Business type of formation varies depending on the laws of each type. A non-profit and profit corporations have their laws, and a limited liability company also has its own. For an organization to remain in existence, it must follow the rules and regulations that apply. This paper will look at the guidelines a non-profit organization that needs to become a profit-making company can follow. Also, it will look at laws that govern independent contractor agreements.
Limitations of a Non-profit Organization in Delaware
There are thousands of non-profit corporations in the city of Delaware and still, many more are being formed. Corporations are competing for available resources because they need finances and volunteers. Despite the advantages that come along with establishing a non-profit corporation in the city, there are notable limitations.
Before setting up a non-profit corporation, stakeholders are required to acquire a tax exemption status code from the Internal Revenue Code Section (501) (C) (3) (Law respect.com). Qualifying to receive the code is a hectic process. For one, the non-profit must apply a fee. Secondly, it must wait for approval by the IRS body before receiving the tax exemption status. In regards to this, the so-called “charitable” organizations are accorded a tax exemption status including the employees. If an employee ceases to work for the non-profit organization, they cannot produce a tax-paying statement if it is required in another organization because as accorded, they have not been paying.
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The owner of the corporation does not make money. As assets are brought into the organization, the ownership of the non-profit becomes a corporation. Therefore the owner cannot sell it to make up the money (Law respect.com). This limits people because of setting up a non-profit because they do not gain money. Additionally, if the non-profit is liquidated, all its assets go to another non-profit organization, thus, proprietors do not benefit.
Non-profit Organization Laws
When forming a non-profit organization, some laws that govern them apply.
Before forming a non-profit, one must obtain a tax exemption status from the internal revenue code. This includes filling a form where the board of directors provides details of the organization.
Choose a business name that matches with the state law. Generally, any state requires a new name ending with Inc., Corporation, or Limited. Furthermore, words such as bank, cooperative, national, or reserve are prohibited (US Legal p.2). On top of this filling, an article of incorporation that goes for a fee of $40 is required.
Before business starts, a board of directors must be elected. They include; the president, treasurer, and secretary. The management is responsible for overseeing activities going on and managing employees. Again, an internal meeting must be performed by the management before the business.
To retain the tax exemption status, non-profits must not use the profits of the company to benefit themselves, rather they should benefit the community. They should also pay taxes to unrelated activities other than the ones included in the tax exemption status application form.
Profit Corporation Laws
A profit corporation is a legal entity where the owners are shareholders rather than proprietors. Just like any other form of business, forming a corporation for profit requires one to adhere to some laws.
Choose a business name ending with the names corporation, company, incorporated, or limited. The business name should be distinguished from others in the state. Therefore, checking the availability of the name is crucial (Digital Media law p.1).
The corporation must have at least one director. The director(s) must be shareholders of the corporation or residents of where it is located. The number of directors must also be included in the articles of incorporation.
The management should prepare and file articles of incorporation to the state departments. Departments such as labor and growth, and corporate division. The filing comes with a cost depending on the number of shares.
Another requirement is coming up with the corporation bylaws. This includes the rules that will guide shareholders as well as the employees. For example, duties and responsibilities of employees.
Obtaining any required local licenses is another law. This includes any other unrelated trade that the corporation may carry out.
Limited Liability Company Laws
Limited liability is a legal status whereby a person’s returns are limited to a fixed sum depending on the person’s investment (Halpern, et al. p.117). Likewise, it also constitutes some laws.
Registration must be accompanied by a registration fee according to section 5(1). The registration form should contain; name and address of the company and the duration the company will exist. Thereafter, the registrar issues a certificate to the company.
Naming a company requires the inclusion of a Limited Liability Company or LLC and must be reserved by the secretary of the state. Also, the company’s name must be unique.
Before business starts, members must announce the existence of the company through publishing which comes at a cost. Some states require members to announce through a circulating newspaper. Filing fee ranges from $50 to $500 (Inc p.3).
Lastly, the company’s management should hold a meeting and create an operating agreement. The agreement constitutes the division of profits, voting rights, and company management. Generally, it should include every activity to be carried out within the organization.
After analyzing the laws of the business forms discussed, CIA clients can consider creating a Limited Liability Company to get hold of the assets. The client can have ownership of the assets by forming an LLC which will become a subsidiary of the non-profit corporation. That is the only way a non-profit can have its assets held (IncNow p.1). This would result in the non-profit having only one member which is the formed LLC. Therefore, the client will have the chance to manage the online education organization’s assets.
Although most laws of starting a profit corporation and an LLC are close to similar, I would advise shifting to LLC. The fact that the client started the corporation and want to retain most of its ownership, in an LLC, will have the largest shares and will receive the biggest profits. Even though non-profits do not allow the selling of assets on dissolvent, the client can still gain profits by becoming a proprietor of the LLC.
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Employment and independent contractor agreements
To make sure that the instructors sign the independent contractor agreements accordingly, the client may consider the following laws. The laws explain an independent contractor agreement (Murray p.1).
General agreement and nature of work. The company and the instructors should establish what each will do. For instance, the instructors’ work might be to mark student’s papers and allocate marks. Details of the roles should be stated in the agreement such as when and how to do so.
Independent contractor status should be stated. This is the most crucial part. Stating that the instructor is an independent contractor and not an employee. It states whether the company will assist the contractor or not.
The next thing is stating how the contractor will be paid. This section says that the money paid to the contractor does not involve tax deductions and that the contractor is responsible for paying taxes. Also, no compensation or financial benefits such as insurance are paid to the contractor.
The contractor is responsible for all the expenses incurred in the course of working. Such expenses may include but are not limited to phone calls, internet, and transport. The company does not cater to any expense.
The agreement should clarify that termination of contract can happen without notice. Either party can do so because the contract is independent depending on prevailing circumstances. For instance, if the CIA Company decided to reduce the number of instructors, it can terminate two or three independent contractors without noticing them. Therefore, if the client needs the instructors to be viewed as independent contractors, then the above regulations must be contained in the agreement.
To sum up, every business is confronted with some rules and regulations and they must be followed if the organization is to remain in existence. A non-profit corporation has its advantages one being exempted from taxes. However, transforming it into a profit-making corporation may be difficult unless through the formation of a Limited Liability Company that will act as a subsidiary to the non-profit. Also, to make sure an independent contractor is not viewed as an employee, the company must agree on the payment, work details, status, expenses, and termination of the contract. The client can therefore consider these factors.
Digital Media Law. “Forming a Corporation.” Digital Media Law Project, 10 Sept. 2020, www.dmlp.org/legal-guide/forming-corporation.
Halpern, Paul, et al. “An Economic Analysis of Limited Liability in Corporation Law.” The University of Toronto Law Journal, vol. 30, no. 2, 1980, p. 117.
Inc. “Limited Liability Company.” Inc.com, 0000, www.inc.com/encyclopedia/limited-liability-company.html.
IncNow. “Can I Form a Non-Profit LLC, 501c3?” IncNow, 11 July 2018, www.incnow.com/blog/2018/07/11/can-i-form-a-non-profit-501c3-llc/.
Lawaspect.com. “The Limitations of a Nonprofit Corporation.” Lawaspect.com, lawaspect.com/limitations-nonprofit-corporation-state-delaware/.