Start a Non-profit Organization

So you're feeling you should contribute more to the world. Maybe you feel blessed to be financially successful and secure. You see lots of pressing human needs. People are starving. Children are homeless. Animals are battered and abused. You feel there is no better way to serve your fellow human beings than to start a non-profit organization. Before you rush to a lawyer's office to start a new corporation, please read on.

I'll skip the cheap shot about how many people start non-profit organizations without intending to. I am better than that – then again maybe not. Before you ask the fine people at the state corporation commission to interrupt their nap time to process your corporate application, ask yourself this one question. “Have I ever successfully managed any organization in my life?” In other words, have you successfully started and managed a business? Have you ever successfully managed a department with financial responsibility in a large company? Please note the word, successfully.

If no one has ever trusted you with the financial responsibility to manage an organization, why do you think you are qualified to run a non-profit organization? Step one in starting a charity is good intentions. However, step two is having the talent and experience to run one. There are two parts to having talent and experience. Part one is having expertise in your charity's mission. I like dogs. That doesn't qualify me to run a dog rescue organization anymore than watching the Redskins qualifies me to coach football. Part two is having general business experience. Charities are businesses too. Fools don't have higher success rates in charities than they do in for-profit businesses.

Sue opened up a new corporation ten months ago to promote better breeding opportunities for teenage male giraffes. Giraffes need to get laid too. For the last ten months, Sue has been trying to qualify her organization as a charity under I.R.S. rules. The chief benefit of Sue's qualifying as a charity is that she can then solicit tax deductible contributions to support her effort to find slutty female giraffes. Six months ago, Sue sent a cheerful e-mail missive to all of her colleagues and friends announcing that her organization had qualified as a charity. She was a bit premature.

Starting a charity is not an easy process for experienced non-profit executives in the best of circumstances. First, you create a corporation with specific wording, required by the I.R.S., in the articles of incorporation. This is not a do it yourself task. Setting up a corporation varies state by state. I strongly recommend using an attorney with experience in non-profit organizations. I know a couple if you need a referral. Operators are standing by waiting for your call.

Next, you complete an application with the I.R.S. to be classified as a charity. The application is form 1023. Form 1023 is the bureaucratic equivalent of the Bataan death march. It is twenty-six pages of pure administrative torture with short pauses for sheer horror. The CIA makes terrorism suspects fill out this form when water boarding doesn't break them.

The questions to be answered and the schedules to be completed could only be designed by mindless, bureaucrat-zombies. For instance, the form requires that new organizations complete budgets three years into the future. What is wrong with this? What is the point? Is there a particular brand of crystal ball they recommend? The I.R.S. can't reliably produce its own historical financial statements, but they can require new organizations to predict the future. Similarly, the form asks for details of future operations that don't exist yet.

The I.R.S. hopes that this insane paper chase will allow them to spot and eliminate scam charities before any money gets stolen. In reality, scam artists are typically VERY good at paperwork. Remember Bernie Madoff? Bernie was a paperwork genius. Filling out stacks of S.E.C. disclosure forms was how he kept his scheme alive. The easiest way to complete a form, like the 1023 form, is to lie.

What the I.R.S. has really accomplished with the charity application is the creation of a business plan competition for charities. The twist is that I.R.S. employees are the judges. If you have had the misfortune to have extensive interaction with I.R.S. employees, you know they aren't exactly business geniuses. For the most part, they are moderately competent at what they do, but what they do certainly isn't business consulting.

Let's see how Sue stacks up as a potential charity executive. First, does she has experience in her charity's mission? Of course she does. She is the world's foremost expert on all the lines male giraffes use to pick up chick-giraffes at local watering holes. Any dude-giraffe, who is striking out with the ladies, would be happy with her expertise.

Does she have any business experience? Sadly no. She has been an employee all of her career without much supervisory experience. She is an excellent technician, but not a good candidate to run an organization. Nonetheless, she feels her enthusiasm for providing sex toys to giraffes trumps her lack of experience. I disagree.

Four months after Sue sent her cheerful message announcing her organization's acceptance as a charity by the I.R.S., she received a notice from the I.R.S. that she had lost the business plan contest. She hadn't permanently lost. They sent her a list of twelve additional questions before they would reconsider her application. This is not unusual. Winning the I.R.S. business plan competition the first time isn't nearly as likely as it was ten years ago.

One of the items requested was a detailed description of Sue's as yet non-existent facility. Not surprisingly, this confused her. The I.R.S. was really asking for her plans for the future, although that wasn't how the question was worded. This gave Sue license to indulge her fantasies about providing government subsidized giraffe condoms. I do wonder how they put them on. Sue concocted, I should say prepared, answers to the twelve questions.

A month later, the I.R.S. sent another list of nine additional questions. Apparently, they weren't impressed with the giraffe porn that had been enclosed with the earlier questions. Sue was angry and made an ill-advised call to the I.R.S. agent in charge of her application. From my experience dealing with the I.R.S., I know there is a time to indulge your worst qualities and scream at an I.R.S. agent. This wasn't such a time. We needed the agent in a happy frame of mind. Sue threatened to call the agent's supervisor, the President of the United States, and his holiness, the Pope. None of this upsets the average I.R.S. employee. They get threats like this ten times a day. A disgruntled taxpayer flew a plane into an I.R.S. building a few years ago. What really throws them off is being nice. Answering their inane questions also works pretty well – eventually.

Sue wanted to debate the statutory authority of I.R.S. employees to ask questions that went way beyond the questions actually on the 1023 form. We could debate that with James Madison, George Washington, and Thomas Jefferson on our side, but that wouldn't get the tax exemption for her organization. The only way to get the exemption, before the sun burns out and the universe ends, is to appease the I.R.S. employee in charge of the application. This is like paying alimony to your ex – distasteful but necessary.

Here is where Sue's application is today. I am working on repairing the relationship with the I.R.S. agent. I got her to laugh at one of my jokes. That's a good start. We are working on answering the additional questions. Sue will eventually get her charity status unless she actually calls the Pope or does something else stupid. However, I don't have much hope that her organization will succeed. This experience has convinced me that Sue doesn't have the business experience and maturity to lead an organization. Because of her phone tantrum, thousands of horny male giraffes aren't getting the romantic assistance they need.

After Sue's story, if you are still intent on helping your fellow earth inhabitants, please consider joining an existing charity instead of starting one. According to the National Center for Charitable Statistics (www.nccsdataweb.urban.org), in 2010 there were 1,014,816 charities in the United States. Maybe you aren't a fan of horny giraffes, but that still leaves 1,014,815 charities that could use your help. I sit on the Board of Directors of Christian Relief Services (www.christianrelief.org). C.R.S. is involved in relieving hunger and deprivation in the United States and around the world. Please consider joining our efforts.

As always if you are looking for less snarky tax and business advice, please check out the main Stitely & Karstetter web site, www.skcpas.com. Thanks for reading!

Even More Messing With the IRS

Last football season, I wrote a few times griping about the Redskin's quarterback situation. Because I am the fine person I am, I don't believe in criticizing without offering a solution. I am lobbying Dan Snyder to sign Jennifer Aniston as a free agent. Given the sorry state of the Redskins offensive line, Jen will make a better Redskins quarterback than either John Beck or Rex Grossman. She enjoys getting sacked. If you haven't seen Jen's latest movie, “Horrible Bosses”, I highly recommend seeing it. Her bra could win an Oscar for best supporting an actress.

Over the last year, I have become a home wrecker and destroyer of marriages. Men, keep your wives away from me. You might think it is because I am a dead ringer for Brad Pitt. He's richer, smarter, and better looking than I am. Damn, he is also a better actor. But outside of that, we could be twins. Venturing back to reality, I wreck marriages with tax returns.

In the middle of last tax season, a female business owner called me to get copies of her company's tax returns for the prior two years. I had to tell her that the last two years' returns had never been completed. A few years ago, her husband had quit his job to help her run her business. She had relied on him to coordinate the preparation of the tax returns. He had done precisely nothing.

Her business is a multi-level marketing business. These businesses, typically Amway or something similar, never make money. At least statistically they never make money. Her business makes a lot of money. It is unique. I have never seen anyone make money like this in multi-level marketing. Making money in multi-level marketing is about as likely as winning the lottery. Of course, I have some clients who have won lotteries. So it happens – just like people win once in a while in Las Vegas – just not very often. If people won very often, Las Vegas wouldn't exist. I was more surprised that she was making money in this business than I would have been if she told me she had won a $150 million lotto jackpot. The lotto odds are better.

Not only had her husband not arranged for the tax returns to be prepared, he hadn't even done the bookkeeping for the two years. I arranged for her to see a bookkeeper, who got the work done in less than a month. Then we prepared the business tax returns. As a result, she owed a lot of money. I mean a lot of money to the IRS – plus penalties and interest.

As you can imagine, she wondered exactly what her husband had been doing for the past two years if he wasn't doing anything on the administrative end of the business. He had nothing to do with sales. She did that. She was a little more than mildly peeved. Here's a hint for all the men reading this. If you are going to work for your wife's business, you should actually do some work. Sloth isn't sexy.

This whole situation caused enough tension in the marriage that they soon separated and are on the way to a divorce. Normally being the sexist I am, I would side with him. No chance here. As George Thorogood sang, “Get a haircut and get a real job.”

I broke up another marriage a couple weeks ago. Right after tax season, I prepared and presented a draft tax return to a married couple. They had some changes and comments. I revised the return and gave them an updated draft. Weeks went by with no word from them. If we prepare your tax returns, you know that our web-based client center sends automated e-mail reminders when we give you a tax return draft. Every five days, you get a reminder until you approve the draft, and we are able to finalize the returns. After a couple of months, I also begin sending out personal reminders just to get the process moving.

On a Monday, I sent a personal e-mail reminder to this couple. The following Wednesday, the husband called me. I expected the conversation to be about finalizing the draft tax returns. I was surprised that he wasn't calling about the draft. He called to ask some tax planning questions for the current year.

“Frank, I am hoping to avoid owing taxes the way we did for 2010. How can we change our exemptions to not owe money for this year?”

“Dan, the 2010 returns haven't been finalized.”

“Why not?”

“Because you haven't approved the draft I posted a couple months ago.”

“My wife was supposed to handle that. She handles all of the finances.”

Oops – I stepped into a steaming pile of poo with that conversation. He continued, telling me about how he no longer believed they were real partners in the marriage. He told me she was hiding things from him – financial things. I felt like I was in the opening scene of an Investigation Discovery episode. In the next scene, a dead body floats down the Potomac River into Georgetown to be found by a collegiate rowing crew. The only question is, “Whose body?”

Now you see how I have become a home wrecker. Here is some advice for married couples when it comes to family finances. First, leave me out of it. Second, marriage requires complete honesty in financial affairs. Third, leave me out of it. I ain't no Dr. Phil.

Ignore an Unhappy Customer

This week, I am lucky to have Rhonda Miller as a guest blogger.  Rhonda A. Miller is an attorney with over 15 years of experience specializing in Estate Planning, Asset Protection Planning and Business Planning.  Ms. Miller is the co-founder and Principal at Matsen & Miller, PLLC, and is licensed to practice law in Virginia, California and the District of Columbia.  You may contact her at rhonda@rhonda4law.com.  Rhonda and I have many shared clients.  Take it away Rhonda.....

You own a business.  What should you do if someone threatens to sue you?

If you are a business owner, chances are someday you are going to make someone unhappy.  It is just the law of averages.  It is what you do when that happens and how well you have protected yourself that will affect how much it hurts. 

A few months ago, I got a frantic phone call from my client.  Let’s call her Sue. Sue is a decorator, and she had just gotten a letter from an attorney representing Mary, one of her customers who was unhappy with the price she was paying to design her vacation home.  After the work was done, Mary decided she was being charged too much.  Sue had collected only half of her fee, but she had completed all of the work. 

Sue’s knee-jerk reaction was to call the lawyer who wrote the letter.  She just wanted to make this go away and she did not want to hire her own attorney.  After all, attorneys are expensive!  When speaking with Mary’s lawyer, Sue blurted out, “Fine, I will just refund all of the money.”  Mary’s lawyer responded, “Well that is a good starting point.”  Realizing she was in over her head, Sue hung up and called me.  Then I called the attorney.  The problem was the negotiation in his mind was starting at a full refund and only going up. I had to find something to counter his positions.  This is a situation that was made far more complicated because of a knee-jerk statement made by my client. 

 What should Sue have done?  She should have stayed calm, listened, said nothing, and then called me!

 If you have an unhappy client, do not promise anything.  If you hear from an attorney, do not communicate with him.  Instead, call your own attorney.   We all have a natural instinct to be sympathetic, but that sympathy can and will be held against you.  Anything you say or write is admissible to prove fault. 

Now, back to Sue and Mary.  In Sue’s case, I contacted the other lawyer and we were able to come to a mutually agreeable arrangement.   But what if that had not worked and Mary went ahead with a law suit?

Let’s take a look at a situation in which one of my other clients found himself.  I bring it up here because it’s a great example of how a business owner can be proactive in ensuring the protection of his or her personal assets in the event of any future lawsuits.  Let’s call this client Jim.  When Jim started his business, I helped him set his company up as a Limited Liability Company (LLC).  Many years later, he was sued by a disgruntled employee.  Not only did the employee sue Jim’s LLC, but she also brought suit against Jim himself, trying to get at his personal assets as well as the assets of his business.

Once the lawsuit started, our main focus was to get the personal claims against Jim dropped.  However, the attorney on the other side was very clever and immediately tried to “Pierce the Corporate Veil”.  What does that mean?  It means that the lawyer was trying to show that Jim and his corporation were one and the same. The first thing the lawyer did was ask to see all of the corporate books.  He wanted to review the Operating Agreement, yearly minutes and the financial records of the company.  He was looking for any indication that the company was not being run separately from the individual and was instead just a front being used to hide Jim’s own assets.

 For example, was Jim paying for personal items out of the business account?  Did Jim’s LLC have the required Operating Agreement and yearly company minutes?  By arguing to the court that the company and the person were one-and-the same, it would not have mattered if we got Jim personally dismissed from the lawsuit.  If the Court allowed the “Corporate Veil” to be pierced, all of Jim’s business assets and personal assets would be at risk for all of the claims in the lawsuit.

 Fortunately for Jim, we had been keeping his company books for years.  We also had worked closely with his accountant so everything was squared away. Although the attorney went fishing, he caught nothing.  Jim’s personal assets were safe.

 The take-away lessons from this post are many.  But most importantly I hope that you can see how critical it is that business owners be proactive and prepared.  And that having a good relationship with your lawyer and your accountant will go a long way towards your security and success.

Thanks Rhonda! Thanks for reading - as always, you can get great tax and accounting information at www.skcpas.com.  Frank

Sports and Business: "Refuse to Lose"

I am sports mad – I always have been. As a young man I played representative rugby at school and in the Army. I sat on bench for the County under-18s. My consolation at not making the starting fifteen is that the position was occupied by one Richard Hill who went on to captain England. I ran cross country for the County at schoolboy level. I played football for the Academy first eleven when I was at Sandhurst and I played Rugby, cricket and football for my regiment, I captained the regimental cross-country team and I was the regimental 800 metres champion. I only list this achievement to illustrate that I have a small insight into the psychology of the sportsman.

I discovered my passion for business in my late twenties at about the time my serious sporting days were beginning to wind down. I don’t think there was any connection between the decline of one and the rise of the other. However I do think there is a remarkable analogy between successful sportsmen and successful businessmen and this is something I want to explore in my blog over the coming weeks and months.

I have enjoyed this year’s Wimbledon as much as any of recent years. I especially enjoy watching Rafael Nadal play. I would love to know what goes on in his head when he is playing. Whatever it is, he has built a mindset that I describe as “Refuse to lose”. How often do we see him chase down shots that other players would give up on and concede the point? Often he still loses the point but sometimes he doesn’t – he rescues a point from a seemingly impossible position and turns a certain lost point to his favour. The key here is that unless he tries he won’t know whether he will win it and he is willing to try anything and everything.

This translates almost perfectly into the world of business and particularly into the world of sales. In my experience there are two types of salesman – there are those who give up on an opportunity as soon as it starts to get difficult. They only seem to want to work on low hanging fruit. And then there are the Rafael Nadal’s – people who keep fighting even when the odds seem stacked against them. Like Nadal they will lose plenty of these seemingly lost causes, but they will also win some and everyone they win is one more customer for the company that you would not have achieved from the low hanging fruit pickers.

As an example I remember a situation in my days at Transmit International, my first business start up. We had been through a formal tender process with the London offices of a leading Swiss investment bank. We were already an incumbent supplier to part of the bank and we knew they were very happy with what we did so felt we were well placed. So we were very surprised and a little confused to receive a letter out of the blue announcing that the bank had selected another company. Now many people would have accepted an official letter as the end of the matter – but we didn’t. We pulled some strings with our existing contacts and after a number of phone calls we managed to get an audience with the Managing Director of the division concerned. We met him and laid out our case that we felt we had been treated very unfairly and surely the low risk option was to use us as a known quantity rather than try someone completely untested. To cut a long story short, the decision was reversed and we were awarded the new contract. It was always a long shot, but on this occassion it worked.

So when things don’t seem to be going your way, remember Rafael Nadal sprinting to the far boundaries of Centre Court chasing down a ball that to most players would be dead. If you apply the same “Refuse to lose” mentality to your sales campaigns the worst that can happen is that you will be no worse off than if you hadn’t tried. But occasionally you will win business that you would otherwise have lost and in doing so you will also make yourself a very valuable asset to your sales team.

There is no place for unethical practice in business

Someone asked me recently in a profiling questionnaire if I thought there was any place for ethics in business. My answer was immediate and almost involuntary. I said that I thought that there was no place in business for unethical practice.

Nowhere is this being more graphically illustrated at the moment than in the case of Rebekah Brooks, the embattled Chief Executive of News International. Brooks was The Editor of the News of the World (NOTW) when a private investigator, allegedly working on its behalf, hacked into the mobile voicemail of Millie Dowler when she was missing and a full scale police search for her was underway. The discovery that voice mail on Millie’s mobile phone was being accessed gave the impression that she was still using her mobile phone. We now know the dreadful truth was that Millie was dead and the activity was a private investigator without scruples or morals working to find a story for the NOTW.

Brooks yesterday told News International staff it was "inconceivable" that she knew of or sanctioned the hacking of Milly's mobile phone. But this is not a defense – it is utterly irrelevant. I don’t think anyone is accusing her of personally organising this action. But as the Editor of the paper she can’t distance herself from it by pleading ignorance. That is as weak a position as it is possibe to take. She was in charge, she was responsible for setting the culture at the NOTW and I am afraid it stretches credibility that she didn’t know that this kind of behaviour was prevalent. If she didn’t know about it she should have done – she was the boss.  It may not have directly been her fault but it most certainly was her responsibility.

So it is time for Rebekah Brooks to show some moral courage and set an example to her staff. She has allowed her organisation to behave in the most despicably unethical way and she has no option but to resign. Her attempts to distance herself from the act beggar belief. She was in charge; there is no distance between her and the tactics of her staff. Every day she clings on to her job is another day when she is making the very clear statement that she condones unethical behaviour. Far better to hold her head high, stand up for stong ethical business practice, admit responsibility (if not fault), be accountable and resign than to be forced from office by a public campaign that shows no signs of relenting.