If an LLC protects me, why get business insurance?

Business clients often ask me why, if they form their business as a limited liability company (LLC), would they need business insurance?  Doesn’t the LLC structure protect me from liability?

You can launch a business tomorrow simply by starting to do whatever your business does, without filing with the state, choosing a business entity.  If you want to sell widgets, you would get widgets and sell them.  You would be a sole proprietor, you would have a sole proprietorship structure to your business.  You would be your own boss, totally responsible for business decisions.  That sounds perfect to many people.  However, you would also be totally responsible for liabilities, and your personal assets would be vulnerable if your business was sued for whatever reason.  Your business’s money and property and your personal money and property are all at risk as a sole proprietor.  You might not only lose your business’s widgets in a lawsuit, you might lose your house.

To create a divide between “business” and “personal,” sole proprietors and people starting a business choose to incorporate.  The limited liability company (LLC) is a common choice of business entity in Ohio.  If your LLC is sued, only the business’s assets are at risk and your personal assets should be safe.  (“Piercing the corporate veil” in a lawsuit against an LLC could put personal assets at risk, but that is a topic for a different blog post.)  So, why would you need business insurance since your personal assets are protected?

The question becomes what happens if your business faces a large lawsuit.  For example, one of the widgets you sold was defective and caused a horrible personal injury to the customer who bought it.  Even if your company is found not liable, it could face financial ruin defending itself.  Business liability insurance protects the assets of your business.  Errors and omissions (E&O) insurance would cover the cost of defending your business in a lawsuit, while general liability insurance would cover your business in situations arising from negligence.

If you are a sole proprietor, or plan to start a business, incorporate your business to protect your personal assets.  Then, purchase business insurance to protect your business’s assets.

If you want to start a business in Ohio, or have any questions about LLCs, email me at julie@juliemillslaw.com.

 

 

10 Essential Steps to Start a Nonprofit–Final Step

Step #10:  Dissolving Your Nonprofit

Step #10 runs contrary to the title of the series, “10 Essential Steps to Start a Nonprofit,” but should be reviewed by those who are forming (or thinking about forming) a nonprofit.  Dissolving a nonprofit happens for many reasons: it becomes too difficult to raise funds or obtain grants; there are too few resources or revenue streams to offer programs or services; the mission or cause is no longer relevant or has been accomplished; or it has failed to file necessary forms and tax-exempt status has been revoked, leading the board of directors and voting members to vote to dissolve.  Whatever the reason, start with these steps (this list is not exhaustive!) to dissolve your Ohio nonprofit.

  1.  Have the board of directors and voting members vote to adopt a “resolution to dissolve.”  This resolution provides authority to move forward with the dissolution process.  In certain circumstances it is possible for directors alone to authorize dissolution–check to make sure you can proceed this way before starting.  Your dissolution should comply with the dissolution terms set forth in your code of regulations/bylaws.
  2. File a Certificate of Dissolution with the Ohio Secretary of State.
  3. File a Final Annual Report and Asset Disposition form with the Ohio Attorney General.
  4. File a tax clearance certificate with the Ohio Department of Taxation showing that all necessary tax obligations have been met.
  5. If your nonprofit had employees, you will need to notify the Department of Job and Family Services that contributions are either not required, or have been paid.
  6. On your IRS tax forms 990 or 990EZ, you will need to file a Schedule N (Liquidation, Termination, Dissolution, or Significant Disposition of Assets) as well as some organizing documents to notify the IRS that your nonprofit has dissolved.

Some nonprofits choose to just let the organization “expire”: the IRS revokes tax-exempt status after three years pass without filing the 990 tax form; the Secretary of State takes control of business records and lists the nonprofit as inactive if filing dates are missed, etc.  However, it is recommended (by me, for example) to complete the steps in the dissolution process so that you officially end the nonprofit corporation’s existence.  The main benefits of formal dissolution are that you make the organization beyond the reach of claimants and creditors, and you fulfill your obligations under Ohio law of distributing any remaining assets properly (i.e., to a like-minded nonprofit).

If you want to discuss how to dissolve a nonprofit, email me at julie@juliemillslaw.com.

10 Essential Steps to Start a Nonprofit (cont’d)

Step #9: Money and People!

You have completed most legal steps to forming your nonprofit, now it’s time to start the steps that help truly launch your organization, i.e., money and people.  Securing funding, forming partnerships—these steps will put your group in a position to accomplish your goals.

  1. Fundraising: know your state’s laws on fundraising that involve gambling or alcohol. Keep detailed financial records of the funds you receive.  If your events involve minors or animals, have waivers and releases ready!  Inquire when you need insurance for events.  Obtain the correct permits and permission from local authorities before your event.  If you are serving or selling food, be sure to check with your local health department and other agencies to see if you need to provide information.  This list is not exhaustive.
  2. Grants: educate yourself, your grant committee if you have one, and others who want to help with grants, on grant writing and the grant application process.  How you present your organization when applying for a grant affects how grant funders view your organization.  They are determining whether to give your group money from the application you submit.  Are your financials in order?  Are your goals and mission clearly described?  Are you organized, which implies trustworthiness with the money they give to you?
  3. Corporate sponsorships: one thing I learned when trying to identify potential corporate sponsors is that you want to look beyond what the corporation does and sells.  For example, animal related nonprofits tend to approach animal-related companies, e.g., pet food, pet supply, pet boarding companies.  This leaves out a potentially large source of funding.  A large contributor to local pet charities in my town is a basement foundation and repair company.  Another large sponsor of animal rescue-related charities in my area is a laptop repair and sales business.  Expand your outreach with companies!
  4. Partnerships: other organizations can be one of your greatest assets. Leverage your contacts in forming partnerships.  The food pantry you start would get much public view if you partner in an event with a group who fills bookbags with food to provide weekend meals for kids who suffer from food insecurity.  Contact organizations who might benefit from your group, and who might provide a benefit to yours.
  5. Media: send the word out to local media about your group, your events. Become familiar with preparing media releases.  Connect with Facebook groups, prepare a content calendar for posting on social media such as Facebook, Instagram, Twitter, Pinterest, etc.

Information about grant writing, fundraising, partnerships and related topics could fill a book.  The information above should serve to get you started in launching your organization’s work.  I’m happy to answer any questions–contact me at julie@juliemillslaw.com.

10 Essential Steps to Start a Nonprofit (cont’d)

STEP #8: WAYS TO LOSE YOUR TAX-EXEMPT STATUS

Most charities rely on donations to operate.  To attract donations, nonprofits will pursue tax-exempt status from the IRS so they can tell donors that their donations are deductible from their taxes.  People generally recognize the IRS code, 501c3, as an indicator that their donations are deductible.  Tax-exempt status makes it possible to secure grants, and makes the organization attractive to corporations and business who want to donate, for “good will” reasons and/or to receive a deduction off taxes.  Losing your tax-exempt status can be a huge blow to a charity, both financially and to the charity’s reputation.  Becoming knowledgeable on ways to lose tax-exempt status is crucial in running a tax-exempt nonprofit.

The federal government grants your organization tax-exempt status if you agree to certain behavior.  The government is saying, “we won’t make you pay certain taxes, but you now owe the public certain things (disclosure and accountability), and you must not do certain things.”  Not following the rules means that the IRS could revoke your organization’s tax-exempt status.

How to jeopardize your tax-exempt status:

  1. Inurement,” or private benefit.  First, as you read the definition of inurement, know that any amount can jeopardize tax-exempt status.  Second, inurement means to “benefit.”  The prohibition against inurement means that there shall be no using income or assets of a tax-exempt organization to unduly benefit an individual or organization that has a close relationship with the tax-exempt organization.  The inurement prohibition is absolute.  Assets and income are to be used to further the organization’s mission, period.
  2. Unrelated Business Income (UBI).  If your organization runs a business that produces income for your organization, but the purpose of the business is unrelated to your organization’s mission, then the organization is subject to tax on its income from the business.  If your tax-exempt organization provides clothing for shelters and low-income families, and receives income from a thrift store it runs, it is unlikely there would be a risk for UBI.  If your organization is a pet rescue and receives income from a nail salon business, the rescue might have UBI.
  3. Political campaign activity.  As with the inurement prohibition, any amount of political campaigning in support or opposition of a candidate is prohibited and could result in loss of 501c3 (tax exempt) status.  I counsel nonprofit clients that the organization can’t engage in political activity regarding a candidate, but can generally support or oppose an issue.  The tax-exempt “clean oceans” organizations can oppose a ballot initiative to ease pollution restrictions, for example.  I caution to proceed carefully, since tax-exempt status can be revoked if political activity is deemed to be “substantial,” and there are tests the IRS uses to determine this.

Guard your organization’s tax-exempt, 501c3 status.  Having to reapply is cumbersome if you lose this status, and it might give donors a reason to donate their money to an organization who has not behaved in ways that result in losing this designation.

If you have any questions about getting, maintaining, or losing tax-exempt status, email me at julie@juliemillslaw.com.

 

 

10 Essential Steps to Start a Nonprofit (cont’d)

STEP #7: EDUCATING YOUR BOARD

When I see articles on starting a nonprofit I rarely see “educate your board” yet this step is crucial.  Educate about what?  Why?

Educate about what? Inform about liabilities board members might face, educate about their duties and rights, educate on actions that could jeopardize the organization, particularly its tax-exempt status .  This list is not exhaustive.

Why?  Board members need to know what they are required to do, what laws govern their actions, how they can unwittingly get into trouble, among other reasons “why.”  In some situations, although uncommon, board members can face personal liability.

People have good intentions when forming a nonprofit that will pursue a charitable cause.  There are legal responsibilities and potential liabilities if you don’t do what you are supposed to as a board member.  Unfortunately, awareness of these duties and liabilities often comes after there’s an issue.

Board member responsibilities, in general (can be in addition to state law requirements):

  1. Duty of Care: duty to exercise reasonable care when he or she makes a decision for the organization. Reasonable care is what an “ordinarily prudent” person in a similar situation would do.
  2. Duty of Loyalty: A board member must never use information gained through his/her position for personal gain and must always act in the best interests of the organization.
  3. Duty of Obedience to the Mission: A board member must be faithful to the organization’s mission.  He or she cannot act in a way that is inconsistent with the organization’s goals. The board member is trusted by the public to manage donated funds to fulfill the organization’s mission.

Board members should have bylaws in place that govern the functioning of the organization.  They should be apprised of potential legal pitfalls that could impact them or the organization.  There should be short primers provided on open records laws, aka “Sunshine Laws,” and how they impact board meetings and public attendance; a primer on insurance, waivers and releases for events, protocol to be followed if someone is injured at an organization event; fundraising do’s and don’ts, liability with alcohol at fundraisers; political activity and what is permitted; among many other topics relevant to nonprofits.

Sitting on the board of a charitable organization can be rewarding, and board members do have a responsibility to educate themselves on what liability they could face.  Moreover, nonprofits should educate their boards on personal and organizational liability so board members can act accordingly, and avoid making decisions that unknowingly put themselves or the organization at risk.

If you have questions about board member liability, contact me at julie@juliemillslaw.com.

10 Essential Steps to Start a Nonprofit (cont’d)

STEP #6: ADDITIONAL FILINGS; APPLICATIONS; REGISTRATIONS

Depending upon the nature of your nonprofit or what activities you undertake for fundraising–e.g., bake sales, pet bakery sales, bingo tournaments, etc.–you might be required to register with other agencies or organizations.  For many nonprofits, it’s highly recommended that you register with certain organizations.  The listings below are often specific to Ohio, so be certain to check with your state’s agency or organization for registration information.

Places where you might be required to register:

Places where you might decide to register; information you might need:

For information about where you should register, email me at julie@juliemillslaw.com.

10 Essential Steps to Start a Nonprofit (cont’d)

You created a nonprofit corporation under your state’s corporation laws.  You presented your nonprofit corporation to the IRS and requested tax-exempt status.  Congratulations, you just received your Determination Letter from the IRS that grants your nonprofit tax-exempt status!  You are a 501(c)(3) tax-exempt, nonprofit organization.  By this time, you are probably ready to start soliciting donations from the public, who you’re certain will be anxious to contribute to your worthy cause.  Are you finished with the applying, registering, filing, etc?  No!

STEP #5: REGISTER YOUR CHARITY WITH THE ATTORNEY GENERAL

In Ohio, a charity that solicits donations from the public must register with the Ohio Attorney General.  Ohio law requires such registration, and other states likely have similar charitable registration laws.  At this point, my clients are often tired of registering, filing, and applying, and some tax-exempt nonprofits actually overlook this important step in the process.

It helps to see the big picture with many legal processes.  Here, you create an entity in your state to do business, whether it’s for-profit or nonprofit.  As a nonprofit, you want to attract donors, so you decided to offer them a tax deduction for their donation by asking the IRS for permission to do that–having your nonprofit become tax exempt.  Since you are asking the public for their money, the attorney general enters the picture as the agency in charge of protecting the public.  To protect people about to donate their money, the attorney general ensures that charities in its state are legitimate.  There are many unscrupulous people who use fake charities to attract donations and the attorney general is tasked with protecting people from giving money to scams.  Fake charities tend to mimic the name or mission of popular charities, particularly veteran organizations, breast cancer charities, and charities that pop up after disasters.

In Ohio, the Ohio Revised Code requires charities to register with the Ohio Attorney General, and to file annual registration statements.  There are charities that are exempt from this requirement.  If your organization contracts with a professional fundraiser or solicitor, parts of the Ohio Revised Code govern your contractual relationship–in other words, special attention is paid to these arrangements.  Certain disclosures need to be made to the public for any organization asking the public to donate, and records of all fundraising activity need maintained for 3 years whether you hire a professional fundraiser or not.

Clients sometimes wonder at this point why all of this work is needed when they just want to “do good.”  There is much initial work involved, and annual registrations and other actions must be followed, but the main reason clients must follow these steps is to make sure that people are giving money to legitimate causes.

If you have any questions about registering your Ohio charity with the Ohio Attorney General, email me at julie@juliemillslaw.com.