Want More Info About Bankruptcy?
Our Maryland Bankruptcy Lawyer Compiled These Articles for You
Our Maryland bankruptcy attorney put together a list of articles that explain bankruptcy further, including information about bankruptcy exemptions, filing fees, credit repair, and more. If you have additional questions about bankruptcy, please contact our Maryland bankruptcy lawyer now.
Statement required by 11 U.S.C. Sec. 528(a)(4):
We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.
- Minimum Requirements for Working as an Independent Contractor
- Use Written Service Contracts for Your Clients
- Start Your Own Business: 50 Things You'll Need to Do
- How to Form a 501(c)(3) Nonprofit Corporation
- Protecting Your Nonprofit Corporation's Tax-Exempt Status
- Should my very small business incorporate in Delaware?
Minimum Requirements for Working as an Independent Contractor
Independent contractors and freelancers must comply with several laws.
Many independent contractors start earning money without really planning on it. Before they know it, their sideline projects have become legitimate businesses -- which means that they have to fulfill some basic business start-up requirements. Whenever you provide services and get paid, you must comply with several government rules, even if you work only a few hours per week.
At a minimum, do these three things when you're first starting out as an independent contractor:
- Choose a business name (and register it, if necessary).
- Get a tax registration certificate (and a vocational license, if required for your profession).
- Pay estimated taxes (advance payments of your income and self-employment taxes).
Choose a Business Name
It's a good idea to choose a business name that you can use on your invoices and business cards. Using a business name rather than your own name appears more professional.
Depending on the name you choose, you may have to register it with the government. Any business that doesn't use the legal name of its owner as part of its business name must register the name as a fictitious business name (called an assumed name or a DBA -- "doing business as" -- in some states). This allows customers to easily contact the business owner with a complaint or to take legal action against the business. For example, Madeline Quinn names her consulting business "Madeline Consulting." Because the business name doesn't include her full name, Madeline must register it as a fictitious business name.
There are other reasons to register your business name. First, you won't be able to enforce any contract that you sign under an unregistered name. Second, many banks won't open an account under your business name unless you provide proof that you have properly registered the name.
Skipping This Requirement
If you use your full name in your business name, you don't have to register it. For instance, many contractors who run small service businesses simply add a word or two after their full name to come up with a business name, such as Aidan Ray Editorial or Mike Russell Architectural Services. You can start using a name like this without filing any paperwork.
How to Register Your Fictitious Business Name
In most states, including California, you register your fictitious business name at the county level, with the county clerk. Different counties often have different forms and fees for registering a name. (In a few states, such as Florida, you register a fictitious name with a state office, such as the Department of State.)
The best thing to do is call your county clerk's office to find out its procedures, requirements, and fees.
Get a Tax Registration Certificate
Many cities and counties require every business -- even single-owner, home-based operations -- to register with the local tax collector and obtain a tax registration certificate. This certificate is sometimes called a business license, but it is essentially a receipt for the tax you must pay for the privilege of doing business in a city, and nothing more.
If you operate your business out of your home, you usually need to get a tax registration certificate in the city where you live, even if none of your clients are in that city. Contact your city clerk for an application.
Skipping This Requirement
Some independent contractors fail to register, figuring they can stay under the local government's radar. But consider this: tax registration certificates are inexpensive, while the penalties for operating without a license can be hundreds of dollars. In addition, in some locales it is a misdemeanor to violate city ordinances by operating without a tax registration certificate.
Getting a Vocational License
Depending on your trade, you may also have to get a professional or vocational license. For instance, some states license auto mechanics, barbers, massage therapists, and real estate agents. Ask your trade association or go to your state government's website to see if you need a particular license.
Pay Estimated Income and Self-Employment Taxes
Unlike employees, who have income taxes and other taxes (Social Security and Medicare taxes) withheld from their paychecks, independent contractors have to handle all of their own taxes. This means you have to set aside enough money to pay your tax bill each year. All independent contractors who make more than $400 per year from business activities must report their business income to the IRS.
In addition, if your business is at all profitable, the IRS requires you to pay your taxes in four installments during the year, called paying "estimated taxes." (If you will bring in more than $3,000 in adjusted gross income from business activities in any year, plan on paying estimated taxes.)
Skipping This Requirement
If you have a day job, you can avoid making estimated tax payments by asking your employer to increase the income withheld from your paycheck to offset the taxes that will be due on your business income.
Some small-time independent contractors skip paying taxes on their freelancing or consulting income altogether. But before you consider hiding income from the IRS, you should know that penalties and interest on back taxes, especially self-employment taxes, can be quite high. Also, any client who pays you more than $600 in any calendar year must report the income paid to you to the IRS, and the IRS will check your tax returns to see whether you are reporting this income.
It's better to bite the bullet and just pay taxes on your business income. By being clever about deducting your expenses, you may not end up paying taxes on much income at all -- independent contractors can deduct many more expenses than employees, often lowering their income by as much as 50% for tax purposes. In addition, sometimes your business activities can produce a tax loss that can reduce your taxable income from other work. F .
How to Register With the IRS as an Independent Contractor
To set yourself up as a self-employed taxpayer with the IRS, you simply start paying estimated taxes (on Form 1040-ES, Estimated Tax for Individuals) and file Schedule C, Profit or Loss From Business, and Schedule SE, Self-Employment Tax, with your Form 1040 tax return each April. You can get these forms from the IRS website at www.irs.gov.
As Your Business Grows
Above are the three basic steps you need to take before you start providing services as an independent contractor. Once you get started, you will be running a legitimate business.
As a small business owner, you should learn the basics of bookkeeping and recordkeeping, and you may also want to take marketing steps, such as listing your business in the Yellow Pages. areas.
For everything you need to know about being an independent contractor, get Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Consultants, by attorney Stephen Fishman (Nolo).
Use Written Service Contracts for Your Clients
Independent contractors can avoid trouble by putting client agreements in writing.
When you agree to perform services for a client, you are entering into a legal contract -- you promise to do the work, and the client promises to pay you for it. Many independent contractors rely on handshake agreements with their clients. But if something goes awry with the deal, you may have trouble enforcing the agreement. To protect yourself, get the agreement in writing.
Why You Need a Written Service Agreement
If a client refuses to pay, insists that you agreed to perform more or different work, says that you agreed to charge less than your usual rate, or otherwise won’t live up to his or her end of the bargain, you’re in a bind. You could try to convince a court that your version of the contract is correct but, without a written contract, it will be your word against the client’s, and there’s no telling whom a judge or jury will believe.
Fortunately, there’s an easy way to avoid these problems: Always get your agreements in writing. Using written contracts will help you prevent misunderstandings, clearly define the expectations you and the client have about the job, and prove your case in court, should it come to that.
What’s more, a written client agreement can help you establish that you are an independent contractor, not the client’s employee -- which will be very useful if the IRS or another government agency questions your status.
What to Include in the Service Contract
A written client agreement should cover at least these topics:
- the services you will perform
- how much you will be paid
- how and when you will be paid (for example, whether you will receive a set fee or an hourly rate; whether you will be paid up front, at completion, or in installments; whether the client will have to pay a fee for late payments; and so on)
- who will be responsible for paying expenses (most ICs pay their own)
- who will provide materials, equipment, and office space (again, most ICs provide their own, but there are exceptions)
- how long the agreement will last
- the circumstances under which you or the client have the right to terminate the agreement, and
- information relating to your independent contractor status -- that is, that you are an independent contractor, that you have all of the necessary permits and licenses to do the work, that you will pay your own state and federal taxes, and that you have your own liability insurance.
There are also a few standard legal provisions you should include, such as a statement that you and the client are not partners in business and that you and the client have no outside agreements about the deal except what’s been included in the contract.
To get language for all of these provisions (and many more) get Consultant and Independent Contractor Agreements and Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Consultants, both written by Stephen Fishman and published by Nolo.
Start Your Own Business: 50 Things You'll Need to Do
From insurance to accounting to taxes, here’s what you need to do to start a business.
Thinking about starting a business? You’re not alone. Every year, thousands of Americans catch the entrepreneurial spirit, launching small businesses to sell their products or services. Some businesses thrive; many fail. The more you know about starting a business, the more power you have to form an organization that develops into a lasting source of income and satisfaction. For help with the beginning stages of operating a business, the following checklist is a great place to start.
Evaluate and Develop Your Business Idea
1. Determine if the type of business suits you.
2. Use a break-even analysis to determine if your idea can make money.
3. Write a business plan, including a profit/loss forecast and a cash flow analysis.
4. Find sources of start-up financing.
5. Set up a basic marketing plan.
Decide on a Legal Structure for Your Business
6. Identify the number of owners of your business.
7. Decide how much protection from personal liability you'll need, which depends on your business's risks.
8. Decide how you'd like the business to be taxed.
9. Consider whether your business would benefit from being able to sell stock.
10. Research the various types of ownership structures:
- Sole proprietorship
- Partnership
- LLC
- C Corporation
- S Corporation
11. Get more in-depth information from a self-help resource or a lawyer, if necessary, before you settle on a structure.
Choose a Name for Your Business
12. Think of several business names that might suit your company and its products or services.
13. If you will do business online, check if your proposed business names are available as domain names.
14. Check with your county clerk's office to see whether your proposed names are on the list of fictitious or assumed business names in your county.
15. For corporations and LLCs: check the availability of your proposed names with the Secretary of State or other corporate filing office.
16. Do a federal or state trademark search of the proposed names still on your list. If a proposed name is being used as a trademark, eliminate it if your use of the name would confuse customers or if the name is already famous.
17. Choose between the proposed names that are still on your list.
Register Your Business Name
18. Register your business name with your county clerk as a fictitious or assumed business name, if necessary.
19. Register your business name as a federal or state trademark if you'll do business regionally or nationally and will use your business name to identify a product or service.
20. Register your business name as a domain name if you'll use the name as a Web address too.
Prepare Organizational Paperwork
21. Partnership:
- Partnership agreement
- Buyout agreement (also known as a buy-sell agreement)
22. LLC:
- Articles of organization
- Operating agreement
- Buyout agreement (also known as a buy-sell agreement)
23. C Corporations:
- Pre-incorporation agreement
- Articles of incorporation
- Corporate bylaws
- Buyout agreement (also known as a buy-sell agreement or stock agreement)
24. S Corporations:
- Articles of incorporation
- Corporate bylaws
- Buyout agreement (also known as a buy-sell agreement or stock agreement)
- File IRS Form 2553, Election by a Small Business Corporation
Find a Business Location
25. Identify the features and fixtures your business will need.
26. Determine how much rent you can afford.
27. Decide what neighborhood would be best for your business and find out what the average rents are in those neighborhoods.
28. Make sure any space you're considering is or can be properly zoned for your business. (If working from home, make sure your business activities won't violate any zoning restrictions on home offices.)
29. Before signing a commercial lease, examine it carefully and negotiate the best deal.
File for Licenses and Permits
30. Obtain a federal employment identification number by filing IRS Form SS-4 (unless you are a sole proprietorship or single-member limited liability company without employees).
31. Obtain a seller's permit from your state if you will sell retail goods.
32. Obtain state licenses, such as specialized vocation-related licenses or environmental permits, if necessary.
33. Obtain a local tax registration certificate, a.k.a. business license.
34. Obtain local permits, if required, such as a conditional use permit or zoning variance.
Obtain Insurance
35. Determine what business property requires coverage.
36. Contact an insurance agent or broker to answer questions and give you policy quotes.
37. Obtain liability insurance on vehicles used in your business, including personal cars of employees used for business.
38. Obtain liability insurance for your premises if customers or clients will be visiting.
39. Obtain product liability insurance if you will manufacture hazardous products.
40. If you will be working from your home, make sure your homeowner's insurance covers damage to or theft of your business assets as well as liability for business-related injuries.
41. Consider health & disability insurance for yourself and your employees.
Set Up Your Books
42. Decide whether to use the cash or accrual system of accounting.
43. Choose a fiscal year if your natural business cycle does not follow the calendar year (if your business qualifies).
44. Set up a recordkeeping system for all payments to and from your business.
45. Consider hiring a bookkeeper or accountant to help you get set up.
46. Purchase Quicken Home and Business (Intuit), QuickBooks (Intuit) or similar small business accounting software.
Set Up Tax Reporting
47. Familiarize yourself with the general tax scheme for your business structure. (See Tax Savvy for Small Business, by attorney Frederick Daily.)
48. Familiarize yourself with common business deductions and depreciation. (See Deduct It! Lower Your Small Business Taxes, by attorney Stephen Fishman.)
49. Obtain IRS Publications 334, Tax Guide for Small Business, and 583, Taxpayers Starting a Business.
50. Obtain the IRS's Tax Calendar for Small Businesses.
As you can see, starting a business involves making quite a few initial decisions and getting policies and paperwork in place. For more information about and help with starting a business, call Adams Law Office, LLC at 301-805-5892 to consult with an attorney.
How to Form a 501(c)(3) Nonprofit Corporation
Here's how to form a nonprofit corporation and receive a 501(c)(3) tax exemption.
Forming a nonprofit corporation is much like creating a regular corporation, except that nonprofits have to take the extra steps of applying for tax-exempt status with the IRS and their state tax division. Here is what you need to do:
- Choose an available business name that meets the requirements of state law.
- File formal paperwork, usually called articles of incorporation, and pay a small filing fee (typically under $100).
- Apply for your federal and state tax exemptions.
- Create corporate bylaws, which set out the operating rules for your nonprofit corporation.
- Appoint the initial directors. (In some states you must choose your initial directors before you file your articles, because you must list their names in the document.)
- Hold the first meeting of the board of directors.
- Obtain licenses and permits that may be required for your corporation.
Choose a Business Name
Before you form your nonprofit corporation, you need to decide on a name that complies with the rules of your state's corporate filing office. The information packet you receive from the filing office should contain your state's rules, but the following guidelines commonly apply:
- The name of your nonprofit cannot be the same as the name of another corporation on file with the corporations division.
- The name must end with a corporate designator, such as Corporation, Incorporated, Limited, or Corp., Inc., or Ltd. (This is required in only about half of the states.)
- The name cannot contain certain words prohibited by the state, such as Bank, Cooperative, Federal, National, United States, or Reserve.
Your state's corporations division can tell you how to find out whether your proposed name is available for your use. Often, for a small fee, you can reserve the name for a short period of time until you file your articles of incorporation.
|
Contact Your State's Corporations DivisionIn addition to confirming that another corporation in your state isn't already using your proposed name, you must make sure your name won't violate a trademark owned by another company (in your state or out of state). To do this, you'll need to conduct a trademark search.
Once you've found a legal and available name, you aren't usually required to file or reserve the name with your state -- when you file your articles of incorporation, your nonprofit's name will be automatically registered.
Prepare and File Your Articles of Incorporation
After you've decided on your business name, you must prepare and file articles of incorporation with the corporate filing office. This document goes by a different name in a handful of states; your state may instead use the term articles of organization, certificate of incorporation, certificate of formation, or charter.
Your state's corporate filing office will usually provide you with nonprofit articles of incorporation -- either a fill-in-the-blank form or a sample on which you can base your articles. Although preparing this document isn't difficult, you do need to include specific language to ensure that you'll receive tax-exempt status. Your state's nonprofit formation packet, if available, may include the required information. If not, or if you need help understanding the requirements, consult a good legal self-help guide such as How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo), to make sure your articles comply with your state's nonprofit law.
Apply for Your Federal 501(c)(3) Tax Exemption
After the corporate filing office returns a copy of your filed articles, you can submit your federal 501(c)(3) tax exemption application to the IRS. (The IRS requires you to submit a copy of your filed articles with your application.) This is a critical step in the formation of your nonprofit organization since most of the real benefits of being a nonprofit flow from 501(c)(3) tax-exempt status.
To apply for your exemption, you must complete IRS Form 8718, User Fee for Exempt Organization Determination Letter Request, and IRS Package 1023, Application for Recognition of Exemption. For instructions on filling out these forms, read IRS Publication 557, Tax-Exempt Status for Your Organization. (You can obtain all of these items for free by calling 800-TAX-FORM, or you can download them from the IRS website at www.irs.gov.) If you need a bit of help deciphering the IRS-speak, consider downloading Nolo's plain-English eGuide, Nonprofit Corporations: Qualify for Federal Income Tax Exemption.
|
Read the Tax Exemption Application Before Filing Your ArticlesAfter the IRS reviews your application, it will send you a letter indicating that it has approved your nonprofit status, or it might ask you for more information about your organization. The IRS can also deny your application outright. If this happens, see a lawyer who specializes in nonprofits.
Apply for a State Tax Exemption (If Necessary)
In a few states (California, Montana, North Carolina, and Pennsylvania), you must complete a separate application to get a state tax exemption. In other states, as long as you file nonprofit articles of incorporation and obtain your federal 501(c)(3) tax-exempt status, your state tax exemption will be automatically granted. In still others, to get your state exemption you must send in a copy of the IRS determination letter that granted your federal exemption. Contact your state tax agency to find out what steps you must take.
Draft Corporate Bylaws
Next you must create bylaws, the internal rules that govern your nonprofit corporation. Bylaws contain rules and procedures for holding meetings, voting on issues, and electing directors and officers. To create bylaws, you can either follow the instructions in a self-help resource or hire a lawyer in your state to draft them for you. Typically, the bylaws are adopted by the corporation's directors at their first board meeting.
Appoint Directors
Directors, who meet and make decisions collectively as the board of directors, have the authority (and responsibility) to manage and run the nonprofit corporation. Many states allow nonprofits to have just one director, but other states require at least three.
Hold a Directors' Meeting
The purpose of the first meeting of the board of directors is to conduct the initial business of the corporation and take care of other formalities, such as recording the receipt of federal and state tax exemptions.
The directors should first adopt the bylaws and elect officers -- state law usually requires a president, secretary, and treasurer, and sometimes a vice president as well. Then, the directors should authorize the newly elected officers to take actions necessary to start the business of the nonprofit -- for example, setting up bank accounts and admitting members.
After the meeting is completed, minutes of the meeting should be created and filed in your corporate records book.
Obtain Licenses and Permits
Many businesses, whether operating as for-profit or nonprofit corporations, partnerships, or sole proprietorships, are required to obtain state or local licenses and permits before commencing business. So, while you may not be subject to the kind of red tape that entangles profit-making enterprises, you should check with your state department of consumer affairs (or similar state licensing agency) for information concerning state licensing requirements for your type of organization. For instance, a local business license (sometimes called your tax registration certificate) may be required for your activities, and if you sell anything to consumers, you'll need a sales tax permit.
Protecting Your Nonprofit Corporation's Tax-Exempt Status
Learn how to protect your tax-exempt status while running a nonprofit corporation.
Nonprofit corporations are organized very much like regular corporations; however, running a nonprofit corporation means complying with a few special rules. Here's what you need to know.
The Organizational Structure of Nonprofit Corporations
Like any corporation, a nonprofit has a board of directors to make important policy decisions, officers (president, treasurer, and secretary) to oversee and manage the day-to-day operations of the organization, and possibly employees to do the work.
Unlike regular corporations, however, nonprofit corporations do not have shareholders or owners. (Nonprofits are owned by no one person or group of persons and cannot be sold. In the event the directors of a nonprofit want to dissolve the corporation, they must distribute all of its assets to another nonprofit corporation.)
Although a nonprofit corporation can choose to have members who have voting rights, many nonprofit corporations decide not to adopt a membership structure and, in the interests of efficiency, leave the decision making up to the directors. If a nonprofit does opt for a membership structure, the members participate in major corporate decisions. Specifically, the members have the exclusive right to elect directors, amend articles and bylaws, and vote on a merger or dissolution of the corporation.
Corporate Records
All nonprofit corporations must keep good corporate records. These records help to preserve directors' limited personal liability and protect your organization's tax-exempt status. Good record keeping means preparing minutes of directors' and members' meetings and documenting important corporate decisions.
You'll want to organize these materials in a corporate records book, which should also contain a copy of your articles of incorporation, bylaws, and tax exemption determination letters from the IRS and your state tax agency, if applicable.
In addition to keeping records of important decisions, your nonprofit corporation must record any financial transactions in a double-entry bookkeeping system and keep other financial records in order to file an annual corporate tax return.
Limits on Nonprofit Activities
In addition to keeping corporate records, nonprofit corporations must follow some additional rules and abide by certain prohibitions in order to retain their tax-exempt status:
- Nonprofit corporations cannot contribute money to political campaigns. Nonprofit corporations with a 501(c)(3) tax exemption (the most common) are not allowed to participate in political campaigns or contribute money to them. If they do, the IRS can revoke their nonprofit status, and can assess a special excise tax against the organization and its managers.
- Nonprofit corporations can engage in only limited lobbying activities. Tax-exempt 501(c)(3) nonprofits that influence legislation to any "substantial degree" face the loss of their nonprofit status. However, for tax-exempt nonprofits that want to participate in lobbying, the IRS simply sets a limit on the money they can spend on political activities.
- Nonprofit corporations must not distribute profits to members, officers, or directors. A nonprofit corporation cannot be organized to financially benefit its members, officers, or directors. However, reasonable salaries and expense reimbursements are permitted.
- Nonprofit corporations must pay taxes on income from "unrelated activities." Sometimes, a nonprofit organization will earn income through activities that aren't directly related to its nonprofit purpose; for example, the directors of an organization dedicated to preserving open space may collect a consulting fee for advising other nonprofits. The IRS requires nonprofits to pay corporate income taxes on such unrelated income over $1,000, whether or not the group uses that money to fund its tax-exempt activities.
- Nonprofit corporations cannot make substantial profits from unrelated activities. If a nonprofit spends too much time on unrelated activities, or if the unrelated activities generate "substantial" income, the group's nonprofit status may be jeopardized. Nonprofit corporations that plan to engage in activities that aren't related to their tax-exempt purpose should consult a lawyer or tax expert with experience in nonprofit law.
- When a nonprofit corporation dissolves, its assets must be distributed to another tax-exempt group. Since tax-exempt organizations and their assets cannot be owned, they can never be sold. If the directors of a nonprofit decide to disband the organization, they must donate its assets to another nonprofit group. This also means that once property goes into a nonprofit corporation, it cannot later be distributed to a member or director.
Should my very small business incorporate in Delaware?
QUESTION:
I have heard that Delaware has the most business-friendly corporation laws. Would I save money or gain other benefits if I incorporated my new two-owner business in Delaware, or is it better to do so in my own state?
ANSWER:
Delaware's public relations folks should be proud -- when it comes to incorporating, the very mention of the state's name carries a mystique not unlike "Camelot." But the fact of the matter is that while incorporating in Delaware may make sense for large, publicly held corporations, it's usually not worth the effort for small, privately held corporations that do business only in their home state.
First, you're not likely to save any money in taxes by incorporating in Delaware. If your business makes money from operations in your home state, you still must pay your own state's income taxes on this income.
Second, while incorporation fees may be lower in Delaware than they are in your home state, you will have to qualify to do business in your state in addition to incorporating in Delaware. This process takes as much time and costs as much money as filing incorporation papers in your own state. And you would also need to appoint a corporate agent to receive official notices in Delaware -- another cost you'd have to bear.
Your best approach is probably to stay where you are and incorporate in your home state.