Should my homeschool group file as an LLC?

Hello, Carol.

I have learned so much from your website. Thank you for your expertise. I am part of a co-op and we need to open a bank account. I am in Texas.

My bank told me that we need the “assumed name certificate” as well as the EIN. We do not have an “owner.” Do I file as a Limited Liability Company?

Jennifer L
Texas

 

Jennifer,
I’m glad my website was helpful.

Becoming a Limited Liability Company (LLC) is a complicated issue for nonprofits.  Most small nonprofits such as your homeschool co-op do not become LLC’s because the IRS has 12 conditions that must be met for the LLC to be tax exempt. It may be more than you cared to learn, but it is important to understand the complexity of nonprofit LLC status.

Here’s a helpful article discussing LLC status and IRS tax exempt 501(c)(3) status.

http://www.insightcced.org/uploads/publications/legal/LLCs-as-exempt-orgs.pdf

The reason that most for-profit businesses obtain the LLC status is for limited liability. I organized my own sole proprietorship accounting practice as an LLC  because I wanted limited liability and protection of my personal assets.

For a nonprofit organization such as your homeschool co-op, nonprofit corporation status in your state brings similar protections of limited liability.

So if your main reason for seeking LLC structure is for limited liability, nonprofit incorporation in your state is the simpler option.

Read more about nonprofit incorporation here: http://homeschoolcpa.com/leader-tools/articles/ or in my latest book, The IRS and Your Homeschool Organization.

 

 

 

Now my “lawyer” words:

The information contained on this site is designed to provide accurate information in regard to the subject matter covered. However, this site is  not a substitute for legal guidance. This information is provided with the understanding that the author is not engaged in rendering legal advice. If such advice is required, the services of a competent legal professional should be secured.

Carol Topp, CPA

Can my family’s homeschool be a nonprofit?

Homeschool CPA was recently asked,

I see several articles (on your website www.HomeschoolCPA.com) on setting up as a not-for-profit for homeschool organizations (e.g. homeschool co-ops), but I wonder if I could set my own family’s homeschool up as a non-profit. We’re in Texas, so we are considered a private school.
-Lauren in TX

Lauren,
You asked a good question and I’ve been asked it before in different ways. Nonprofit organizations have a lot of benefits including tax free income, discounts, and sometimes pay no sales tax!

I’m not a lawyer, nor familiar with Texas private school laws, but I’ll try to explain how I see things.

Briefly, a nonprofit organization exists to serve a group, not an individual. The IRS will not grant “recognized charity”, 501(c)(3) tax exempt status to a group that is formed solely to benefit the founder’s family. A tax exempt organization must serve a public good.

The IRS forbids private “inurement” in 501(c)(3) tax exempt organizations. Inurement means to be beneficial or advantageous. Inurement occurs when an organization is formed or operates with an incorrect charitable purpose that allows individuals in control to profit from the organization. 501(c)(3) organizations can lose their tax exempt status for practicing inurement.

Inurement/Private Benefit – Charitable Organizations

A section 501(c)(3) organization must not be organized or operated for the benefit of private interests, such as the creator or the creator’s family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.
>From the IRS website at http://www.irs.gov/charities/charitable/article/0,,id=123297,00.html

So, in short the answer is “No”, even if your state classifies a homeschool as a private school. That’s how I see it.

Carol

Now, here are my “lawyer words…”
Any tax advice contained in this communication was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

Can a homeschool be tax exempt and obtain grants?

Dear Carol:
I am interested in writing proposals for grants for my family’s home school. As an individual home school, not as a home school support group, I want to apply to receive small amounts of money for travel, museum entry, art gallery entry, books, posters, etc. More often than not, I find this statement :

“All applicant organizations or sponsoring agencies must be exempt from federal taxation under the Internal Revenue Code Section 501, in order to be eligible for funding.”

What do I have to do to have our home school be exempt from federal taxation?

Thanks.

Nancy H., Mississippi

Nancy,

You asked an excellent question. You are correct that many fund raising organizations now require 501c3 tax exempt status. Some homeschool groups want to become 501c3 tax exempt organization just so that they can participate in some fund raisers. I have a homeschool co-op as a client right now applying for 501c3 status.

A private individual or family cannot be a 501c3 tax exempt organization. The reason is that the IRS does not allow tax exempt organizations to offer private benefits or what they call “inurement” (meaning to become beneficial or advantageous) to individuals. Tax exempt organizations must benefit a group, preferably the general public.

I have been asked your question before so I wrote about it on my blog. Here’s the link: Can my family’s homeschool be a nonprofit?

You might also read my blog entry on doing a family fund raiser: Can my individual homeschool have a fundraiser?

I hope that helps!

Carol Topp, CPA

Is my homeschool a nonprofit?

Every year our county sends out a form to every homeschooler that asks this question, “Have you filed Articles of Incorporation with the office of the Kentucky Secretary of State as a non-profit corporation drafter under KRS 273 or received a letter from the IRS granting you 501c3 status as a non-profit corporation? (Homeschools, by their nature, are considered non-profit.)”

I am confused as to how a homeschool is by nature non-profit and it seems to imply that if we are we should have filed for that status.

Can you point me in the right direction to answer this question?

Kindly,
Gina in KY

From what I understand, KY considers homeschools as private schools.

Brick and mortar private schools are 501c3 nonprofit charities, but individual homeschool families cannot qualify for 501c3 nonprofit status with the IRS. Only groups qualify for 501c3 status with the IRS. A homeschool group may qualify for 501c3 status, but an individual family cannot be a 501c3 nonprofit, even though in KY they are private schools.

It is a bit confusing because of the inconsistent way that the IRS and KY define private schools.

This blog post should be helpful:
http://homeschoolcpa.com/can-my-familys-homeschool-be-a-nonprofit/

I hope that helps.

Carol Topp, CPA

Congratulations: Another homeschool group receives 501c3 status

Congratulations to Eclectic Teaching Consortium (ETC) of Arkansas on receiving 501(c)(3) tax exempt status form the IRS!

The IRS received approved their application in only 32 days!  That’s fast for the IRS!

I was happy to help this group become tax exempt and continue serving homeschoolers in AR!

 

Carol Topp, CPA

 

Do you know the pros and cons of 501c3 status?

Do you know what 501c3 status could mean for your homeschool group?

My book The IRS and Your Homeschool Organization could help your group as well.

A 120 page book explaining the pros and cons of tax exempt 501c3 status. Is it needed? Is it worth it?

 

Table of Contents
Sample pages

Price: $9.95

Ebook version $3.99 (pdf format)

Kindle version $3.99

Smashwords version $3.99 (multiple e-reader formats for Kindle, Nook, Sony, etc)

Another homeschool group awarded 501c3 tax exempt status!

 

Hi Carol,

 

We wanted to share our excitement in that Hartsville Home Educators, Inc. of Hartsville SC has been granted their 501(c)(3) status.

You have been a great help to our organization as we have developed by-laws and our co-op. We purchased your book and submitted our IRS application in May and was awarded our status in November.

Thanks for all you do for the home school organizations throughout the country.  We could not have done this without your guidance.

Terri King

Hartsville Home Educators

 

 

Do you know the pros and cons of 501c3 status?

Do you know what 501c3 status could mean for your homeschool group?

My book The IRS and Your Homeschool Organization could help your group as well.

A 120 page book explaining the pros and cons of tax exempt 501c3 status. Is it needed? Is it worth it?

 

Table of Contents
Sample pages

Price: $9.95

Ebook version $3.99 (pdf format)

Kindle version $3.99

Smashwords version $3.99 (multiple e-reader formats for Kindle, Nook, Sony, etc)

Update on IRS Cyber Assist

Here’s the latest on the Cyber Assistant from author and former IRS examiner Sandy Deja:

The National Taxpayer Advocate’s 12/31/2011 Report to Congress is critical of IRS delays in releasing the Cyber Assistant and recommends that Congress require the IRS to move forward on making it available. (You can view this report at http://www.irs.gov/advocate/article/0,,id=252216,00.htmlis.)

In response, the IRS said, “Software testing revealed problems requiring correction prior to public launch, and the IRS had to delay the release. Because the IRS must balance a number of competing information technology needs, we cannot presently predict when Cyber Assistant will be available.”

So it looks as if the Cyber Assistant is on the back burner for now.

Sandy Deja
501c3book.com
Author of Prepare Your Own 501(c)(3) Application

 

Background: Cyber Assist was (is?) the IRS’s program to allow nonprofits to apply for tax exempt status online. The IRS was proposing to lower the application fee from $400 or $850 to only $200 for organizations applying online using Cyber Assist.

 

Thank you Sandy for the update, even if it’s not what we want to hear…

Homeschool leaders, Sandy has a terrific website http://501c3book.org/ and ebook Prepare Your Own 501(c)(3) Application to help you apply for 501c3 tax exempt status. Don’t go down that road alone!

 

Carol Topp, CPA

 

 

Should your homeschool group be an LLC?

Limited Liability Company (or LLC) is a relatively new type of business structure. Several homeschool leaders have been asking if its something their homeschool group should consider.

In particular, many homeschool groups wonder if they should file for LLC status as part of becoming a 501(c)(3) tax exempt organization.

Caution:  I am not an attorney, nor am I offering legal advice.  I will relay what I have leaned about LLC’s filing for 501c3 tax exemption from the IRS, but I am not offering a legal opinion. I recommend that you seek legal counsel if you pursue either option.

Only recently has the IRS granted 501c3 tax exempt status to LLCs. LLCs are a relatively new business structure (only available in all 50 states in the mid 1980′s) and the IRS is slow to accept changes. In a document titled “Limited Liability Companies as Exempt Organizations-Update” (2001 Exempt Organization CPE Text. Available at http://www.irs.gov/pub/irs-tege/eotopicb01.pdf ) the IRS outlined 12 conditions that an LLC must satisfy to qualify for exemption under IRC (Internal Revenue Code) 501c3.

These conditions are legally complex and I would strongly recommend that you seek experienced legal counsel before organizing a nonprofit LLC.

I read an article titled “Nonprofit LLCs: Time for a New Experiment” (http://www.mayer-riser.com/Articles/nonprofit/npllc.htm) and the author, a nonprofit attorney, advises:

Until state legislatures address the unresolved issues, the actual use of the LLC form by nonprofit organizations should be undertaken only after careful review of current law in the applicable jurisdictions, and only with the assistance of qualified counsel with experience in drafting complex and detailed operating agreements and experience in the law of tax-exempt organizations.

Unfortunately, at the time of the article in 2002, only 11 organizations had obtained 501c3 status as LLCs, so experienced assistance may be difficult to find.

The reason that most businesses use the LLC structure is for limited liability. I organized my own sole proprietorship accounting practice as an LLC  because I wanted limited liability and protection of my personal assets. For a nonprofit organization, such as most homeschool groups, nonprofit corporation status in your state brings similar protections of limited liability. If your main reason for seeking LLC structure is for limited liability, nonprofit incorporation in your state is the easier option.

Carol Topp, CPA

I am not an attorney, nor am I offering legal advice. I recommend that you seek legal counsel if you have additional questions or pursue Limited Liability Company status.

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Print them put and share them with your homeschool leader.

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Carol Topp, CPA

Does a nonprofit need to file any tax returns before they apply for tax exempt status?

I was advising a small homeschool organization about applying for tax exempt status and explained that they had 27 months after their date of formation to file an application with the IRS.

Hi Carol,

I just read this and was concerned that I would need to file something during the 27 months time frame.  Please explain if possible.
http://www.irs.gov/charities/article/0,,id=156389,00.html

Teri

Teri,

The link to the IRS website concerns IRS requirements before you apply for tax exempt status. The link above states this (in part)

Tax Law Compliance Before Exempt Status Is Recognized

An organization that claims tax-exempt status under section 501(a), but has not yet received an IRS letter recognizing exempt status, is generally required to file an annual exempt organization return.

This is a fairly new requirement from the IRS. I used to tell nonprofit organizations that if they had not yet applied for 501c3 status, they did not have to file the Form 990. It came to my attention only a week ago that the IRS wants Form 990 from all nonprofits.

Fortunately, the form your organization (and all small nonprofits with annual gross revenues of less than $50,000) would need to file is the 990N, an electronic postcard that asks about 5 questions: Name and address of organization, the principle officer’s name and check a box that your annual gross revenues are under $25,000. It is very short and would take less than 5 minutes once a year.

Here’s a blog post that answers your question. http://homeschoolcpa.com/does-new-irs-990n-apply/

I hope that helps.

Carol Topp, CPA

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