Under the new law a dividend is permitted if paid out of retained earnings OR if immediately after the distribution, the value of the corporation’s assets would equal or exceed the sum of its total liabilities.

The Internal Revenue Service today launched a new program that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers.

This new program will allow employers the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.

To be eligible, an applicant must:

• Consistently have treated the workers in the past as nonemployees,
• Have filed all required Forms 1099 for the workers for the previous three years
• Not currently be under audit by the IRS
• Not currently be under audit by the Department of Labor or a state agency concerning the classification of these workers

Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.

Click here for more information.

The committee’s letter states, “As currently drafted, the Bill includes among the permitted special purposes those charitable and public purpose activities that may be carried out by a nonprofit public benefit corporation. It does not include reference to religious purpose activities that may be carried out by religious corporations. Although the California Corporations Code has separated nonprofit public benefit and religious corporations into parallel statutory schemes, the purposes of religious corporations are traditional charitable purposes just as much as those public and charitable purposes of public benefit corporations. Religious purposes encompass activities which may even be identical to those conducted under charitable purposes. There are a significant number of social welfare type of organizations that are incorporated as religious organizations. By leaving out the reference to purposes of religious corporations, the Bill excludes the activities of a large segment of the social welfare and charitable community and unnecessarily restricts the special purposes which could be included for this type of organization.”

In contrast, the California Association of Nonprofits, along with California Church Impact, California Society of Association Executives, and the Blood Centers of California, have written a letter opposing the bill.  They express the following concerns (quoted from their letter):

• What are the consequences for the quality of social, environmental, cultural, and educational services used and needed by California residents if for-profits are provided with enhanced capacity to compete with nonprofits for government grants and contracts, financial and human capital and the definition of the form and scope of practices for delivering social benefits?

• Some SB 201 proponents maintain that the capital pool for existing nonprofits and Flexible Benefit Corporations are mutually exclusive. What is the evidence to substantiate that claim? How can we be sure that investments in FPCs are not being made in lieu of charitable contributions?

• Although the single largest source of revenue for nonprofits is earned income, nonprofits are likely to find themselves at a competitive disadvantage with FPCs with access to capital simply unavailable to governmental and charitable entities. What are the likely outcomes of that situation?

• By all accounts, public benefit is difficult to evaluate and measure. How will nonprofits and investors be protected from misrepresentations by management and directors accountable only to their shareholders and not to standards established in many areas of nonprofit practice by existing nonprofit professional associations?

• There may be lessons to be learned from the UK, where there is a highly developed system for assessing public benefit outcomes of Community Interest Companies, a hybrid similar to that proposed in SB 201 and in existence since 2005. In the legislation, this core principle is achieved through the “community interest test.” A company satisfies the community interest test if a reasonable person might consider that its activities (or proposed activities) are carried on for the benefit of the community. Many community interest companies use independent social auditors, whose audits provide the basis for evaluations by social audit panels.  Through this audit system, the UK approach requires accountability not only to the shareholders but also to the stakeholders, such as recipients of social services, who are the purported beneficiaries of the companies’ activities.

• To the limited extent that they are regulated, what’s to prevent a Flexible Purpose Corporation from enjoying the same “light touch” from regulators received by their UK counterpart, the Community Interest Company, as reported in a recent article “Wrong Way Corrigan and Recent Developments in the Nonprofit Landscape: A Need for New Legal Approaches,” by James J. Fishman Pace, University School of Law?

• Given that they are engaging in “charitable and public purpose activities that could be carried out by a nonprofit public benefit corporation,” should FPCs be subject to some specific form or degree of oversight or accountability similar to the requirements for nonprofits from the California Attorney General, Internal Revenue Service, Franchise Tax Board, Board of Equalization, and Secretary of State?

• What assurances do we have that FPCs will continue to provide needed services when the economy is faltering when there are decisions to be made about shareholder returns? Nonprofits must maintain their vision and mission regardless and face scrutiny by taxing authorities and the California Attorney General.

• What is likely to be the impact of FPCs and similar measures on service and volunteerism, which up to now have been key component of our way of life in both California and the nation? Will the mixing of for-profit with charitable motives send a message that undermines the efforts of religion, nonprofits and government to encourage individuals, families and communities to unselfishly “take action that changes the world,” in the words of the mission statement of the Points of Light Foundation.

• In addition the proposals already pending in the Legislature, there are other available methods, some that have been in place for decades, to blend public and private purposes in single or related corporations. What are the relative merits of each type from the perspectives of potential abuse, impact on nonprofits, and impact on existing businesses? Will they erode or enhance the capacity of existing nonprofit entities under current law and in which both the public and private sectors have invested immense amounts of time and dollars?

The Supreme Court has said that the following will be considered a security: “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”

So what if someone invests in a venture with the expectation of receiving a beautiful gift basket at the end of one year – could that be considered an “expectation of profits”?

Unfortunately, this issue has not been addressed directly by the courts.  Crowdfunding web sites like IndieGoGo and Kickstarter are based on the assumption that giveaways would not be considered “profit” and therefore subject to securities regulations.

At what point might a reward be valuable enough that it could be seen as a financial return on investment?  Just because it is not paid in cash surely could not be the determining factor – that would be a loophole big enough for a mack truck!

The Supreme Court has already held that the initial investment does not have to be in cash – it could be in the form of goods or services.  Can the decision that profits can be in the form of goods and services be far behind?

Because of this uncertainty, if you are conducting a non-securities funding campaign and providing giveaways to your donors, it is best to structure it so that the primary motivation is not the giveaway but other intangible benefits of supporting a wonderful venture.

For tax years beginning on or after January 1, 2010, California tax-exempt organizations with gross receipts normally equal to or less than $25,000 (except churches) are now required to electronically file FTB 199N, California e-Postcard (available January 3, 2011).

In response to a request from a reader, here is a brief summary of legal issues related to local currency which draws heavily from an article by Lewis Solomon in the Kansas Journal of Law and Public Policy called Local Currency: A Legal and Policy Analysis.

In 1864, Congress passed a law that prohibited private coinage, but the issuance of paper money is allowed.

Privately issued currency must be easily distinguishable from US dollars to avoid violation of counterfeit laws.

State codes may limit the ability to issue and use alternative currencies.  Some state statutes require that employees be paid in U.S. currency and some specifically prohibit the issuance of currency.

Another important thing to know about using local currency – income is taxable just as if it were paid in U.S. dollars.

One of our clients, Sonoma County Go Local Co-op, is developing a Rewards Card system that allows local businesses to issue credit into a trading system that community residents can use to purchase goods and services from participating businesses.

Please share your experiences with community currency!

The maximum credit goes to smaller employers –– those with 10 or fewer full-time equivalent (FTE) employees –– paying annual average wages of $25,000 or less.  The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of $50,000 or more per year.

For more information, click here.

1.     If your organization’s gross receipts are normally $50,000 or less, you can file a Form 990-N – a simple filing (this threshold has been increased from $25,000 – thank you IRS!)

2.     If your organization’s gross receipts are greater than $50,000 but less than $200,000 (and total assets not more than $500,000), you can file a 990-EZ (which is not necessarily easy, but it is easier than the Form 990)

3.     All others must file Form 990

Click here for more information.

First, a cooperative formed under the law of any state that sells securities to its members in Colorado is exempt from the Colorado registration requirement.  (Note that it will still be necessary to qualify for a federal exemption – in this case, probably the intrastate exemption would be used.)

Second, securities offered and sold in compliance with a federal exemption for small or private offerings (such as Reg D) is exempt from Colorado registration.  All that is required to qualify for this exemption is the filing of a simple notification of exemption with the Colorado Division of Securities along with a $75 fee.  If used in conjunction with federal Rule 504, this means that a company can conduct a private placement (no general solicitation) for up to $1 million to an unlimited number of accredited AND unaccredited investors.

The business must be a C corporation with gross assets of no more than $50 million at the time of investment.

Tell your potential investors to take advantage of this great opportunity!