Nearly nine months ago, USA Today reported that about three quarters of the nation’s small- and mid-sized business leaders indicated they were anticipating higher revenues in the year ahead, and nearly 60 percent expected rising profits. Among those who expressed confidence in their future, 54 percent expected to hire more employees, and 50 percent were planning to invest in their facilities.

Only time will tell if the cautious enthusiasm turned into reality. What cannot be disputed, however, is growth is often accompanied by change (and the same may be said for business contraction). We know that increased employment and faster growth are factors that often lead businesses to change their legal form of organization. Why? Savvy business owners should constantly be looking for ways to reduce their exposure to risk.

While there is really no way to completely avoid risk, many find that adopting the business form of a limited-liability company (LLC) provides a step in the right direction.

What are the potential benefits? An LLC offers many of the legal advantages of a corporation and may help shield the business owner’s personal assets from lawsuits brought against a firm’s products or employees. In theory, financial losses would be limited to the owner’s stake in the company, but exceptions may include any business debt that has been personally guaranteed or misdeeds (such as fraud) of the owner.

An LLC may also be simpler to deal with in the formative stages. In many states, an LLC is easier to form than a corporation, and there may be fewer rules and reporting requirements associated with operating an LLC. Single-member LLCs carry the easiest tax-compliance burden of all, so a single owner may find the LLC a favorable option to incorporation. Another potential plus — a board of directors and annual meetings are not usually required in an LLC.

From a general tax perspective (not just limited to the single-member LLC noted above), an LLC acts as a pass-through entity for tax purposes, so a company may avoid tax liability by passing profits or losses on to the members (owners), who declare them on their personal tax returns. Members have the latitude to choose whether the company is taxed as a sole proprietorship, a partnership, an S corporation, or a C corporation, provided it would qualify for the particular tax treatment. One caveat: not all conversion transactions are without tax consequence.

Finally, think flexibility. The structure of an LLC may help facilitate growth as an unlimited number of owners and/or investors may be added to the business, and ownership stakes may be transferred easily from one member to another. LLCs may also be owned by another business.

Perhaps you are thinking now is the time to begin the LLC consideration in earnest.  Your first conversation should be with your CPA where you can establish an understanding of the potential benefits and drawbacks, compliance requirements, transition concerns, as well as discuss possible tax consequences and set a solid plan in motion. 

Gail Kinsella is a partner in the accounting firm of Testone, Marshall & Discenza, LLP. Contact Kinsella at gkinsella@tmdcpas.com

“I was gratified to be able to answer promptly. I said I don’t know.”   —Mark Twain

There are less than 9 months before the 2012 presidential election. For the past six months, and the next nine, the answers to questions asked of the candidates will continue to be rhetorical and nebulous, at best. I felt it appropriate to provide clarity and substance to a number of questions that the reader may be asking regarding our nation’s tax-exempt industry and service sector. 

“Arch the Answer Man” will, in just a few short minutes, provide you with clear and concise answers to questions that you may find of interest. 

You can fully expect to hear many allegations made by political candidates about our nation’s health, education, arts, and cultural and human-service sectors. Please take most criticism that you hear with a substantial grain of sea salt. In order to truly understand the incredible benefits and economic productivity of the tax-exempt sector, speak with someone knowledgeable and/or do your own research on the subject. 

Before I begin, I will acknowledge that the tax-exempt sector, like every other business/industry segment, has issues that need to be addressed. Productivity, cost efficiency, service quality, and value for the dollar, are just a few of the opportunities for improvement. However, in most cases, the solution to these issues begins with the recognition that America’s society and the individual citizen have much higher expectations than what is affordable for this nation to provide. 

You can look at almost every government-funded program in the nonprofit sector and see opportunities for improvement. However, at the same time, you can recognize that the vast majority of individuals receiving government support and services are justified in their need.

Question (Q): What was the total dollar amount of charitable contributions for 2010 in the United States and what percentage came from individuals?

Answer (A): Charitable contributions in 2010 totaled just shy of $300 billion, and 73 percent was donated by individuals. The U.S. is number one in the world in charitable giving.

Q: What two billionaires have created “The Giving Pledge,” in which wealthy individuals commit to donating more than half of their wealth to charitable endeavors?

A: Bill Gates (Microsoft) and Warren Buffett (Berkshire-Hathaway) created The Giving Pledge in 2010. More than 50 billionaires have signed on to the pledge. Of interest locally, Tom Golisano many years ago pledged the majority of his estate wealth to his foundation, which supports health-care services and people with disabilities.

Q: Which type of charitable organization receives the greatest amount of charitable contributions each year?

A: In 2010, religious organizations received 35 percent of contributions. The education sector was next at 14 percent.

Q: How many charitable organizations are registered with the Internal Revenue Service (IRS) as having tax-exempt status, and which one spent the most on program services?

A: The U.S. has about 1.4 million nonprofit organizations. The American Red Cross was number one in providing program support and services at more than $3 billion.

Q: If an individual donates a car, boat, RV, or other like property, how much of a charitable deduction does the individual receive for tax purposes?

A: Based on regulations adopted several years ago, donations of this type qualify for a charitable deduction for only the amount that is received by the charity when it sells the item donated. Deductions for “Blue Book” values are no longer allowed.

Q: Volunteer efforts and in-kind contributions to charitable organizations are a critical component of balancing the budget for many nonprofits. What percentage of Americans volunteer their time to charitable causes?

A: In 2010, the Urban Institute estimated that 26 percent of Americans volunteered their time, believed to be the largest number of any country on the planet.

Q: During 2011, the IRS requested that non-routine filers of Form 990 prepare and file Form 990N, so that the IRS could determine whether tax-exempt organizations in their database were still operating. How many nonprofit organizations lost their tax-exempt status by not responding to this IRS request?

A: About 275,000 tax-exempt organizations registered with the IRS that lost their tax-exempt status in 2011. The vast majority of these entities were smaller nonprofits and/or those that had ceased operations. Check to see if your organization is on the list at www.irs.gov.

Q: What percentage of the charitable organizations in the country have annual operating budgets exceeding $10 million?

A: Recent estimates indicate that less than 10 percent (slightly more than 100,000 organizations) had budgets in excess of $10 million. About 90 percent of nonprofits have annual budgets of less than $10 million.

Q: Nonprofits with annual budgets of $10 million or more represent what percentage of total charitable organizational spending? 

A: In 2009, it was estimated that organizations with $10 million or more in annual expenses represented 85 percent of total charitable-organization spending.

Q: What percentage, on average, of revenues received by charitable organizations is derived from government sources and private-pay fees for goods and services?

A: In 2009, it was estimated that 76 percent of charitable-organization revenue came from government and private-service fees. 

This election year should, but most likely will not, include extensive discussion and debate regarding rationing of goods and services to the American population. Health-care rationing has existed throughout our nation’s history in a subliminal way. Politicians from all parties recognize that it is “political suicide” to use the “R” word. However, the age and income demographics of our country make it impossible for the government to provide all health and human services expected or demanded by those of us in the mirror. One can only hope that the necessary debate and dialogue will occur before the issue of rationing must be addressed in a crisis mode.

For example, I challenge those families that still eat meals at the dinner table to debate and discuss the following question:

Should every American of the baby boom generation receive an artificial hip, knee, and/or shoulder replacement, regardless of his/her age? 

On a final note, don’t be at all surprised to hear serious discussion during the election campaign regarding taxation of income generated by charitable organizations. If the question above is too sensitive for discussion at your dinner table, I would hope that a sports question will serve as an adequate replacement. 

Should income from college football, basketball, and other profitable and lucrative college athletic programs be subject to some form of taxation and why? 

Enjoy your dinner conversation and pay close attention to the election debates, political platforms, and the inevitable rhetoric. 

Gerald J. Archibald, CPA is a partner with The Bonadio Group. Contact him at garchibald@bonadio.com