Co-ops help with socialization of homeschooled children

Here’s a great article about how a homeschool co-op helped one family with their concerns about socialization.

Breaking the homeschool barrier

Cheryl Littlejohn and her husband Tom have been homeschooling for five years. Before that, Derek and Carrie were attending a local private Christian school affiliated with their former church. When changes in the church and school made them uncomfortable with the children’s educational situation, they began looking into homeschool programs.

The parents had two major questions: Would homeschooling be an effective choice in their education, and would they miss out socially? In the end, they decided to give it a try. “When considering our educational choices, in light of the changes in our lives, we felt that homeschooling was best for our family,” Cheryl said.

The socialization her kids get at the co-op is the other key to the Littlejohns’ homeschool success.

Five years later, all worries Tom and Cheryl had about their children’s socialization and academic progress have been dismissed. Their resources are plentiful, their schedule is flexible, and they can customize the curriculum. They plan field trips with other homeschooled families — an IMAX movie about the Lewis and Clark Expedition and a trip to a feline rescue center in Clay County are examples — and vacations rely only on Tom’s work schedule, which allows them to do things like take an extended off-peak trip to Europe.

And she’s not worried about her kids’ future any more than any other concerned parent. The education they’re getting is sound — Derek is the president of the local branch of the National Honors Society for Homeschoolers — they’re well-developed socially, and they’re tuned into college preparation. Five years ago, she was afraid of the stigma, but the accessibility of the SAT and ACT levels the playing field. Even if parents did inflate their kids’ grades, the proof would be in the pudding when it came to standardized testing.

“Our decision to homeschool is in no way a statement on other people choosing a different course for their kids,” Cheryl said. “We have friends whose kids have done quite well in the public school system, and others who have been successful in the private Christian realm. At this time, we feel that homeschooling is best for our family.”

Read the entire article here

Carol Topp, CPA

Can a homeschool co-op be denied 501(c)(3) status?

I frequently learn a lot about nonprofit law from Harvey Mechanic’s All Experts Site. Mr Mechanic is an attorney that does a fantastic job of answering all sorts of questions about nonprofit law. I always learn a lot.

Recently, a parent from a small private school mentioned the need to do fundraisers and have everyone “do their fair share.” That is a pretty common expectation in activities involving children like youth sports leagues, scouting, etc. But to my surprise, Mr Mechanic has a problem with the “fair share” idea.

Here is Harvey Mechanic’s reply:

The statement that you made about “fair share” indicates that you do not want to operate properly. The fair share is applicable for a co-operative organization but not a charitable organization. In denying exemption to a purported 501(c)(3) organization booster organization, in 1992 the IRS at
http://viewer.zoho.com/docs/s2ca6g on page 6 stated “The reason you were created and your method of operation indicate that you are made up of a group of parents who have joined together to work cooperatively to provide funds to pay for the participation of their children in athletic events.
The expenses incurred by these children would otherwise have been paid by the parents.  All parents of competitive team members are automatically members of your organization.  Accordingly, members expect to receive a benefit in return for their membership.  You pay no benefits to non-members.

Another, similar denial of exemption was issued by the IRS in 1990 and may be viewed at
http://viewer.zoho.com/docs/a4vd3

Such an operation would be what the IRS calls a cooperative. A cooperative is not qualified as a 501(c)(3) organization. (emphasis added)

Wow!  So does that mean homeschool co-ops cannot obtain 501(c)(3) status? Oh, no!  I spend a lot of time helping homeschool co-ops obtain 501(c)(3) tax exempt status. I have been successful many times. I even wrote a book telling homeschool organizations how and why to become a 501(c)(3) organization. See Tax Exempt 501(c)(3) Status for Homeschool Organizations. Am I wrong?  Or is Mr. Mechanic incorrect?

Neither.  Or rather, it depends on how your organization is structured and your purpose.  If your homeschool organization is a support group that is “made up of a group of parents who have joined together to work cooperatively to provide funds to pay for the participation of their children in athletic (or educational) events.” you do not qualify for 501(c)(3) tax exempt status. But you can qualify for a different IRS tax exempt status called 501(c)(7) Social Club status.

I am assisting a homeschool support group that has a few co-op classes, but their main purpose is to join together to support each other in homeschooling. They are applying for 501(c)(7) as a Social Club. They will receive many of the benefits of tax exempt status, but not quite the same a 501(c)(3) status.

What about your homeschool organization?  Would you qualify as a 501(c)(3) charity or 501(c)(7) Social Club? Do you know the difference? How can you decide? It depends on your activities, purpose and structure.

I can help you sort out the differences.

Please contact me about a phone consultation to help you determine which status is best for your organization.

Do not make the mistake of choosing the wrong tax exempt status.  You could be denied by the IRS like Mr Mechanic mentioned and waste a lot of time and money. It can happen to your group.  Read a real life story here:

http://homeschoolcpa.com/irs-intimidates-homeschool-group

If you need help discerning the tax exempt status of your homeschool organization, send me an email at Carol@HomeschoolCPA.com. We can arrange a private consultation to discuss your particular situation.

Carol Topp, CPA

What are the legal responsibilities of homeschool leaders?

Carol,

We are hesitant about linking personal Social Security Numbers to the group EIN. What legal ramifications does putting personal SSN info on the group form have for that individual?

Tasha

Tasha,

The IRS form SS-4 Application for Employer Identification Number asks for the name of a responsible party and either a SSN, ITIN (tax ID for aliens) or EIN (for businesses). You asked what are the legal ramifications of putting a name and SSN on the EIN application for a nonprofit organization.

The answer lies in the responsibility of leadership. All leaders, officers or directors of a nonprofit has some responsibilities. Each board member has a fiduciary (i.e. legal) duty of care and loyalty to manage the organization and its funds within the purpose/mission of the organization and not for private gain or benefit. The board’s job is to govern the organization, be responsible for the management of funds, and be responsible for its programs. Those are the “legal ramifications” of leadership.

Specifically, the duty of care includes:

• Be aware of the nonprofit’s mission, plans and policies
• Be sure that all activities are in accordance with the mission, plans and policies
• Fully participate in Board meetings, deliberations and decisions.
• Read, evaluate and ensure the accuracy of all reports, including minutes and financial statements.
• Ensure the organization has sufficient people, funding and other assets to meet its purpose.

The duty of loyalty includes clearly making a reasonable and good-faith effort, when acting as a Board member, to:

• Always be thinking about, and focusing on, the priorities of the nonprofit, and not that of yourself or another organization.
• Share ideas, opinions and advice to forward the progress of the nonprofit.
• Represent the nonprofit in a favorable light.

These definitions and examples come from an excellent article on board responsibilities found at Managementhelp.org, a great website with lots of articles on running a nonprofit.

http://managementhelp.org/misc/Fiduciary-Responsibilities-of-NP-Board.pdf

Most of these fiduciary (legal) responsibilities are not too heavy for any loyal board member. I think they are very reasonable. It might be a good idea to share them with new and old board members.

So next time someone asks, “What are my responsibilities as a board member?” or “What are the legal ramifications of putting my name on an IRS form?” you have an answer to give.

Carol Topp, CPA

Can a small group be an IRS qualified charity?

In the past week, I have received two emails from homeschool leaders in MD and CA with  a surprisingly similar situations.

In both groups, a small number of homeschooling families were  joining together to hire a single teacher to teach their children once or twice a week. Both groups were very small, only seven families total, but they were paying each instructor quite a bit of money-$11,000 annually in one case and $17,000 in the other. This meant that they exceeded the IRS threshold of $5,000 annual gross revenue and needed to consider filing for 501c3 tax exempt status.

They had several concerns such as a contract with the teacher, how should the teacher be paid and could the group qualify for 501c3 tax exempt status as an educational organization?

Here were some of their questions:

I found your website and found it to be most interesting and helpful to homeschool co-ops.  I would like to schedule a personal consultation with you.  I am part of a homeschool group that informally hired a teacher to teach certain classes in past years, but this coming year the teacher wants a contract.
Rosemary in MD

I saw your website and had some general questions for you.  Appreciate your ministry to homeschoolers. We are trying to decide whether our group should be a sole proprietorship owned by person or try to establish a nonprofit. What would be the pros and cons of each? What if we can’t afford to file for tax exemption at this time?  What are our choices if our gross receipts are around $11K/year?
Teri in CA

There are several options for homeschool organizations who are trying to decide how to structure themselves. I advised the leader from CA to read this article:

When to become a 501c3?

I offered a private phone consultation and discussed the concerns and options with the leader from MD. I explained that I doubted the IRS would grant 501c3 “qualified charity” status to a group with only seven families. An IRS qualified charity is supposed to serve a public good, not the needs of only seven families.

Instead of pursuing 501c3 tax exempt status, we discussed that the hired teacher is really running a for-profit business (a sole proprietorship) with seven families as her customers. I shared with her several sample contractor agreements the teacher could use in her business.

There is a sample contractor agreement available in my ebooks Money Management in a Homeschool Organization and Paying Workers in a Homeschool Organization.

Thank you again for the consultation.  It answered a lot of questions for me, and I appreciate your support. Thank you also for the contractor agreements – I have been reading through them.
Rosemary in MD

If you have a unique homeschooling situation and would like to schedule a private consultation with me, please send me an email at Carol@HomeschoolCPA.com. Tell me a little about your group and we can arrange a mutually convenient time to talk.

Carol Topp, CPA

Do you need insurance on your officers?

In my article, Insurance for Homeschol Groups , I discussed several types of insurance a homeschool organization might need. One type is called Director and Officers Insurance, or D&O insurance.

D&O insurance provides defense for leaders if they are sued for wrongful acts in their capacity as leaders. Typical lawsuits against a nonprofit organization include mismanagement of assets and improper employment practices such as discrimination, wrongful termination, and harassment. Many small homeschool organization find that D&O insurance can be very expensive and sometimes forgo purchasing a policy.

But could that be harmful to your organization or leaders?

Since writing that article, I have found an excellent explanation of D&O insurance for nonprofit organizations written by the Nonprofit Coordinating Committee of New York. You may read the entire article here.

Here is a helpful excerpt:

Unlike general liability insurance — which any organization that has a physical plant would be foolish not to have — many nonprofits are uncertain whether they need D&O coverage. When a person becomes a board member of a nonprofit organization, she assumes a level of responsibility for the organization (”duty of care”), and exposes herself to claims for not running and managing it in a proper way. Whether or not your organization needs D&O insurance depends on what the likelihood is that one of your board members will be the target of such a claim.

Claims generally fall into two categories: bodily injury (physical harm) and non-bodily injury (non-physical harm, like discrimination or termination). The majority of claims are for bodily injury. Your general liability insurance covers board members, subject to policy terms and conditions, for claims arising out of bodily injury and property damage.

Directors & Officers liability insurance only covers non-bodily injury claims. Non-bodily claims include employment-related claims and mismanagement of funds.

Fear of non-bodily injury lawsuits would be one reason to have D&O insurance. Although there are very few reported cases, it doesn’t mean that claims have not been filed and then either settled out of court or dropped.

Generally, there are two types of lawsuits in which a claim might be brought against a board member: derivative lawsuits and direct or third-party lawsuits.

Derivative lawsuits are claims against a board member on behalf of the corporation. The typical claim here would be mismanagement of assets. But, under New York State law only a few people have “standing” or the right to bring such claims. They are: 1) board member(s) suing other board member(s) 2) members of an organization suing a board (if at least 5% of the total membership join the lawsuit), and 3) the state Attorney General.

Because of these restrictive standing rules, very few derivative claims are ever made. It should be noted that claims of these types are not made for awards to an individual, but rather to make the corporation “whole.”

Direct or third-party lawsuits are brought by an employee or by a person not connected with the corporation who asserts a claim against it or its board on account of some non-bodily injury.

Employment practices like termination and discrimination are the largest exposure in these types of claims. If you have a small, friendly staff, and feel unlikely to have employment claims resulting in a lawsuit, you might not think it necessary to carry D&O insurance. However, when employees feel they have been wronged and are angry, they may file a claim even if it is baseless. At that point, you will have to hire lawyers. Your D&O then becomes a legal defense policy.

Indeed, Swords’ view is that D&O insurance is essentially legal defense insurance, noting that “99.99% of the cases brought against a board are going to be thrown out, but you’re still going to have to pay the legal fees if a claim is filed.”

In this connection, the “deep pocket” theory is relevant. This theory holds that only people with money are likely to be sued. Lawyers may file a suit based on a bogus claim against “deep pocket” board members with the hope of securing a settlement for their client. Organizations that have a board made up of “ordinary” people who aren’t known to have vast amounts of money may then be comfortable without D&O insurance.

I think their explanation of D&O insurance being “legal defense insurance” is very understandable. They also point out that most of the lawsuits filed against nonprofits are related to employees.  If your homeschool organization does not hire employees (and most do not), your risk is low and D&O insurance may not be necessary.

Carol Topp, CPA

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