“Nonprofit Enterprises: An Overview”
One of the most important and valuable services the Ortega Business Law Firm, APC provides to its clients is legal counseling on the feasibility of establishing and structuring a nonprofit entity. It is important to understand the challenging legal nature of nonprofit corporations and entities to ensure that they fit the charitable, financial, and estate planning goals of our clients. Two basic forms of nonprofit enterprises are unincorporated associations and nonprofit limited liability companies.
An unincorporated association (“UA”) can be classified as an informal group of two or more persons joined together to benefit the public in some way without earning a profit. This can be as simple as a few neighbors coming together to raise money to help feed fire fighters at the local station. Most of the time, these informal groups are created for a charitable purpose on a short-term level. As long as the UA is for a charitable, educational, or scientific purpose, it can qualify as a 501(c)(3) organization whose donations are tax-deductable. Unincorporated associations are easy to form and there’s virtually no paperwork required to maintain them. There are, however, some major disadvantages; namely, there’s no separate legal existence apart from the UA’s members, which means that individuals are liable for debts and obligations. In addition, it may be hard to get donations and virtually impossible to get grants without a formal determination letter from IRS proving the legitimacy of the charity.
A nonprofit limited liability company (“LLC”) is an entity that provides limited liability for debts and acts to its members (aka owners), organized for a charitable purpose. Members can consist of one individual, two or more individuals, corporations, or even other LLCs. A nonprofit LLC may apply for tax-exemption status as a 501(c)(3) organization by filing Form 1023. The legal requirements for LLCs vary based on state, but in general, LLCs do not require management like corporations with a board of directors or officers, and they’re not taxed as a separate entity; instead, members report profits and losses on their personal tax returns. In California, LLCs pay a franchise tax to the IRS for the benefit of limited liability (minimum of $800 per year), and members are considered self-employed and must pay self-employment taxes regarding Medicare and Social Security.
If you would like more information regarding the services Ortega Business Law Firm, APC provides regarding the above-mentioned nonprofit enterprises or nonprofit corporate law in general, please reach out to Rosana Hererra-Ortega, a San Diego corporate attorney, to set up a consultation.