charitable. We're actually raising money to
build computers for remote villages in North India and donating the rest to a
blind school. The iPhone app is just a means of fundraising.

------
bhickey
Did you incorporate in Rhode Island for any reason other than the absence of
age restrictions?

We aren't exactly known as a business friendly state, unless you're an anti-
government[1] retired up baseball player who has decided to take handouts from
the governor [2].

[1]
[http://en.wikipedia.org/wiki/Curt_Schilling#Political_advoca...](http://en.wikipedia.org/wiki/Curt_Schilling#Political_advocacy)

[2] <http://en.wikipedia.org/wiki/38_Studios>

~~~
kulpreet
They also automatically grant state tax-exemption, if you are tax-exempt for
federal taxes

------
wahnfrieden
Only tangentially related to the article, but please use a more screen-
friendly font than Helvetica Neue Light for bodies of smaller-point text. It
was a bit painful to read.

------
rprasad
Based on what you did, its pretty obvious that you did not consult a lawyer,
because what you did is illegal under US tax law.

Nonprofits are required to meet specific requirements to get tax-exempt
treatment _before_ engaging in income-generating activity. 501(c)(3) status
_is not granted automatically_ (IOW, it is not granted "statutorily"). It is a
legal status specifically granted by the IRS after a review.

Income raised prior to receiving the exemption is almost always treated as
income earned through non-exempt (i.e., for-profit) activities. There are
exceptions, of course, but you need to consult a tax lawyer (specializing in
non-profit/charitable tax law) to figure out if you qualify for those
exceptions. There are very important reasons behind this (including, but not
limited to, the deductibility of transactions).

State tax law may be more permissive, but that only affects your state tax
status. Federal tax law governs your federal tax status. It may be possible to
be a non-profit for state taxation but a for-profit for federal taxation.

Also, to address inaccuracies in your blog post: 1) There are no age
restrictions in any state on incorporation. However, few businesses will enter
into contracts with minors unless their parents guarantee the contracts
because minors have very special rights under American contract law.

2) There is no need to incorporate a solo operation. Incorporation is intended
to simplify accounting for collaborative efforts. Individuals can simply
register a DBA (if they're making up a "company" name"). In your case,
incorporating is proper: you claim to be founding a charitable organization,
so incorporation is a necessary step to receiving tax-exempt status.

3) It's humorous to see that you believe that a non-profit only needs to file
2 forms, online, once a year. Those two forms are just the start. There's a
lot more paperwork involved.

You need to consult a lawyer, immediately, because you may receive a call from
the IRS in the near future.

~~~
kulpreet
Thanks for the heads up. You're probably right that filling out 2 forms is
humorous, but it is the bare minimum and I did get away with it for the 2009
tax year (which we had no activity because we incorporated late in the year).
I'm eventually going to have to file the W-9 with Apple and some other forms
if I plan on sending money abroad.

After I was done incorporating and everything was ready, I did consult an
accountant and he did say there might be some issues down the road, but only
if I was planning on taking money out of the country (which I kind of am). I
also did have to make a phone call to one of the IRSs numbers to have them add
the organization to the list of tax-exempt organizations, so I could file my
990N online. They did make me verify that my gross receipts were less than
$5,000/year.

Regarding age restrictions: In New Jersey and a lot of other states, the law
specifically states that you need to be 18 years or older to incorporate
and/or be a board member of the organization. This isn't true in some other
states, depending how lenient their laws are. I ended up incorporating in
Rhode Island, because they didn't have any age restriction and you are
automatically tax exempt at the state level if you are at the federal level.

Thanks for the advice. I'll probably contact you or someone else if I do have
any issues.

