how to form a non-profit corporation in Birmingham Alabama

How to Form a Non-Profit Corporation in Alabama

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Starting a nonprofit is an excellent way to translate your vision into reality if you like helping others and serving the community. Some of the common types of nonprofits include educational, religious, animal welfare, human service-oriented, and more.

You should plan on incorporating and applying for 501(c)(3) status when you are considering a nonprofit. This will allow you to accept donations and apply for grants. 501(c)(3) status also makes the nonprofit exempt from federal corporate income tax while limiting the liability of the directors and officers.

Here are the key steps that are necessary for forming a nonprofit corporation in Alabama:

Choose the Name and Directors

You need to file a name reservation request form with the Secretary of State before you can begin filing the certificate of formation. This is something you should do after choosing the initial directors for the corporation. It’s necessary to have at least three directors on the board for creating a nonprofit corporation in Alabama.

The name reservation certification from the office of the Secretary of State has to be included with the certificate of formation for creating a nonprofit. The name reservation request form has detailed instructions for checking whether the name you want is available or not.

Prepare and File the Certificate of Formation

You would need to file a nonprofit certificate of formation with the Alabama Secretary of State along with a filing fee. The certificate of formation should include the following information:

  • Statement if the nonprofit is not going to have any members
  • Name of the organization
  • Type of organization
  • Purpose(s) for which the organization is being formed
  • Period of duration if the organization is only for a specified period
  • Street and mailing address of the initial registered office with the name of the registered agent
  • Name and address of each organizer for the filing entity
  • Provisions that the incorporators elect for the regulation of the internal affairs of the nonprofit organization. This includes provision for asset distribution on the final liquidation or dissolution. The provisions should not be inconsistent with the law.
  • Number of directors on the initial board of directors with their names and addresses

There is a fillable certificate of formation form for nonprofits on the website of the Alabama Secretary of State. You can complete the form following the instructions provided. You should read AL Code § 10A-1-3.05 and 10A-3-3.02 if you want more information on various requirements.

Additional Specific Language for 501(c)(3) Status

The certificate of formation available on the Secretary of State’s website has minimal necessary information for creating a nonprofit entity in Alabama. It doesn’t include the language needed for obtaining 501(c)(3) federal tax-exempt status from the IRS. You need to include additional specific language with the form for receiving tax-exempt status. This includes:

  • A statement of purpose meeting the IRS requirements
  • Statements that the organization will not engage in any prohibited legislative or political activity
  • Provision regarding the dissolution of assets in which the assets will be dedicated to another 501(c)(3) organization

You can read IRS Publication 557, Tax-Exempt Status for Your Organization, for more information on 501(c)(3). You can work with a proven attorney to understand the necessary provisions and specific language required by the IRS in the nonprofit certificate of formation.

Prepare Bylaws

The next step is to prepare bylaws in compliance with Alabama law. This should be completed before you file the certificate of formation. The bylaws would need to contain the corporation’s rules and procedures for holding meetings, taking care of corporate formalities, and electing officers or directors. Bylaws are internal operating manuals and don’t need to be filed with the state.

Hold a Board of Directors Meeting

The first board meeting is called the organizational meeting of the board. It should take actions, such as:

  • Appointing officers
  • Approving the bylaws
  • Setting a tax year and accounting period
  • Approving initial payments and transactions of the organizations, such as opening a bank account

You should ensure to create minutes that record the actions taken by the board accurately once the meeting is completed. You would need to create a corporate records binder for the nonprofit. This will hold all important documents, including the minutes of meetings, bylaws, and certificate of formation.

Apply for EIN or Employer Identification Number

EIN refers to a unique tax identification number required by a business. You need this number before you submit the applications for federal and state tax exemption. This is a free application that can be submitted online at the IRS website.

Get Local Licensing Requirements

You don’t need to get an Alabama business license for operating your nonprofit. Moreover, you would need to check with local towns and counties about business licenses. This depends on the goods and services you would be offering. Check with the local licensing commission for identifying requirements.

Choose a Knowledgeable Alabama Corporate Attorney

Registering your nonprofit is not as straightforward as it may appear beforehand. You will need to ensure that you remain compliant with all government agencies. Our experienced business attorneys at the BHM Law Group can help you achieve your goals most effectively and provide you with the skilled legal advice you will need in the process. To schedule your free consultation, call us at (205) 994-0902 or fill out this online contact form.

Liability For Interference with Contractual Relations

Liability For Interference with Contractual Relations

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In our capitalistic society, the laws have been designed in a way to promote the freedom of entities and individuals to enter into contractual relations as they want. Unfortunately, an increasing number of commercial litigation cases in Alabama have involved claims of tortious interference in business relations. This type of claim is filed by the possessor of a contract against an alleged intermeddler that adversely affected the contractual relations.

What Is Tortious Interference?

Tortious interference occurs when someone interferes with business interests or relationships intentionally. There are two types of tortious interference:

  • Intentional interference with prospective economic advantage
  • Intentional interference with existing contractual relations

Interference with prospective economic advantage involves an intermeddler that damages the other party’s chances of entering into a business relationship. Intentional interference with existing contractual relations involves the intentional sabotage of another person’s existing contract.

Proving Liability in Wrongful Interference

There are specific elements required for proving tortious interference. However, these can vary between jurisdictions, which makes it important that you consider a knowledgeable local business attorney. Generally, the plaintiff is required to meet the following elements for proving wrongful interference with contractual relations:

  • The existence of a valid contractual relationship or contract
  • The tortfeasor was aware of this relationship or contract
  • The tortfeasor intentionally induced one of the contracting individuals to breach the contract
  • The tortfeasor was not in a position to otherwise authorize or induce the breach
  • There was an actual breach of contract
  • Specific economic damage was suffered by the plaintiff because of the tortious interference

Remedies for Tortious Interference with Contracts

Remedies issued in a tortious interference case are usually dependent on the seriousness and the type of harm caused to the plaintiff. Compensatory damage is a more common remedy available in a civil tort case. This involves monetary damages provided to the plaintiff. Compensatory damages are awarded to cover economic harm, such as replacing or repairing the property. It may also include lost money and medical expenses related to the contract breach.

In some cases, an injunction may be ordered by the court. This is to get the defendant to stop doing things that caused harm to the plaintiff. For instance, the defendant may be asked to stop spreading rumors about the plaintiff. The defendant may be asked to clean up an oil spill if they caused it to lower the property value.

In limited circumstances, plaintiffs may be awarded punitive damages. These are provided in very specific circumstances and are intended to punish the defendant for their malicious and harmful actions or gross negligence. Punitive damages are rare since they are awarded only in the most egregious of cases where the compensatory damages are considered insufficient. They are awarded when the defendant is required to pay a price beyond compensating the plaintiff for actual damages.

Alabama Supreme Court Addresses Interference with Business Claims

The important decision in Fitzpatrick v. Huehn made by Alabama Supreme Court addressed issues in relation to the tort of intentional interference with business or contractual relations. The case involved a dispute among family members regarding the sale of a property that had an operational flea market.

Valid argument and affirmative defense were that the defendant was not a ‘stranger’ to the contract. An issue dealt with was whether the defendant or plaintiff had the burden to raise this during the pleadings. Over the last 7 years, the Alabama Supreme Court has elaborated the defense for preventing tortious interference claims against companies or persons that were parties to the contract in such a manner that they may not be considered a stranger to the contract.

The court in the case of Fitzpatrick v. Huehnheld that the defense was not an affirmative defense. Instead, it was part of the burden of proof on part of the plaintiff for presenting the claim.

Proactive Actions to Protect Your Company

The threat of tortious interference should not be ignored by individuals or entities. There are several steps you can take to protect your business and interests if you are negotiating a new contract or are already in a contract with another company.

Few proven ways to do this include:

  • Require all contractors, consultants, and employees to sign non-disclosure agreements
  • Keep your confidential information secure
  • Monitor social media and online platforms for any leaks or unauthorized disclosures
  • Act quickly if you think that tortious interference took place

It is vital that you act quickly and file a legal complaint against the offender if you believe tortious interference took place. Your company can get damaged more if you wait long. The attorney you retain will seek injunctive relief for preventing further interference. Tortious interference cases are complicated, and you should always consider retaining an accomplished business litigation attorney.

Get Legal Advice from a Qualified Business Litigation Attorney

The qualified and diligent legal team at the BHM Law Group can help if you suffered losses in contractual relations because of tortious or wrongful interference. It’s critical that you file your claim in a timely manner or you could limit your recovery. To schedule your complimentary consultation with our business lawyers, call us at (205) 994-0902 or reach us online.

business entity selection

Tax Implications of Business Entity Selections

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You need to carefully consider the legal structure of your business while starting a new business, bringing in additional investors, or expanding the scope or scale of your existing business. The type of business entity you select will have an impact on your current and future taxation as well as your business operations strategy.

You may need to consider the significant tax implications from a state, federal and international perspective. The entity you choose may also play a major role in future liquidity events. Businesses have the option to operate in the form of:

  • C-corporation
  • S-corporation
  • Limited or general partnership
  • Limited liability company (LLC)
  • Sole proprietorship

A critical distinction when it comes to taxation is whether a business entity is a passthrough or non-passthrough.

Sole Proprietorships, Partnerships, LLCs Can be Clubbed as Passthrough Entities

Passthrough entities pass on the income to the shareholders directly. The income is reported through individual shareholder tax returns. This can be better explained through an example. Consider a partnership with 4 equal partners that generates $100,000 of income in a given year.

Each partner receives $25,000 on their tax return which they would have to report in their tax return. Passthrough entities need to take into account deductions, adjustments, and other possible options that can be used for lowering potential tax burdens.

C Corporations & Special Elections are Non-Passthrough Entities

Non-passthrough entities are subject to double taxation. The income generated is taxed at the entity level and then in the hands of the individual shareholder. Taxation at the entity level is known as corporate income tax. This involves a completely different rate structure as compared to personal income tax.

Income is again taxed when given to the shareholders in the form of dividends. However, these need to be qualified dividends. Ordinary dividends are submitted to standard taxation rates that apply to the personal income tax of individuals.

C- and S-corporations are the only non-passthrough entities. However, this doesn’t mean that other entities cannot be taxed as a C-corporation. They would need to make the right election for tax purposes. This means that a partnership can be taxed as a C-corporation if it elects for it.

Factors to Consider During Entity Selection

These are a few factors you should consider when choosing the right entity type for your business:

  • Income tax rates (current and anticipated future)
  • Projected spread between individual and corporate tax rates
  • Potential gains for S-corporation
  • Double tax considerations
  • Projected distributions
  • Future plans for raising capital and outside investors
  • Maximum use of shareholder tax basis and business losses
  • Desired allocation of income to investors
  • Self-employment tax considerations
  • 1202 stock gain exclusion opportunities (C-corporations)
  • State tax consequences
  • Flexibility to convert entity type depending on need
  • International consideration

 

Types of Common Business Taxes

There are taxes that every business needs to pay. Once you have selected the form of business, you would need to pay the following five general types of business taxes:

  1. Income tax

Every business entity except partnerships is required to file an annual income tax return. Partnerships are only required to file an information return. The form used depends on the type of business organized.

  1. Estimated tax

Federal income tax works on a pay-as-you-go principle. You would need to pay the tax as you receive or earn income during the year. In general, businesses are required to pay taxes on the income through regular payments made during the year in the form of estimated tax. This includes self-employment tax.

  1. Self-employment tax

Self-employment tax (SE tax) is a way for individuals working for themselves to contribute to their Medicare and Social Security programs. Typically, entities are required to pay SE tax and file a Form 1040 or 1040-SR (Schedule SE). This is needed only when the net earnings from the entity are $400 or more.

Qualified church-controlled organizations, church, fishing crew members, aliens, state or local government employees, notary public, international organization employees, and foreign governments are subject to special rules and exceptions. This is why you should work with an experienced business formation attorney.

  1. Employment tax

Employers have responsibilities in terms of employment tax. This includes the various forms you need to file, such as payroll taxes. Federal and state income tax withholding, workers’ social security and Medicare taxes, and federal unemployment (FUTA) tax are all part of employment tax.

  1. Excise tax

You may need to file and pay for various excise taxes if you are selling or manufacturing products, using certain equipment, products, or facilities, or operating a specific business.

Expert Counsel is Important Before Making an Entity Selection

There are several benefits to passthrough taxation. Stemming from this, non-passthrough taxation has its own set of advantages as well. You should seek expert counsel to make a firm decision since a C-corporation and LLC have their own sets of benefits.

Discuss Your Concerns with a Corporate Lawyer Today

The business formation attorneys at BHM Law Group have decades of experience in helping businesses find the right entity type in regard to taxation and other considerations. Schedule an appointment with a qualified attorney today. Give us a call at 205-994-0902 or fill out our online form.

 

shareholder dispute attorney in Birmingham, Alabama

Common Causes of Shareholder Disputes

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Shareholders range from the average joe with stocks in a family’s private holding to municipal pension funds with large holdings. No matter whether the number of shares owned is large or small, a shareholder can potentially get entangled in a dispute with other shareholders or company owners. In these cases, it is best to consult with a seasoned commercial litigation attorney in Alabama for professional guidance.

Common Reasons for Shareholder Disputes in Alabama

  1. Shareholder agreement violation

There are several ways that a shareholder agreement can be violated. Selling shares is among the most common violation. For instance, there are specific rules in many shareholder agreements regarding the sale of shares. There may be clauses that dictate the particular circumstances in which a shareholder can sell stocks. There are specific limitations on who is eligible to purchase shares.

Whether you are a company or an individual shareholder, you should consider speaking with a business lawyer immediately if attempts at rectifying and handling the situation have not reaped any solutions.

  1. Change in direction of the company

Business partners generally agree on the same things in regard to where the business should go while creating a shareholder agreement. However, the vision for the future may get distorted or less clear with time as the company grows and its shareholders increase.

Typically, shareholders have a very different vision about how a business should be run. Disagreements can arise which can be particularly troubling for the shareholders that invested when the company was created. There needs to be a clear policy regarding shareholder voting for minimizing conflict.

  1. Minority shareholders may get disgruntled

Not being entirely in control is one of the cons of being a minority shareholder. Such shareholders can feel that all decisions are made without their consent. However, this is a situation that can be easily fixed. A shareholder agreement can balance the power by including a voting clause to avoid such conflict. Each shareholder can have one vote regardless of the number of shares owned. Furthermore, it can be specified that the votes need to be unanimous or pass by a certain percentage.

  1. General disagreements

Disagreements are bound to arise and there is not much that can be done about them. Certain shareholders may get upset over changes in personnel. Others may believe that certain potential investors don’t need to be allowed because of a conflict of interest. Reasons for shareholder disputes are endless. However, a fair and thorough shareholder agreement can significantly reduce the chances of it happening.

Shareholder Rights in Alabama

Shareholders are people with a share or ownership interest in a company or corporation. These are a few rights awarded to shareholders in Alabama:

  • Shareholders of a company have the right to amend, adopt, or repeal emergency and initial bylaws of the company through the voting process
  • Shareholders are entitled to copy and inspect various corporate documents, including basic financial documents and a list of shareholders
  • Shareholders can elect directors (one or more) at the first annual shareholder’s meeting. They can change or elect more at each annual meeting thereafter.
  • Corporations are required to hold shareholder meetings every year at a time fixed and stated in accordance with the company bylaws
  • The company is required to notify the shareholders of the place, date, and time of each annual meeting in writing. This should be communicated at least 10 days before the meeting date.
  • At a shareholder’s meeting, each outstanding share is usually entitled to one vote on every matter that is voted on
  • Shareholders of business corporations in Alabama have the option to vote by proxy
  • Any merger plan needs to be unanimously approved by all shareholders or as per the shareholder agreement
  • Consent of shareholders is required for the sale of substantially all or all property and assets of the corporation
  • Shareholder’s approval is needed before the company can be dissolved
  • A fiduciary duty is owed by the majority of shareholders to the minority shareholders to not put the minority at a disadvantage by using their majority to control the corporation
  • Shareholders are given the right to bring derivative suits for wrongs against the corporation on behalf of the corporation

Possible Options for Resolving Disputes

These are a few possible options to resolve disagreements and disputes between shareholders in Alabama:

  • Direct discussions with an aim at a resolution
  • Direct discussions regarding any sale or purchase of shareholder’s ownership interest
  • Arbitration
  • Mediation
  • Litigation

Business attorneys can provide helpful insight into shareholder dispute causes and rectification. They can help you determine the best way of resolving disagreements.

Talk to Experienced Business Litigation Attorneys in Alabama Today

Business relationships may tend to get strained over time. They may affect the operation of the company. The belief that a shareholder, manager, or director is not acting in the best interests of the company or fulfilling their fiduciary duties may result in the need for court intervention.

If you find yourself in the middle of a shareholder dispute, consult with the skilled and knowledgeable attorneys at the BHM Law Group. Give us a call today at 205-994-0902 or contact us online to set up a free and confidential consultation.

choosing the right business entity

Choosing The Right Entity for Your Alabama Business

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If you are planning to start your own business in Alabama, you might be wondering what kind of ownership structure might be right for your business. Choosing the right entity is extremely important, as it can impact several aspects of your business including how you are taxed, whether you can have partners, and whether or not you can be held personally liable for your business debts and liabilities.

In this article, we take a look at five ownership structures or entities that you can consider for your business.

Sole Proprietorship

A sole proprietorship – as the name implies – is a business entity that is owned and operated by an individual. It is undoubtedly the simplest way to structure your business, as you are not required to file any paperwork or pay any fees in order to set up your business. The only thing you might require is a license and a permit, depending on the nature of your business.

One of the most notable aspects of a sole proprietorship is that the business and the person who owns it are one and the same. What it means is that you are not required to report the income you earn from your business separately. It is considered your personal income and you can file tax returns using your own social security number.

The downside of a sole proprietorship structure is that you can be held personally liable for your business debts and liabilities. Since the business cannot be legally separated from its proprietor, you have no protection against business-related liabilities like liens or court judgments.

Moreover, due to the restrictive nature of the sole proprietorship structure, you might not be able to raise the capital you need to expand your operations – if and when you want to.

General Partnership

It is a business entity that is owned by two or more partners. In order to set up a partnership, you need to create a partnership agreement that specifies the ownership interests of the partners, how profits, losses, and liabilities should be shared, and how the business should be operated.

Each partner can file their own tax returns and pay taxes on the income they earn from the business. As is the case with a sole proprietorship, the downside with a partnership is that you are not protected against business-related debts and liabilities.

Limited Partnership

It is a slightly more complicated form of partnership that allows other people to invest in your business. You – as the general partner – can have complete control over the day-to-day operations of the business and the investors – as limited partners – cannot have any say in it. They are entitled to receive a share of the profits generated by the business.

The biggest downside of a limited partnership is that you as the general partner can be held liable for business debts and liabilities, whereas the limited partners are protected against it.

Limited Liability Company (LLC)

If you want to protect your personal against business-related debts and liabilities, an LLC might be the best choice for you. The most notable aspect of an LLC is that the company itself – not the owner – is responsible for all the debts and liabilities it incurs.

In order to set up an LLC, you need to file paperwork and pay a filing fee. An LLC can have a single owner or multiple owners. If there are multiple owners, each has to pay taxes on the income they earn from the company.

The downside with an LLC is that it can be slightly more complicated to set up and operate compared to a sole proprietorship or general partnership. Also, your business might be subject to additional taxes at the state level.

Corporation

If you want to be able to raise capital for your business with the help of investors when you need to, a corporation may be the right entity for you. If you choose to set up an S-Corp, you can raise capital through local investors. The corporation is required to pay taxes on the profits it earns. Apart from this, shareholders are also required to pay taxes on their share of the profits – resulting in double taxation.

If you choose to set up a C-Corp, you can raise capital through local as well as international investors. The corporation’s profits and losses can be passed on to the shareholders, who are required to pay federal income tax on their share of the profit.

Looking to Start a Business in Alabama? Let Our Business Law Attorneys Help You!

The business law attorneys at BHM Law Group have a deep understanding of state and federal laws governing small businesses and corporations and have decades of experience in providing legal counsel to businesses of varying sizes. We can help you choose the right ownership structure for your business and take care of all the paperwork involved.

We can also help you restructure your business, guide you through mergers and acquisitions, and provide you with the advice you need to expand your business operations.

To find out how we can help you with your business, call us today at 205-994-0902 or contact us online and schedule a free consultation.