Started an international commodity trading business with most of profits to eventually go to humanitarian /charitable organizations. What would be the best business structure to minimize taxes? Initially, the bigger chunk of proceeds will be for our personal use to settle our obligations, and have some for investment. Will a non-profit corporation be the best mode to go? This is a husband-wife team with assistance from children, based in California but covers USA and international trades. Do we have to consider a Delaware corporation? Or Nevada?
You may want to consider looking into a few new business structures that have been created in the past few years, two of which were recently green lighted by the California legislature.
The first is called "Benefit Corporation." A Benefit Corporation can be formed for the purpose of creating a general public benefit (you can also specify a benefit if you want to, but the requirement for formation is simple that the corporation be formed to create a general public benefit). This was created by Assembly Bill 361, which was signed by California Governor Brown in October. It takes effect January 1, 2012. Other states that have passed Benefit Corporation legislation include Virginia, Vermont, Hawaii, Maryland and New Jersey. While a Benefit Corporation remains a 'for profit' structure, it has the effect of expanding the fiduciary duties of Officers and Directors to include taking into account the specific or general benefit that the corporation has identified. This allows for use of the corporations resources to help create that benefit (whereas in a traditional business models the fiduciary duty is to the stakeholders, and the obligations of the officers and directors is largely to maximize profitability for those stakeholders).
The second hybrid entity formation is called a "Flexible Purpose Corporation," created by the Corporate Flexibility Act of 2011 (it also goes into effect January 1, 2012). A Flexible Purpose Corporation is similar to a Benefit Corporation in that you must identify a "special purpose," (special purposes include a charitable or public purpose, which could be carried out by a qualifying nonprofit). Flexible Purpose Corporations allow for integration of the for-profit philosophy of the traditional or standard corporation with a "special purpose" mission that is similar to a charitable purpose.
There is also a new hybrid entity called a "low profit limited liability company" or L3C, but California has not adopted legislation authorizing the formation of such companies yet, so you'd have to form in a state that has such legislation. The L3C was created to help with investing into socially beneficial, for profit ventures, similar to "Program Related Investments," by non-profits. To my knowledge, the L3C structure has not been signed off on by the IRS for treatment as Program Related Investments, so there may be some unanswered questions about the ability of the L3C to carry out its intended purpose.
With all of these "hybrid" entities or structures in their infancy, it is difficult to project what the tax implications or treatment of each will be. The purpose of the legislation creating them, however, is to bridge the gap between the for profit and non profit worlds, to allow for a traditionally "for profit" business model to be used in creating social good. In so doing, there very well may be tax advantages that can be derived by implementing these social purposes. If you are interested in following up on one of these business structures, it may be a good idea to meet with your accountant to discuss whether or not one or more of these structures would meet your goals from a tax perspective.
I don't see the need to use a particular business structure in this case. Generally, a separate entity is used to minimize liability and I don't see how you would incur significant liabilities in your commodity trading business. Trading does not generally result in having significant personal risk with the parties involved. Perhaps, I am off point, but don't think so.
I would ask:
1. What is your goal here?
2. What taxes to you think you can avoid?
3. Why do you think a non-profit corp. will work?
First of all, you must determine whether your trading activity is meant for the benefit of others or your own personal benefit. It doesn't sound like you're going to be running this as a true non-profit. That being said, you may well have to register your entity with the NFA as a commodity pool and your entity as a commodity pool operator, subject to applicable exemptions. This is on the assumption that the "commodities" that you seek to trade are those on markets recognized by the CFTC.
That certainly doesn't mean that you can't contribute money to charity from the company, however.
Structure wise, there are many options, but no matter what you'll be paying taxes in CA.
I see 2 issues that sort of jump out at me that are essential to your question but may not initially appear that way:
(1) will you be trading in your own account (meaning not using any $$ from others)? If so, then the IRS does not regard that as a business unless you reach some threshold which none of know where it is--therefore you may have a state entity and do the trading in that name but it all sort of falls apart when you try and do the accounting.
(2) if you are trading with your money (and others) then there is a stack of regulations (and exemptions) a few feet high (both state and federal), that you must adhere to including licencing, bonding, and so on an on and on.
I would suggest you speak to an attorney thoroughly versed in this area as if you are doing number (2) above the failure to follow all the rules can result in civil AND criminal liability. If you are doing number (1) above, just get a good accountant.
The general inquiry for commercial business seems to be, "Why shouldn't we use an LLC?" As far as forming/incorporating in a state other than where all/most business will be, I rarely see a true benefit for privately owned businesses, and it usually presents several disadvantages... e.g., multiple reporting, exposure to the jurisdiction of a distant state court, added tax and legal complexities, etc. As noted in another reply, an L3C may be a good choice. Although only a dozen or so states officially distinguish L3Cs, other state LLC laws, like NJ's, is so flexible, you can structure it to operate as an "L3C".
Kindly note and remember that my response is merely a general comment on the law related to your question, and NOT legal advice or opinion. Also, your question and my response does NOT create an attorney-client relationship between us. You cannot rely upon what I have written, because I do not have all of the information that I need to advise you or render an opinion. Even simple facts you have not shared can completely change my answer. For me to give you legal advice or opinion, you would need to hire me to be your lawyer, and then we would need to discuss this in detail and go over the documents.
IRS CIRCULAR 230 DISCLOSURE: As required by U.S. Treasury Regulations governing tax practice, you are hereby advised that written advice contained herein (if any) was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.
With best wishes,
Barry F. Gartenberg, Esq.
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