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Guest Post by Travis Crabtree People across the nation are starting new nonprofit organizations at an unprecedented rate. In March 2020, nonprofit organizations increased by 39 percent when compared to other types of businesses, according to Swyft Filings proprietary data. It's no coincidence this spike in nonprofit formation is happening during a global pandemic. This crisis has inspired people who want to make a difference. For many, the best way to help is by starting a nonprofit to bring a mission to life. Whether it's from the effects of a devastating pandemic or rampant social injustice, nonprofits assist communities in need by providing people, supplies, money, organization, and other much needed aid. If you want to start your own nonprofit to help those in need and further the public good, this guide can show you the way. 1. Determine your mission and create your purpose statement The first step when creating any nonprofit is to create a purpose statement. Let's say you want to help people through the COVID-19 crisis. How exactly are you going to help? Are you equipping healthcare workers with needed medical supplies? Donating financial resources to people who lost their jobs? Providing books, tablets, and internet access to disadvantaged kids whose schools have closed? Finding forever homes for all the puppies and kitties who were given up for adoption when their owners could no longer care for them? Declaring your specific purpose doesn't just give your nonprofit clarity and direction; it's the law. The IRS requires that all 501(c)(3) organizations include a purpose statement in their articles of incorporation to receive tax-exempt status. 2. Organize your leadership Many new nonprofits start as simple one-person operations. You might be the founder, executive director, and entire staff all by yourself. But as you grow, you're going to have to get organized. To run efficiently, nonprofits, like any business, must appoint people to leadership positions. These include managers, directors, executives, and administrative staff. You'll need a board of directors to hire executives, provide oversight, and vote on major financial and strategic decisions. In fact, many states require nonprofits to have at least three officers — two of whom cannot live in the same home. States view nonprofits as truly public entities. They want oversight from more than one person so the entity is not abused. 3. Incorporate While not a legal necessity, incorporating your nonprofit can be an excellent idea. An alternative is setting up an unincorporated nonprofit association, but this only works for small, limited income organizations. On the other hand, you can incorporate even if you are the only employee of your nonprofit, and there are significant advantages if you plan on growing. Incorporation limits liability, adds authenticity to your organization, and typically only costs a few hundred dollars with filing fees. Despite the obvious lack of profits, a nonprofit is still considered a business by state law. Your incorporation will be filed at the state level. Startup costs and processes can vary greatly depending on where you live, but most jurisdictions require your nonprofit to follow specific naming conventions and create bylaws and articles of incorporation. Naming Be sure your name accurately reflects your cause. Search both state and federal trademark listings to make sure that your chosen name is unique and not already taken by another organization in your state. To signify that you are incorporated, most states also require your nonprofit's to use an identifying suffix such as "company," "corporation," "incorporated," or "limited" in its official name. Articles of Incorporation Your Articles of Incorporation is a document necessary to officially form your organization with the state. It might also be called a "Charter Document" or "Certificate of Incorporation." Regardless of the name, your Articles of Incorporation should include: Organization name Type of nonprofit Incorporators Directors Purpose statement Registered agent and contact information Designation of stock or non-stock Statement of membership or non-membership-based Bylaws Your nonprofit should also have a set of bylaws. If you are going to file for tax-exempt status with your state or the IRS requirement, you will have to submit your bylaws. These establish the ground rules for how the nonprofit will be run, managed, and who will make certain decisions. The bylaws of every organization are different, but for nonprofits, they typically include: Board members Board meetings schedules Procedures for changing bylaws Voting rules Conflict resolution Committee creation and dissolution Winding down and dissolution procedures 4. Apply for licenses and tax exemptions After incorporation, your next step is to apply for a local business license. This allows your nonprofit to operate locally, manage sales, and file employment taxes. Nonprofits are usually tax-exempt, but it's not an automatic process. You need to obtain 501(c)(3) status by filing Form 1023 with the IRS. Apply for an Employer Identification Number (EIN) on the IRS website and follow their detailed Form 1023 checklist. This step becomes much simpler if your organization is already incorporated. You're not done yet. Don't forget about state and local taxes. After you receive federal approval from the IRS, you'll want to seek exemption from sales tax, property taxes, and state income tax. To maintain your tax-exempt status, your organization must file Form 990 with the IRS every year. 5. Register to receive donations Your nonprofit won't have much of an impact if you can't raise funds. State laws regulate charitable fundraising activities, and most states require you to register before you can solicit funds. This doesn't just apply to the state you're based in; you'll need to register in every state from which you take donations. If someone from Rhode Island wants to give you money, you better be registered in Rhode Island to legally accept, even if you're based in California. To put it simply, if you're doing any kind of fundraising, especially online, your nonprofit should consider filing a registration form in all 50 states. Consider outsourcing to simplify the process All this might sound complicated, and it is, but don't let that dissuade you from starting a nonprofit and doing good in this world. COVID-19 has impacted millions, and we need people willing to help now more than ever. If you're worried about all the little legal hurdles, consider outsourcing this part. There are companies that specialize in helping you navigate all the filing and paperwork for starting a nonprofit. They can make sure the proper forms are filed with the appropriate government bodies so you can concentrate on the important work of helping those in need. Regardless of if you go through a filing company or tackle the typing yourself, thank you for working toward the public good. Get out there and make a positive impact. Travis Crabtree is the president of Swyft Filings, a document filing service that assists clients with starting, growing, and managing businesses.
Guest Post by Madison Crader In an age where the general public rarely agrees about anything of importance, our mutual dislike of taxes is one of the few things we still have in common. And though it’s nice to share something, I think we can all agree that where taxes are concerned, less is more! We can’t make your taxes disappear, but we can offer a few valuable tax tips. Some are long-term strategies that affect your finances all year long, and others are simple tricks for when you sit down to file taxes. While these tips apply to personal taxes as well, they should be especially helpful if you’re wondering how to file taxes as a small business owner. Invest in quality bookkeeping Having thorough, organized financial records is the best way to reduce tax-related stress. Obviously, this is a year-round effort, and it isn’t easy — racking expenses, saving receipts from business purchases, monitoring company assets. It’s a lot of work, but it’ll improve your strategies, boost your bottom line, and make tax prep a breeze. If you’ve got a good handle on bookkeeping basics, you can do it yourself with QuickBooks, Wave, or similar software. Some business owners hire freelance or contract workers for their accounting or invoicing. Alternatively, a good accountant can help you catch up on financial backlog or offer more permanent help going forward. However you decide to do it, quality bookkeeping is a necessity. Verify employee information This is doubly important, since it affects your business taxes and your employees’ personal taxes as well. Before sending out W2s, 1099s or anything else, verify the correct spelling, address, and Social Security number of each employee. Obviously, we’d hope this information is already accurate, but it’s still good to double check before sending out sensitive financial information. Another factor to consider is employee classification. If you’ve hired any new workers during the year, now is a good time to ensure you’ve classified them correctly. The federal government maintains guidelines for full-time, part-time, and freelance/contract workers, regardless of the contract you create yourself. In fact, incorrect classification could lead to an audit and substantial fines, so it’s worth some extra attention. Gather necessary documents Every year, I sit down to do taxes only to discover that I’ve left one of my vital forms inside a book or under a stack of mail. You can skip that minor heart-attack by creating a designated space for tax documents and placing forms there as soon as you receive them. Some of your information will be better accessed in various software, such as your inventory management system, payroll records, or accounting software. Block out some time to extract the details you need. This includes a review of your finances, such as a cash flow statement, balance sheet, and an income statement. You’ll need mileage records for any business vehicles and a summary of your assets. Additionally, you’ll receive a form 1098 with the mortgage information for your workspace, whether that be an office or a section of your home. Prepare a profit and loss statement Some of those documents are prepared for you, like the 1098, but others require your input. Your accounting software may provide tax-friendly reports of your cash flow and income, and your inventory management software can help summarize your assets. If you don’t use comprehensive software, you may need to create these reports yourself. To draft your own income statement, you’ll need to know your revenue, expenditures, gross profit, operating expenses, and a few other details. You’ll report your own salary and that of your employees. Likewise, preparing a cash flow statement will require more details about your daily sales and spending, your investment purchases, or business loan activity. Meet with your CPA Obviously, you can choose to skip this step if you’re set on doing it yourself, but it doesn’t hurt to consider the pros and cons of preparation your own taxes, using tax software, or hiring a tax consultant. Especially if you’re filing small business taxes for the first time, hiring a professional is a smart idea. They’ll know how to file taxes for a small business owner like you, and can answer a lot of basic questions, such as “What percentage does a small business pay in taxes?” and more. If you do choose to hire professional help, keep in mind that not all accountants are tax-certified. An accountant can offer help, and may be cheaper than a CPA, but remember that only Certified Professional Accountants who have passed an extra exam can sign your tax documents and represent you in case of an audit. Remember deadlines After all your careful preparation, it’s a relief to submit those taxes and check it off your list. Yearly taxes are due by April 15, but it doesn’t hurt to plan for an earlier date. You never know what might come up as you’re wading through forms and financial records! And don’t forget — if you’re doing any kind of freelance or self-employed work, you’ll pay estimated taxes each quarter on January 15, April 15, June 15, and September 15. Once you’ve had a year under your belt to assess how much to pay in taxes each year, simply divide that number by four and pay that portion each quarter. As expected, the IRS will fine you if you don’t. The good news is that they make it easy to do with an online direct pay system. Whether it’s your first time filing small business taxes or it’s just been a long year, these reminders should help ease your tax-related stress. With some good bookkeeping, accurate employee and financial records, and support from software and CPAs, you can file in record time and move on to the business tasks you like best. Madison Crader specializes in content related to small businesses building brand awareness and gaining access to capital to grow their business. She has a passion for helping entrepreneurs understand their financial needs and set long-term goals by sharing tips and tricks.
Guest Post by National Funding It’s one of the trickiest questions facing every small business owner — how much do you pay yourself? On the one hand, you don’t want to put the business in jeopardy by setting aside too much salary for yourself. On the other hand, you don’t want to penny pinch unnecessarily. After all, you start a business to make money, not to live as frugally as possible. Finding the balance between too much salary and too little doesn’t look the same for everyone. What could be too much for one small business owner could be too little for another based on their industry, location or time in business.The right salary for you is based on your financial needs weighted equally against the needs of your business. The total could also change unexpectedly if financial conditions change. Ultimately, the only way to find the right figure is to evaluate it over and over again. Use these rules to help you calculate correctly: 1. Keep finances separate Before tackling the question of your salary, you need to separate your personal and business finances. Create a separate business bank account and consider applying for a business credit card. Not only does this create a wall between your finances, it also allows you to build business credit, which helps with securing small business loans or equipment financing. Get in the practice of keeping your finances strictly separate so that your final compensation is transparent. 2. Commit to compensation In some cases, you may not want or need to draw a salary. It’s always better to take some kind of compensation because it signals you have a financial connection to the business — when it succeeds you succeed. Demonstrating that connection is an important signal for employees, investors, financers, and tax collectors. They want to see that you’re committed to a business rather than pursuing a hobby. 3. Consider all options Salary is just one component of compensation. It can also include benefits, stocks, bonuses, or a commission structure. There are multiple ways to take compensation from your company — for instance, extensive benefits may serve your needs better than a large salary. Another option would be to set your salary as a percentage of profits so your compensation is tied to performance. The important takeaway here is that how you decide to collect your compensation will affect your business and personal finances. As you’re investigating how much you need to earn, also consider how different compensation structures will impact both your business savings and your lifestyle. 4. Obey the IRS Small business owners can pay themselves in one of two ways. Either option may be appropriate, but it’s important to understand the tax consequences of both: Salary Method — you pay yourself as an employee of the business. As such, withholdings for Social Security, Medicare, and all your income taxes are taken out before you’re paid. Owner Draw Method — you withdraw money from your business profits. Nothing is withheld from these withdrawals, meaning you’ll be responsible for paying all federal and state taxes owed on your own. 5. Pick your payday When you get paid matters for both you and your business. If you’re drawing a salary, it makes sense to pay yourself on the same schedule as other employees — usually every two weeks. If you’re going with the owner-draw method, plan to make withdrawals on a set schedule and document your actions thoroughly for tax purposes. 6. Don’t neglect investments When the business is doing well it is easy (and often appropriate) to reward yourself with a higher salary. Just keep in mind that employees want raises as well. It’s also important to be regularly investing money back into your own business. It helps relieve your tax burden while also making it easier to get various kinds of small business financing. You shouldn't feel discouraged from raising your wages, but you should consider everything else that money could go to as well. 7. Calculate reasonable compensation At some point you have to put a dollar amount on your salary. According to one survey, the average small business owner salary is $59,000, but that doesn’t account for factors like the size or location of the business. Start by calculating how much you need to make to cover all your fixed expenses. Ideally, this is your minimum salary. You can also estimate an appropriate figure by using salary tracking tools to find out what professionals with similar skills are making in your same area. If that approach doesn’t work, think about how much you would pay to outsource everything you do for your business. 8. Study the financials You can only pay yourself as much as the business can afford. When thinking about how to set your salary, the best way to inform this decision is to understand your business’s cash flow and predict your profitability. Account first for business expenses and profit taxes so you have an idea of what income is available for your salary. Beyond looking at your business’ current financial picture, you also should factor in any future growth plans. For instance, if you plan to open a new location, drawing a sizable salary may cut into your working capital. If the bottom line makes it impossible to earn as much as you need, consider raising your prices or financing a growth opportunity. There is no magic formula for calculating your salary. However, if you follow all of these rules you can feel confident you’re making informed decisions for yourself and your business. And no matter what you end up making, remember one important thing — you’ve earned it. The Bottom Line is a blog from the experts at National Funding, a leading source for small business loans and equipment financing solutions. We show entrepreneurs of all stripes how to resolve cash flow issues and seize growth opportunities. Check in to The Bottom Line regularly to find advice and insights to help you sustain success, and rely on the resources of National Funding if your business ever needs affordable and accessible lending options.