We’ll be covering Federal and Colorado tax filing requirements and deadlines for small businesses.  There will be a handout!  (and I’ll post it here for later download.)

IRC 501(c)4 organizations are tax-exempt, nonprofit associations or corporations. They have historically been social welfare organizations, civic leagues, and local associations of employees. For example, many HOAs and veteran’s groups are 501(c)4. However, 501(c)4 organizations have been used lately as lobbying and political campaign tools.

IRC 501(c)4 organizations basically become political action committees (PACs) that can do substantial lobbying and campaigning without losing their non-profit status. For example, a corporations can set up its own 501(c)4s as the political arm of the corporation. It then contribute funds to the 501(c)4 . However, funds contributed to 501(c)4s are not tax deductible, so it’s not as if the corporation doesn’t have to pay tax on the money it uses for political purposes. Although contributions aren’t tax deductible, the major reason this type of entity has become popular for political campaigning and lobbying lies in the fact that 501(c)4s do not have to disclose their donors publically. Thus, corporations and unions can set up 501(c)4s, fund them, and then not be linked publically to their 501(c)4′s political activities. In addition to their anonymity, 501(c)4s aren’t subject to the contribution limits to which PAC’s are subject. Contributions by individuals to federal PACs are limited to $5,000 per year. It is important to note, however, that as a result of the D. C. Court of Appeals decision in SpeechNow.org v. FEC, PACs which make only “independent expenditures” that are not coordinated with a specific candidate or party are, similarly, not bound by this contribution limit.

The recent Citizens United decision further highlighted the controversial use of 501(c)4′s. While the Supreme Court decision did not overturn the federal ban on direct corporate and union contributions to candidates and political parties, it did strike down the part of the McCain-Feingold Act that prohibited for-profit corporations, non-profit corporations, and unions from broadcasting “electioneering communications.” An “electioneering communication,” as defined by the Act, is a communication that mentions a candidate’s name sixty days before a primary or thirty days before a general election. The Court ruled that the Act’s prohibition of “electioneering communications” by corporations and unions violated the First Amendment. Thus, 501(c)4s are now able to air “electioneering communications” at any time.

The main issue of Citizen’s United was how the First Amendment was a restriction on Congressional action, not a personal right. Before, individuals like George Soros or the Koch brothers could always contribute as much of their own money as they wanted to making “electioneering communications,” and those on the majority side of the Court’s ruling argued that Congress did not have the power to restrict corporations and unions from doing the same. However, corporations and unions aren’t subject to the same consequences as individuals. For example, if a corporation breaks the law or gets sued civilly some top executives could also be in trouble, but for the most part the corporation will only have to pay a fine. After all, the whole purpose of forming a corporate entity in the first place is to limit personal liability. Thus, others argue that these entities now enjoy more freedom without the responsibility that comes with it.

501(c)4s and the Citizen’s United decision will likely remain contentious issues for the foreseeable future. For example, the IRS’s recent actions regarding imposing a gift tax on 501(c)4 donations has developed into a particularly querulous sub-debate between the two political parties. The fight began earlier this year when the IRS tried to impose a gift tax on five Republican donors’ contributions to 501(c)4s. The Republicans, led by Senator Orrin Hatch and other members of Congress, complained that IRS was being manipulated by the Obama Administration and the IRS subsequently decided that it would delay imposing the gift tax until it reviewed one of its prior rulings. Four anonymous political donors are now accusing the IRS of a lack of impartiality with their rule-making process. In an additional controversy, the IRS in April ruled that tax-exempt hospitals could set-up 501(c)4s for political purposes. 501(c)4s will surely gain a lot of renewed attention as the 2012 election season draws near.

While the debt talks may claim a political head or two before all is said and done, the outlook for small-business owners is decidedly less perilous.

Sure, if the federal government defaults on its debts for the first time in U.S. history next week and the ratings agencies downgrade the U.S.’s AAA debt rating as a result, the effects could be swift.

A U.S. Treasury downgrade could force interest rates higher, and, by extension, the cost of borrowing would also rise. The dollar could lose steam, making it more expensive for those who have operations abroad to meet their payment obligations. Further, the stock and corporate-bond markets could see losses as investors flock to safer havens — creating a disruptive atmosphere for doing business and potentially wreaking havoc on business owners’ retirement savings.

Here’s what’s more likely to happen, however:

Click through for more…

First, let’s discuss the options one has when forming a non-profit 501(c)3 organization.

The first and least utilized is the private operating foundation, which is a hybrid of the next two. I is usually a private foundation that incorporates direct program services like those operated by a public charity.

Second, we have the private foundation, which is the default status for a non-profit under federal taxation regulations. In exchange for some disadvantage, for example, lower deductibility limits for donors, mandatory Form 990 filings and minimum asset distributions, private foundations can be controlled by related parties (husband and wife) and be funded by an individual or small group.

Finally, we have the topic of today’s post, the public charity. Non-profits must apply for public charity status and are subject to restrictions in order to maintain such status. The organization must be organized exclusively for 501(c)3 purposes. The IRS requires specific language in the articles of incorporation explicitly restricting it to such activities. In addition, a public charity must have a diverse board of directors to comprehensively represent the public interest. More than 50% of the board must be unrelated by blood, marriage, or outside business relationships and not be compensated employees of the organization. Thus, unlike a private foundation, a public charity may not be controlled by a single family. Lastly, a public charity must be supported by the general public, in that at least 33% of revenue must come from small donors, other public charities, or the government.

Now, back to the original question: can a public charity make grants?

Yes, it can, with restrictions.

In general, so long as the grants in question further the public charity’s exempt purposes, the charity can make grants without restriction. So, in addition to making grants to other non-profits, a public charity may make grants to a for-profit corporation, a trade association, a social welfare organization, or a foreign charity, and even individual grantees. If the public charity grants to an organization or individual that is not organically restricted to the charity’s exempt purposes, it should enter into a grant restriction agreement with the grantee in which the grantee agrees to use the funds solely for the charity’s exempt purposes.

So, there you go!

LLCs are neither new nor strange to the business community in the civil law countries of Europe and Latin America. This business form has its origin in the 1892 German company law known as Gesellschaft mit beschrnkter Haftung (GmbH). German not only was the first civil code country to enact this legislation, but Germany’s enactment became the focal point of legislative discussions in the countries which subsequently adopted this entity format.

Once established in Germany, the concept of the LLC grew quickly, with the following countries creating similar laws: Portugal (1917); Brazil (1919); Chile (1923); France (1925); Turkey (1926); Cuba (1929); Argentina (1932); Uruguay (1933); Mexico (1934); Belgium (1935); Switzerland (1936); Italy ( 1936); Peru (1936); Columbia (1937); Costa Rica (1942); Guatemala (1942); and Honduras (1950). In France, by the late 1940′s, the limited liability entity known as “societes de responsabilite limitee” was more popular than the more traditional stock corporation and comprised approximately one-third of all French companies.

In addition to limited liability, the LLC laws of each of the above countries have the following four basic characteristics which distinguish entities created thereunder from other business forms: (1) all require some use of the word “limited” in the entity’s name; (2) the entity is given full juristic personality; (3) the partnership concept of “delectus personae,” permitting a member to control admission of new members to the entity; and, (4) codes that allow limited liability firms to be dissolved by death of a member, unless otherwise expressly stated in the articles of association. In addition, some provide for probate or sale of a deceased’s share.

In the United States, late in the nineteenth century, Pennsylvania, Virginia, New Jersey, Michigan and Ohio enacted legislation permitting “limited partnership associations” or “partnership associations.” These associations were created to provide a form of limited liability coupled with some of the beneficial characteristics of the partnership association. The enabling legislation for these associations requires that either the principal office or place of business be located in the enacting state. As a consequence of this restrictive language, these associations were not attractive to larger entities active outside of these localities. They were not used extensively.

In 1977, Wyoming became the first American state to enact a true LLC act modeled after the 1892 German GmbH Code and the Panamanian LLC. The Wyoming LLC Act permits the formation of LLCs organized for any lawful purpose except the business of banking and insurance. Wyo Stat §17-15-103. In addition to limited liability, the Wyoming Act has the same four basic characteristics of the European and Latin American codes that distinguished this entity. First, Wyoming reqiures a form of the word “limited” in the entity’s name. Second, the entity is given full juristic personality. Third, the partnership concept of “delectus or intuitus personae” which permits a partner to control admission of new partners to the partnership is present. Fourth, Wyoming’s Act provides that LLCs must be dissolved by death of a member and provides for probate or sale of a deceased’s share. In addition, the Wyoming Act contains a provision that excludes members or managers from litigation involving the business. Florida enacted an LLC enabling statute modeled on Wyoming’s law in 1982, but other states remained reluctant to allow LLCs because the IRS had yet to weigh in on how such entities should be taxed.

In 1988, the IRS finally issued a ruling treating Wyoming-style LLCs a partnership for federal tax purposes. With confidence buoyed, other states began allowing LLCs. In 1996, the National Conference of Commissioners on Uniform State Laws drafted the Uniform Limited Liability Company Act, which proposed a standardization of LLC enabling legislation across the U.S. The ULLCA was amended in 2006 to include an allowance for single-member LLCs. Six states have enacted the ULLCA and it is currently moving through the legislatures of four other states.

Originally, every LLC statute in the U.S. required entities to include at least two members at the time of formation and required dissolution upon the death of a member. As of this year, however, all fifty states and most territories, including Guam, allow single member LLCs under modified enabling statutes. The initial reluctance to allow such entities stemmed from confusion over tax treatment, yet again. If LLCs were to be treated as partnerships for tax purposes, how was a state to deal with one that didn’t have partners? In 1997, the IRS rescued confused states by issuing a ruling that single-member LLCs would be disregarded for federal tax purposes.

Thus, we come to the present day, were despite over thirty years of LLCs, courts are barely scratching the surface of LLC enabling statute interpretation.

I’ve dealt with clients who have been sold a bill of goods. “Form in Nevada! We’ll act as your in-state agent for a small fee and Nevada doesn’t charge state income taxes!” “Form in Delaware! The Fortune 500 do it!”

Here’s what really happens:

People form business entities to protect their personal assets from business creditors and to take advantage of tax credits and deductions. When someone convinces a new business owner to form in Nevada or Delaware, they charge a fee to help form the business (on top of the state’s fee). Then, they charge a fee to act as the in-state agent for the new entity. You can already be out $3000 or more.

They tell you that you won’t have to pay state taxes in the state in which you’ve formed your entity. They’re correct, technically….but:

• You could endanger your personal assets. To have your personal assets protected from business-related liabilities, your business must be registered in the state where you are doing business. If you’ve registered out of state, there’s no protection from business creditors. Your personal assets remain exposed.  You’ve just killed the limited liability that was the whole reason for forming an entity for your business.

• You probably will have to pay state taxes in your state anyway. Unless you’re a resident of one of the several states, including Nevada or Wyoming, that don’t have personal or corporate state income taxes, the reality is that if you are a resident of or doing business in a state with state income tax, then you and maybe even your company will have to pay taxes on the profits you earn anyway.  (How much tax, ala G.E., is another question – if you can afford to keep 975 people on staff to do your taxes, you can take advantage of the tax code, too.)

• Your administrative costs rise. When small-business owners register outside of their own state, they discover quickly they have to come back and register in their own state with a “foreign registration” document. Now, on top of formation and in-state agent fees, you’ve added more filing fees and administrative costs. For large corporations doing business in multiple states, this is already a necessity.  For your small business, it’s money you don’t need to spend.

• You can’t obtain as much “privacy” as in the past by registering in Nevada or Delaware.  Strict privacy protection rules in these states used to allow corporations to keep certain information, such as the identity of officers and directors, confidential. In recent years, though, Nevada, Delaware and the IRS decided they had enough of it. The states tightened their disclosure rules, so there’s no place to hide anymore. What’s more, because your business will need to register as a foreign entity in the state in which you do business, you’ll have to disclose all of the individuals in management anyway.  And really, what are you hiding from?

So, form your business in your own state.

Since the PPACA originally passed, last year, the small business community has been in an uproar over the perceived increase in paperwork that the new 1099 reporting requirements created for them.  When I originally wrote about the new 1099 reporting requirements, back in May of last year, the post went semi-viral.  I actually received hate mail!

That’s all in the past, now.  The teleconference I gave on the section is now rendered invalid, as are all of the posts I have dedicated to the topic over the last eight months.

As for consequences of the repeal, Congress expected an extra $17.1 billion in tax revenue over the next ten years that it will no longer receive.  Headlines across the web (I understand that Fark.com tries to be funny) laugh about the Senate making Health Care more expensive with the repeal.  The problem is, it’s not lost revenue.  It’s revenue that taxpayers are under-reporting and should be paying.  The IRS can only make rough estimates about how many under-reporting incidents are intentional and how many are due to a lack of understanding of the tax code or some other honest mistake.  But, given 100% compliance with tax law, every one of those $17.1 billion would end up at the Treasury Department.

So, the PPACA gets more expensive, sort of, but businesses no longer have to report every transaction over $600 on a 1099.

I first heard Cake in high school when I shared a Friday-evening radio show on WNTH, New Trier High School radio, with a gentleman by the name of Steve Lawson.  Before getting suspended from the airwaves, and winning multiple awards despite never being allowed to return to the air, we played everything from PJ Harvey to Orbital, Frank Zappa to A Tribe Called Quest, and maybe some Flaming Lips thrown in for good measure.  Most of the diversity came from Steve.  He brought in a copy of Cake’s single, Rock’n'Roll Lifestyle, to play over the air one night.  I’ve been a fan since.  (The single was released in 1993, if you’d like to do some math.)

I think the qualities about Cake that have always appealed to me are the complete lack of pretense in McCrea’s vocals, the simple layering of sound in their songs, the classic Moog synthesizer, and of course, the trumpet.  With all of those elements featured, Showroom of Compassion is 100% Cake, despite McCrea’s statements about a stylistic shift.  Original guitarist Greg Brown reappears on what can only be called a country-western track, Bound Away.  Long Time and Moustache Man (Wasted) are both standout tracks with great drums and a nice funk out of bassist Gabe Nelson.

It’s long awaited and well worth a listen.

The most basic privacy policies should cover three things:

• how you gather information on your website’s visitors;
• how you use the information you gather; and
• how you store that information.

Of course, the best privacy policy on the web is useless if you and your employees don’t adhere to it.  So, the second half of the equation is making sure that everyone in your company reads the policy, understands it, and complies with its directives.

What your specific privacy policy says is up to you.  It depends on the three points, above, and obviously varies from company to company.  A small website like this one that simply runs Google Analytics to track traffic and keywords needs an entirely different policy than one, like Amazon, that performs financial transactions and offers to store credit card information and other personal data.

When I discuss drafting a privacy policy for a client, we usually discuss the following things:

• How much personal data will you be collecting and what for?
• How do you plan on collecting the data?  Cookies?  Accounts?
• Do you plan on using third-party software on your site – like merchant services or Google Analytics – that require you to comply with their own privacy policies?
• Do you link to other websites or receive links from third party services (Google AdSense) that require you to comply with their own privacy policies?
• How are you going to store data?
• How long will you hold it?  Cookie expiration? Account deletion?
• Who will have access to the data within your company?
• Do you plan on serving anyone under the age of 13?  If so, plan on compliance with the Children’s Online Privacy Protection Act of 1998 (COPPA).
• Will your site be collecting data from users in California?  If so, plan on compliance with the rules of the California Office of Privacy Protection
• When did you last review your privacy policy?  Because technology changes so quickly, you should review at least once a year, or every time you add a feature that changes how your site uses personal information.

This is just a starting point.

But, of course, I titled this post “Why You Need a Privacy Policy on Your Website,” didn’t I?  This is where I try to scare you into protecting yourself…

The number one liability issue with security breaches is identity theft.  Breaches can happen in multiple ways: accidental (internet posting or email), mobile (lost or stolen hardware), subcontractor (second party theft), hacking, or insider theft.  A data breach leaves you open to loss and expenses for your business as well as liability to the subjects of the stolen data.

Your own expenses can fall under the following catagories:

• Internal Data and Software (modified, stolen, or deleted)
• E-Money (stolen, extorted)
• Information & Trade Secrets (modified, stolen or deleted)
• Business Interruption (lost revenue to your company)
• Other Expenses (costs to isolate/correct breach issue + costs to rebuild network, replace data, etc)
• Notification Costs (usually statutory)
• Public relations and crisis management expenses

This is on top of Liability to Third Parties (your users, merchants, etc) for:

• Breach of Network Security
• Negligent transmission of a computer virus, worm, logic bomb or Trojan horse
• Breach of third party’s Right of Privacy
• Privacy Claims by Employees
• Breach of duty to maintain the security of sensitive personal information under any statute, regulation, or contract including your own privacy policy
• Emotional Distress, Mental Anguish resulting from breach
• Negligence associated with services performed by outside contractors, vendors and outsourcers
• Breach of consumer Data Protection Law
• Breach of Confidentiality, including consumer or commercial information
• Civil or regulatory action related to your failure to maintain security
• Unfair competition resulting from your failure to maintain security
• Intellectual Property Infringement
• Defamation, trade libel, product disparagement
• Shareholder Derivative Claims
• Use of a fraudulent electronic signature to apply for a loan, make an on-line purchase, etc

These are just some of the allegations that creative civil litigation attorneys can muster up.

So, post a privacy policy on your website!