Do I Have to Become a Business? Can I Just "Do Nothing?"

Nope. The end.

Haha just kidding. Here's the longer answer:

I understand. You're running a program out of the goodness of your heart. Perhaps you consider it a ministry. You're not running a business. Well...actually you probably are. Allow me to explain.

If you are providing services in exchange for money, you are operating a business.

Most of the time, this is pretty straightforward. The only gray area might be if you are collecting exact money to pay for an occasional event...more on that later.

Back to you providing services in exchange for money. It's a business...

-->Even if you charge $10/year per family to pay the church rent and you

coordinate a volunteer run co-op (and you are also a volunteer).

-->Even if you only collect money for supplies and then purchase/provide supplies to

program volunteers for a co-op you coordinate as a volunteer.

-->Even if you only collect money for classes and then give 100% of that money to the

class teachers (which is a whole different issue--see this post).

-->Even if you collect money and use 100% for supplies, rent, and insurance and there's

nothing left at the end of the year.

-->Even if your group ends the year with a deficit and you personally cover the loss.

So you're running a business. What does that mean? If you don't make any "profit," do you still have to form legally?? Arg. Yes. Legally, you are obligated to report any/all funds as business income on your personal tax return (unless you want to organize more formally) even if there is no profit. You can also report all expenses, which may prove to be a wash-but that's not the point.

Please note that regardless of the financial aspect, if you do not form a separate legeal entity (corporation, LLC, nonprofit), there will be no distinction between the program and yourself. This means if there was ever a lawsuit or legal action taken against the group or the leadership, you and your personal assets will NOT be protected.

If you truly are a small operation, forming a legitimate business doesn't have to be nearly as complex as a larger operation. You may even be considered a "tiny group." Visit Carol Topp's website for lots of information and resources on this topic.

If you're NOT a "tiny group" (you have over $5,000 in annual revenue--before expenses) and you're avoiding this process for any reason, please don't wait. I recently heard from a homeschool leader who put off this process entirely and paid the price (literally) two years later when she received a 1099 from a payment processor (PayPal). Her personal tax obligation was $16,000 after fees and penalties. She was not operating as a business (she was operating as a "ministry") and had not planned on a bill from the IRS. Yuck!

The only exception I mentioned above would be similar to a group of friends going out to dinner and one person paying for it, then everyone giving that person cash for his/her portion of the check. If this was an occasional thing, it's not considered a business. If you coordinate a field trip and you pay for it personally, but then collect the funds for each family, this may not be enough to consider this a business. However, the more formal it gets, the more likely it is to be viewed that way. If you keep good records, YOU coordinate all of the activities, YOU take in the money on a regular basis... hmmm all that makes it more formal. If you want to avoid this, make efforts to have parents pay for their participation directly whenever possible. Have parents bring their own supplies and books. But be careful about having parents pay teachers directly. That's generally a no-no for other reasons.

Feeling overwhelmed yet? I tell clients regularly that if you want to be compliant with all the various regulations out there, it's either Go BIG or Go Home...literally. Stay home-based and small with no money changing hands, or you may need to go all the way...incorporate, get a website, become a 501c3...all the things.

Not to worry! Don't let the business operations prevent you from bringing your vision to life. I offer affordable consultations and services to help founders navigate the formation process. Carol Topp also has very helpful resources and blog posts as well. With a little perserverance, you can get this done and move forward with the amazing program you are envisioning!

Checkout the following related blog posts:

1. Do I Really Need to Be a Nonprofit?