In our ninth installment of “Ask a Lawyer” we featured questions from Ian Alden.
Read it here
QUESTION: I’ve been running my own business for quite a few years now. I never made an LLC or incorporated but I’ve never had any problems come up. Nobody’s ever sued me or even threatened to. I saw your blog article about LLCs and now I’m wondering if it’s worth it to make an LLC now. Is there any point?
ANSWER: Thank you for that question. It’s one we get surprisingly often. I always tell folks the same thing: “nobody ever has problems until they do.” What that means is that you can go for years without anyone slipping and falling in your store, getting food poisoning in your restaurant, or just having a bad experience that they want to sue you for. Unfortunately, all it takes is one such person to break your perfect record and heap a potentially multi-million dollar claim on your business. When that happens, having an LLC can make the difference between losing your business and losing your home. A Limited Liability Company is tailor-made for small business owners to carry on much as they already do but with an important liability shield: if the business suffers a liability, the LLC (and not its owner) is typically responsible. With a few exceptions, if the LLC doesn’t have enough assets to satisfy a claim, the claim still stops with the LLC – the claimant can’t go after the LLC owner’s personal assets.
Without an LLC or corporation, a business owner has no such protections. Any claims against the business are, by default, claims against the business owner, and the business owner’s assets – including, potentially, their house, car, family heirlooms, and other valuables – can be seized to pay off any judgment. There are some low-dollar exemptions that protect folks from being made destitute, but they’re often not enough to save your property and protect your standard of living. The average cost of an LLC is around $350 and can save their owners millions in legal claims. Suffice it to say, it’s worth it.
To answer your question about whether it’s too late, that old adage “better late than never” certainly applies. Most small business owners without an LLC or other entity (called “sole proprietors”) can effectively create an LLC around their existing business, often using the same bank accounts and vendors that keep their business running. If you’re thinking about making the change, please give us a call – we’re happy to walk you through how to make the switch as quick and easy as possible.
QUESTION: : I’m an independent contractor for a local arts collective and have huge tax bills every year when I file online. I don’t make that much money, so why do I always owe so much in taxes. Am I doing something wrong?
ANSWER:Thank you for that question. Huge tax bills can be devastating to most folks trying to get by, especially when you’re expected to pay them all at once. To understand why you’ve been owing so much every year, it’s important to understand what taxes you’re really paying and how they get paid for employees. Most people think of their taxes as just a standard “income tax”, but that’s not really the case – when you earn money, whether as an employee or as an independent contractor, you’re expected to pay federal income tax as well as Social Security and Medicare taxes (often called “FICA” taxes by employers). On the state side, you’re expected to pay state income tax and, for independent contractors providing services in the State of New Mexico, a Gross Receipts Tax.
For employees, their employers withhold an amount estimated to cover the employee’s income taxes and FICA taxes for the income they’re receiving. The withholdings can actually amount to more or less than an employee’s liability depending on the number of deductions or amount of additional withholding the employee includes in the Form W-4 they fill out when they first start employment. In any event, the employer typically withholds something so that, at the end of the year, the employee files their tax return. Either the employee overpaid through payroll deductions throughout the year and will be entitled to a refund, or they underpaid and will owe the IRS (and state) the difference.
For independent contractors, there is typically no tax withholding coming out of the money they receive. Independent contractors are expected to make quarterly payments to the IRS and the State (called “Estimated Payments”) sufficient to cover their income taxes and self-employment taxes (which are both the employee’s and employer’s portion of Social Security and Medicare taxes). Additionally, in the State of New Mexico, independent contractors are supposed to pay Gross Receipts Tax on their compensation. Generally, those independent contractors add the Gross Receipts Tax as an extra charge to the payors and the payors cover it.
If you, as an independent contractor, start making these payments properly throughout the year, you should owe very little (or maybe even be entitled to a refund) when you file your annual tax return. Obviously, everyone’s financial tax situation is different. You should consult with a good accountant or tax attorney to go over your situation and make sure you’re set up properly.
QUESTION: I run a community-focused nonprofit and want to start pushing for political change. I was told by one of our directors that we can’t do anything political. Is this true, and how can we get around this if it is?
ANSWER:Thanks for reaching out! I understand in today’s political climate that passions run high and people, now more than ever, want to fight for what they believe in. Unfortunately, it is true for nonprofit organizations with 501(c)(3) status that they can’t “participate in, or intervene in (including the publishing or distributing of statements) any political campaign on behalf of (or in opposition to) any candidate for public office.” While this isn’t a complete ban on political activity, a 501(c)(3) nonprofit has to be very careful not to let its support of political positions or legislation become support of or opposition to any particular political candidates. The line becomes very hard to walk, and many well-meaning nonprofits end up in trouble with the IRS over their political activities. Some even lose their 501(c)(3) status and end up closing their doors.
There is, thankfully, a way around this for folks who are willing to set up a separate nonprofit organization for their political activities. Unlike other nonprofit organizations, these would seek tax-exempt status under Section 501(c)(4) instead of 501(c)(3). 501(c)(4) organizations are considered “social welfare organizations” by the IRS and can, as part of their tax-exempt activities, promote or advocate for policies, including legislation. Several prominent political organizations, such as Organizing for Action and Americans for Prosperity, are 501(c)(4) organizations.
That said, there are still some limitations. The primary purpose of a 501(c)(4) organization is to “promote social welfare”. The IRS has held that participating in political campaign activities does not qualify as the promotion of social welfare, so if political campaigning is the primary activity of the organization, it cannot qualify for tax-exempt status under section 501(c)(4). That said, a 501(c)(4) organization can still participate in political campaigning as long as that’s not its primary purpose. If you have a registered 501(c)(3) non-profit organization and want to engage in political activities, I’d highly recommend speaking with a tax attorney who can work with you on achieving your goals in a way that preserves your nonprofit status.
Who is Ian Alden?
Since his admission to the State Bar of NM in 2015, he has represented individuals and small business clients in a wide variety of matters ranging from personal injury and civil rights litigation to business formations and tax disputes. As a law student at the University of New Mexico working in its Business & Tax Clinic, he got his start helping clients create new businesses or resolve old tax debts with the Internal Revenue Service and the State of New Mexico’s Taxation and Revenue Department. He gained a passion for using the law as a way to lift people up and help them realize their potential. Taking that passion forward, his current practice with L4SB focuses on issues that matter to small businesses at every stage of their development, from startup to liquidation – and everything in between. With an LL.M. in Taxation from Boston University, Mr. Alden specializes in tax law and enjoys helping clients to maximize their tax efficiency through proper choice of entity (or entities) and strategically planned transactions. Mr. Alden was selected as a 2019 New Mexico Rising Star Award Recipient, a distinction which recognizes no more than 2.5% of attorneys in each state.
In his free time, Mr. Alden enjoys acting and volunteering in the Albuquerque theatre community.
Here's a short video with Ian talking about some of the benefits of incorporating your business.
In addition to Ian, Slingshot has an awesome team of legal professionals who can provide legal services across the United States including Larry Donahue, Donald Kochersberger, Alicia McConnell, Kameron Kramer, and many more. Our team is ready to answer questions that are important to you.
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