Enterprise Organizational Forms Preview Lecture 1. Sole Proprietorship Partnerships vs. Corporations Not-for-Profits vs. For-Profits. Sole Proprietorship… small and simple and risky. You can conduct business as an individual – the main historical mode. You and your enterprise are co-defined:
Partnerships vs. Corporations
Not-for-Profits vs. For-Profits
You can conduct business as an individual – the main historical mode.
Multi-person business arrangements evolved slowly, often time or event-delimited, mercantile.
With recent U.S. changes, little reason remains to operate in “naked” mode.
“Chartered companies” (e.g. British East India Co.)
Through mid-1800s “small scale capitalism” with market transactions, esp. manufactures
Early 1900s -- managerial capitalism, wide ownership and separation of owners/ managers
Limited Liability Companies (LLCs/ LCs):
Limited Liability Companies (LLCs/ LCs):
Limited Liability Partnerships – start Texas 1991
“Tax exempt” refers here to the status of the organization and not effect on donor.
Two most common NFP types:
501(c)(3) – charitable, educational, etc.
>200K public charities have filed
>50K private foundations; grant-making
501(c)(4) – social welfare organizations
>120K file under this + other types NFP
Corporation, community chest, fund or foundation with limited activities recognized under 501(c)(3) by the IRS
Exempt purposes include charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals.
“The term… includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening the burdens of government; lessening of neighborhood tensions; elimination of prejudice and discrimination; defense of human and civil rights secured by law; and combating community deterioration and juvenile delinquency.”
What forms are precluded for NFPs?
As of 2001, 501(c)(3) filers had:
$1.0Trillion in net worth
$895B in total revenue
$211B in contributions
$122B in public contributions
$89B in government grants
$630B in program service revenue
$861B in total expenses
$739B in program expenses
$109B in management/ general expenses
Pay earnings to private shareholders
Lobby for legislation
Campaign for or against political candidates
Dissolve and then distribute assets to individuals or non-qualified organizations; state law controls.
State law controls exemption from state taxes…
Taxable 1345 with $40B revenue
Exempt 5340 with $330B revenue
Health Care NFPs received 93.2% of revenues from selling program services (2001, IRS).
Question: Do FP and NFP hospitals behave differently?
Must be at least community-wide
Civic associations qualify; tenant, homeowner and social clubs do not.
Exempt from paying taxes on earnings; donations generally not tax deductible
Effectively bound by the same political rules as 501(c)(3)’s; but may lobby for “germane” legislation
Dues allocated to lobbying not tax exempt
Other aspects of political process in gray area
Note the “advocacy nature” of these…
Often a 501(c)(4) has a 501(c)(3) education foundation.
NFP income is essentially tax exempt.
They are liable for unrelated business income
tax (UBIT): trade regularly carried on with public, unrelated to purpose other than internal.
NFP’s cannot just sit on large portfolios.
Within limits, 501(c)(3) donors receive a tax deduction (not a tax credit) – in effect, society subsidizes gifts per the donor tax effect.
Question: Why are hospital gift shops staffed by volunteers?
“…although business income not related to a nonprofit’s mission is subject to tax, much of it escapes taxation.” (CBO, “Taxing the Untaxed Business Sector, July 2005)
Untaxed business sector generates at least 5.3% of NDP; of that, NFPs producing private (not public) goods generate ~ 3.4% of economy’s NDP.
Question: what would happen if the Feds taxed NFPs on these gains?
“Qualified 501(c)(3) bonds are tax-exempt qualified private activity bonds issued by a state or local government, the proceeds of which are used by a 501(c)(3) charitable organization in furtherance of its exempt purpose.” http://www.irs.gov/pub/irs-pdf/p4077.pdf
Here, “tax exempt” refers to the returns to the lender. Effects discussed later in course.