I want to get free donations to my business. Should I start a Non-Profit or an LLC company?
Tax Professional Answers
Both entities you are requesting information about, LLC and Non-Profit C Corp, will require filing fees for Federal, State, and County levels. Be prepared to hire a manager or board of directors to run either of these companies. You should apply for an employer federal identification number (EFIN) from IRS no matter what type of business you have; sole proprietorship, corporation, s-corporation, limited liability company, partnership, etc.
A Not-For-Profit requires one extra step from the IRS, which is to get a Determination Letter from IRS. By determination letter, by this I mean that IRS will "determine" which code section of the tax law code that the organization will fall under which determines how much a donor will be able to deduct on their tax return. You must tell IRS for what cause or group of underserved people that you will be donating the money, time, and donated material to. The application used to be FREE, today the charge is $400 if you expect/receive under $10,000 annually and $850 if you expect/receive over $10,000.
If you are the organizer of a Non-Profit Corporation 501(c)(3), then you must be disassociated from being paid for your role in the company as it constitutes self-dealing which is illegal. Just think of how a big corporation is run and you can imagine how you will need a lot of employees and an accountant to perform an annual audit to qualify for government money. The bookkeeping for a not-for-profit requires a person with the knowledge of this type as it is very close to fund accounting that a government uses as you have to keep track of every item you told IRS was the reason that you are giving to a sector of people (or animals). You can’t comingle your funds or write yourself a check out of the organization’s bank account, that is illegal.
For a Not-For-Profit determination letter from the IRS, the application is 26 pages long and it requires projection of 4 years of income, budgets, questions, etc. It would be best to write a business plan that would help serve to answer the questions that IRS is asking on the form and the business plan could serve as a conduit for grants and loans.
Most businesses fail in the first 3 years so you must educate yourself in how to do so you don’t fail. The best way to learn about operating a business is to take a class sponsored by SBA, the end result is a business plan which might land you a loan at your local bank. They offer 6 weeks and 14 week programs that are held in the evenings in most major cities. Start small, a sole proprietorship so you can get the idea of what is involved and how you have to keep your private life separate from your business bank account.
Please contact me for more information at my email firstname.lastname@example.org or call (775) 341-1719
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