Are you considering taking advantage of the President’s Executive Order for payroll tax cut? If so, just understand it defers Social Security taxes till the end of the year. Defer means the deferral amount has to be paid back. So that deferred amount, over 4 months, can create a large tax liability.

For employers, first consider that the deferral is permissive, that you are not required to defer. So business owners should consider continuing to withhold payroll taxes from paychecks as they normally do rather than deferring if the payback is of concern to their employees.

For employees, if you are in a situation where payroll tax withholding is deferred, then it is up you to be accountable by managing your spending, and saving the proper amount to payback the deferred payroll tax. Then for you those of you owners of s-corporations,  that if you are a shareholder-employee, you are also an employee. Therefore, subject to employment taxes and rules.

For general information view this article.

And as always, when it comes to taxes, employee law, HR policies, and structuring agreements consult with your professional advisors.

Non-Profit Organization

As it is the giving time, I took some time to give a donation through the Friends of Hawaii Charities, Inc. page. As I was going through the process, this triggered my busy-filled brain that I was going to do a series of one-sheets and posts about nonprofits, tax-exemption status, and the meaning of 501(c)(3) . . . Which as you can see I have not done.

So I figured let’s just do a short post on one aspect:  namely, terminology and use of phrases of “nonprofit,” “non-profit corporation,” and “501(c)(3)”.

Be Specific: The Importance of the Right Word

Sometimes the “officialness” of a word tends to confuse rather than help. However, for attorneys, especially transactional ones, like myself, we often correct clients that conflate a “corporation” with an “LLC.”  They are NOT the same entity.  Further, this translates into a shareholder owns stocks/shares in a corporation whereas a member owns membership/ownership interest in their LLC.  While this can get confusing to the average businessperson, we attorneys use it to understand what type of situation we are facing for the purposes of ownership, rights, obligations, taxes, etc.

So this brings me to the point of this post.  I hear many times people use the word “nonprofit” to mean the same thing as “501(c)(3)” and vice versa.  While a 501(c)(3) is a nonprofit, not all nonprofits are 501(c)(3) organizations.  (If you remember nothing else of this post, just remember that sentence!)

What is a Nonprofit?

Many people think that “nonprofit” means that the organization does not make money. While, in a sense true, that does not paint the whole picture.  Like many lay people’s interpretation of the mechanics of law that is oversimplified.  The designation of being a nonprofit does NOT mean that the organization does not intend to make a profit.  What it means is that the organization has no owners (like shareholders or members of for-profit corporations or LLCs) and that the revenues earned by the organization do not inure to any particular owner.  In fact, there are some large revenue-generating nonprofit organizations out there, and one has had some headlines recently is the National Football League (NFL).

Yes, the NFL is a nonprofit; specifically, under the US Tax Code, it is a 501(c)(6).  I will get to the 501(c) thing in a minute.  I’d like to finish this thought on “nonprofit” before segueing to the 501(c).  Because business entity formation happens at the state-level (here in Hawaii you go through the Department of Commerce and Consumer Affairs, and in other states through the secretary of state), nonprofits first step toward 501(c)(3) status is to become a nonprofit corporation.

At that point, after your Articles of Incorporation are filed, you have a non-profit corporation in your state, BUT you are NOT a 501(c) tax-exempt nonprofit organization.

What are 501(c)s? and Specifically What is a 501(c)(3)?

After you have a non-profit corporation most organizations try to determine whether or not to seek further 501(c) status due to their purpose.  Notice that I mentioned that the NFL is a 501(c)(6), which is a Business League,  but in total there are about 29 different types of 501(c)s of varying use.  The most well-known is what everyone thinks of as a nonprofit, which is an organization organized for charitable (or similar purposes) and has 501(c)(3) status.

If the nonprofit corporation has a charitable purpose, its board of directors will seek 501(c)(3) status form the IRS. This tax-exempt status confers a benefit to people who donate money to the organization.  If you look at the website that I made a donation to this is the language they use:

Your donation is made to Friends of Hawaii Charities and is tax-deductible because Friends of Hawaii Charities is a 501(c)(3) tax-exempt charitable organization.

For charitable organizations, that is the key feature of a 501(c)(3) tax-exempt status, allowing the donors to get a tax deduction.  To receive this special status the nonprofit corporation has to meet certain criteria, and even after it gets its 501(c)(3) status the organization needs to abide by standards set out in the tax code.  For example, 501(c)(3) organizations cannot support political candidates and conduct extensive lobbying whereas the 501(c)(4), civic leagues, aka “Super PACS,” are not barred from these activities (yet).

Last Word: Know the Terms

I hope this clears the confusion when you use the words “nonprofit” and “501(c)(3)”. Nonprofit is just a general catchall and consider the fact that the term can just as easily apply to a casual association as well as a formal organization (i.e. one that has filed Articles of Incorporation to become a nonprofit corporation).  Then, you take your non-profit corporation and apply for 501(c)(3) tax-exempt status.  If that does not help, as always seek an attorney or professional and they may explain it better than me.

P.S. If you are feeling giving, be sure to check out the Friends of Hawaii, Inc. site and give to a Hawaii nonprofit through Friends of Hawaii, Inc., which is a 501(c)(3) charitable organization!

In the last post I talked about leasing and subleasing the location of your business, continuing in the vein of location I will briefly discuss buying a location and or using your home.

Buying the land and/or building for the Business

Considerations – space is very valuable in Hawaii and if you are fortunate enough to have the capital to purchase and own the land or building in which your business will sit that removes a lot of concerns with paying rent or dealing with an uncooperative landlord or property manager.   However, you will also then be responsible for a lot of those things that they had to handle, such as property taxes, utilities arrangements, construction and maintenance fees, and basically, you would be adding a land and property management to your property costs.  Lastly, from the legal perspective Hawaii is unique as it has two state land-recording systems.  Therefore, you will want expert help in drafting and executing any land conveyance documents and make sure they are filing in the correct system.

Right of First Refusal – one option that might be good for you starting out is start out with a lease arrangement, but have a “right of first refusal” clause or option attached to have the owner ask you if you would like to buy the property should they consider selling.  Therefore, you get to see if you like the space, can work with it, and ultimately if the landlord leaves you get asked to become the new owner before they approach new buyers.

Using your Home as a Business

This is everyone’s dream, right?  Work at home?  I’ll be honest I do it too when I am drafting lengthy agreement for clients.  It’s comfortable and does not require a 45-minute drive from the suburbs to Downtown Honolulu and allows you to focus without distraction.  It is sometimes very suitable for your business, especially if it is consulting, internet sales, marketing, or the like to have a home business.  Here are some things to think about:

  • Taxes– so long as we do not get drastic changes to the IRS code, there may be ways for you to deduct some of the expenses you incur in setting up your home office.  The biggest problem is satisfying the IRS that you are not some fly by night or hobby business. Some of the tests are complicated and specific.  Therefore, seek some professional advice on how best to approach.

  • Insurance – your homeowner’s or renter’s insurance may not cover owning and operating a business; that kind of insurance protects you from loss if there is a fire, but more importantly protect you if you are sued for negligently causing harm to a person on your property.  If it does not protect those situations, your guests or clients, may sue you and you will have to defend yourself.  First of all read your policy and then if it does not extend to a home-business situation contact your insurer and see if you can get an extension or a policy to cover.
  • Private Regulations – condo associations are governed by binding documents that affect what you can and cannot do in your building, such as starting and operating a business.  The same goes for many of those neighborhood associations or communities.  They have a restrictive covenant in place and it is all designed to keep the building or neighborhood a quiet peaceful place.  You will want to read the document and see if there are such covenants, and if there are it still may be possible to negotiate an exemption or change in the document to allow you to operate.

Once again, this is not an exhaustive list of factors you will need to consider for a home business, but a starting point to get you thinking.  As always if things seem overwhelming seek help from the experts to help mitigate unforeseen problems and bring up creative solutions. Next time I will be discussing zoning matters and how they can determine where you setup your business.

As always if you like this post or any of my other series please Subscribe to this blawg to receive updates to your e-mail.  In addition, follow me on Twitter @Rkhewesq and Like Me on Facebook under Ryan K. Hew.  If you need to contact me directly, please e-mail me at

See you on the next Draw!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.   No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.   Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.