seyfert starkness: 501(c) and LLC notes : Law Office of Trish Newman

February 24, 2013

The two entities requested most for roller derby leagues are 501(c)s and LLCs.? There ARE other entity forms out there but these two are the ones I am most contacted about.? I have provided my raw notes from the talk I gave at Rollercon in 2011 about the two entities. I cannot go every year because of time and budget constraints but I think a basic understanding helps.? This should in no way substitute for the actual retaining of a lawyer for your organization because everyone has different organizational needs including administration constraints and how much time you can devote to maintaining your entity status (translation: devotion to the paperwork and meetings that goes along with these entities) and making sure your Articles and Bylaws match how your organization actually operates.

**This is informational only and is not intended to be legal or tax advice and does not confer attorney-client privilege nor create any attorney-client relationship.**

?Limited Liability Company (LLC) form

LLC is a non-corporate form of business. Owners are called ?Members?.? Combines the benefits of limited liability and continuity of business like a corporation with the ?pass through? taxation on profit like a partnership.

LLC laws vary widely from state to state.? There are restrictions on the types of business that can be LLCs based on the state. (eg. California does not allow professional services LLCs, doctors, lawyers)

Important to have:
-?????? Adequate capitalization
-?????? Separate bank account
-?????? An Operating Agreement

• Member managed v. Manager managed
  • Members are owners; if chose Manager managed: Members do not participate in management or risk losing LL aspect
• Always have dissolution provisions, preferably written.

Organizing document is the Operating Agreement. Defines the basic structure of the LLC such as setting up:

-?????? Managerial responsibilities
-?????? Governance
-?????? Compensation
-?????? Distribution
-?????? Admission/Withdrawal of Members
-?????? Dissolution provisions

Flexible management and operational structure.

Limited liability is not absolute.? Members can still be personal liable if they:
-?????? Personally guarantee debts of the LLC
-?????? Participate in tortious conduct
-?????? Receive improper distributions
-?????? Commingling personal assets with the LLCs

LLCs are not subject to federal or state income taxes because of the pass through taxation to members unless it elects to be taxed as a corporation.
-?????? There may be state and local taxes specific to LLCs that must be paid.

?501cs

Nonprofits are not allowed to operate to the benefit of any specific individual.

***Prior to deciding to become a tax exempt organization get a good CPA who understands TEOs. They will be able to strategically assess whether it is worth it for your league.***

Nonprofits have to be some form of entity before applying for tax exempt status.? There must be en entity because you have to be able to make contracts, own property, exercise legal rights, etc., and because no one owns a non profit, but it still needs management function. The common types are:
-?????? Unincorporated associations ? established by mutual consent of parties involved (social clubs, lodges, athletic orgs)
-?????? Trusts
-?????? Non Profit Corporations (Most Common)
-?????? LLCs***(not really ? the members/owners of a non profit LLC must be exempt organizations; non ownership of a not for profit and LLC ownership are contradictory so there may be resulting confusion from your state and federal agencies if you go this route)

Corporations are creatures of statute and so close attention has to be paid to what it is you are forming.
-?????? Voting provisions ? quorums
-?????? Board requirements (eg. 3 outside independent board members; officer requirements)
-?????? Paperwork and filing requirements -? minutes, bylaws, articles of incorporation, SEPARATE BANK ACCOUNT with EIN.

To become a 501(c)(3) must be one of the following: Public Benefit, Mutual Benefit, Religious

-?????? Public benefit: charitable or public purpose, may not make any distribution of corporate assets to members at any time, and are subject to extensive governmental regulation and supervision
-?????? Mutual benefit: (frats, social clubs, homeowners assoc.) may be formed for any lawful purpose, may make distributions of corporate assets to members on dissolution, and are subject to less stringent state regulation and supervision
-?????? Religious: primarily or exclusively for religious purposes, may not make any distribution of corporate assets to members at any time, and are subject to less stringent governmental regulation and supervision.

Being not for profit is not the same as being tax exempt. You must apply for them separately. It is not automatic.
-?????? Tax exempt = exempt from income tax and donors can give tax deductible donations
-?????? No money to political campaigns; lobbying has restrictions
-?????? There is no reason not to apply for tax exemption if you are a not for profit unless you are not eligible.

Federal Tax Status
-?????? Incorporating at the state level is separate from getting and maintaining your federal tax status ? must include in your articles of incorporation your non profit purpose for the federal purposes

• 27 months from incorporating.? Can go back during that time to get the tax exemption and refund for the 2 years.? You must pay taxes until granted exemption.
• lots of different categories under section 501(c); not just amateur athletics.
• the application to get tax exempt status will cost you some money.

Nonprofits and Dissolution: No one technically owns a non-profit or its assets, and therefore if dissolved, there is no distribution of assets.? Must pay off all debts and the assets must go to another tax exempt not for profit.? Technically running a business for the benefit of society which is why you are given exemption. This also means there is oversight by the state ? usually by the State Attorney General and additionally by the IRS.? There are filing requirements and you must pay attention to the notices sent.? Make sure the agent for service of process actually gets her mail and pays attention to the oversight agencies.

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Source: http://seyfert-starkness.blogspot.com/2013/02/501c-and-llc-notes-law-office-of-trish.html

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