Non-Profit Organization (NPO)

The Rhythm & Reason Blog has examined various business legal structures common for music therapy private practices: Sole Proprietorship, LLC, Corporation, and will now discuss Non-Profit Organizations (NPOs). These brief introductions are for educational purposes only and do not substitute for rigorous research and expert legal counsel.

NPOs are often associated with service and charity. Whereas the previously discussed business structures ultimately seek to increase profits or dividends, non-profits are dedicated to addressing community needs or advancing a social cause. After covering all costs of running the business, surplus revenues must be used to further advance their mission.

Every business can benefit from a well-crafted mission statement. Perhaps no other legal structure demands a more thoroughly investigated statement of purpose more than an NPO. If you aim to build a non-profit, you must pinpoint a need for your new organization, research whether there are any pre-existing organizations serving similar needs, plan how you will ensure start-up plus sustained operational funding, and whether a non-profit is truly the best legal structure for your situation. A non-profit has the best chances of success when board members are judiciously selected, volunteers are motivated to support, and additional resources and supports are utilized. This team should craft a detailed business plan, including marketing and fundraising strategies. You will need professional guidance, preferably from an attorney or accountant with prior experience helping non-profits, to best navigate all of the required paperwork.

Once your team is ready to move forward, you will need to incorporate at the state level, apply for tax-exempt status first with the IRS, file for tax exempt status next on the state and local level, and then submit all applicable annual reports. The IRS recognizes 29 different types of non-profits, but the most common NPOs are categorized under Section 501(c)(3): those whose purposes are charitable, religious, educational, scientific, literary, testing for public safety, fostering amateur sports competition, or preventing cruelty to children or animals.

There are many decisions an aspiring business owner must make. Research, reflect, and seek counsel when selecting which business structure best fits your unique situation and vision. Whether working as a sole-proprietor, building an LLC, founding a corporation, or inspiring an NPO, remember that legal distinctions are just the beginning. Your business will only grow as big as you’re willing to go. Get out there! Live organized, be smart, work hard, study, meet important people, provide excellent service, keep effective records, develop lasting relationships, expand your network, advocate for music therapy, innovate, research, WORK, and flourish. Realizing your potential takes compassion, a willingness to ask for help, courage, commitment, and your own maturing combination of “intangibles.” Get out there and OWN IT!

Internal Revenue Service. (n.d.) Tax Information for Charities & Other Non-Profits. Retrieved from https://www.irs.gov/Charities-&-Non-Profits.

U.S. Small Business Administration. (n.d.). How to Start a Non-Profit. Retrieved from https://www.sba.gov/blogs/how-start-non-profit.

Wikipedia. (n.d.). 501(c) organization. Retrieved from https://en.wikipedia.org/wiki/501(c)_organization.

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Corporation

This brief introduction is for educational purposes only. For those considering incorporation, please seek legal and financial counsel. You dreams are stronger with a well-crafted team.

Unlike a sole-proprietorship or LLC, a corporation is an independent legal entity. The corporation is separate from, and owned by, its shareholders. The corporation itself is held legally responsible for all business actions and debts. Business stock can be sold to attract financial investors or offered to entice premier employees. If you are just starting out or planning on a very small business, corporations may be too complex and expensive for your needs. This business structure is best for larger, well established practices with more employees.

State laws will vary and you should seek legal help when forming a corporation. You should consult legal and financial professionals before making any large decisions. However, to understand the general process, incorporation requires registration of your business name, filing of required documents, and obtaining licenses or permits as needed.

Before building your brand, think and research business names. Most states will require you to include one of the following terms: Co., Company, Corp., Corporation, Inc., Incorporated, Limited, or Ltd. For more information on selecting a business name or fictitious name (DBA), see R&R’s text from earlier posts in this serial.

Before incorporating, the initial owners will appoint directors. Directors must make policy and financial decisions. Owners often appoint themselves to be the directors, but may select people who are not owners. A corporation will also appoint officers; there should be a president and a secretary, but any other positions may be developed as well.

You must file Articles of Incorporation (sometimes referred to as the Certificate of Incorporation, Certification of Formation, or Charter). Your Articles may be short and simple, which will provide your more flexibility, but they may also be more elaborate to enumerate various powers and functions. You will need to state your business name, principle office and mailing address, the number of shares (and designations of different classes of stock if actually applicable), and the name and address of the Registered Agent. Single-owner corporations can be completed by a single person, but co-owned ones will need to be signed by all owners. Every state will be a little different, and may require additional information. Depending on state fees, filing your Articles may cost several hundred dollars. Some states may require additional fees or documents.

An organization should develop bylaws in order to govern how the corporation and those involved within it will operate. Once directors have been appointed, Articles have been filed, and bylaws have been written, an initial board meeting will be held. Shareholders must meet at least once per year and record minutes. The first meeting should address company finances, adoption of bylaws, issuances of stock, and more. The directors may also decide if their “C” Corporation will instead elect for “S” Corporation status.

With ordinary C Corporations, the business itself is responsible for taxes on business profits and owners responsible for income taxes on what they received in personal salary, bonuses, and/or dividends. An S Corporation is taxed more like a sole-proprietorship, partnership, or LLC; business profits pass through to the personal tax returns of the owners. S Corps have stricter requirements than LLCs, but offer tax benefits as your revenue increases. Whereas members of an LLC must pay self-employment tax on all business income, S Corps must pay reasonable salaries and deduct payroll expenses such as Social Security and Medicare taxes, but can split any additional profits as dividends among the owners at a lower tax rate.

Start researching how to prepare for employees by visiting https://www.sba.gov/content/hire-your-first-employee. In brief, you will need an Employer Identification Number (EIN) from the IRS, worker’s compensation, employee eligibility verification, records of employment taxes withheld, and more.

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Limited Liability Company (LLC)

Your Limited Liability Company (LLC) will be a legal “step-up” from a sole-proprietorship. An LLC  provides protection of personal assets similar to a corporation, yet the one or more “members” or “owners” still possess total operational flexibility and enjoy pass-through tax efficiency.

To form an LLC is pretty easy. Legal professionals can help guide or even complete the process for you, but personal initiative and thorough research can save you money. The U.S. Small Business Administration website, and others such as Nolo.com or How to Start an LLC are great online resources. For the record, this serial will help you get started, but can not substitute for independent research and consultation of a legal professional.

Details will vary widely from state to state, but the LLC formation process is conceptually the same everywhere: Register a name, file some paperwork, pay some money, check for any state-specific requirements, and prepare for annual fees and taxes.

First, make sure your business name is available (Look it up here!). If your name is unique, does not include state-restricted terms such as “bank” or “insurance” (which are organizations usually prohibited from filing as LLCs), but does include the term “LLC” or some variant, then you’re ready to file!

File the formal paperwork, often called the Articles of Organization, and pay any associated filing fee (around $100, but can vary widely by state). You will need to appoint a Registered Agent, which for most music therapy private practices will be you! An RA is the person designated to send and receive papers, such as the annual fees required to keep your LLC active. Your Articles will include basic information about your business, the RA, any additional members if applicable, and the desired effective date of LLC. (Note that this information is made public, so expect some spam mail, and navigate all LLC responsibilities and correspondences with prudence.)

Most states do not require you to develop an LLC Operating Agreement, but California, Delaware, Maine (if more than one member), Missouri, Nebraska, and New York currently do. Regardless of legal necessity, people going into business together should write an operating agreement to discern rights and responsibilities. Further, you are not required to develop a business plan, but a carefully crafted, objective road map to pinpoint short-term action steps and guide the business towards larger, long-term milestones can be a tremendous asset.

What next? Obtain all required licenses or permits, if applicable. Beyond the MT-BC credential (and state licensure or registry if applicable), you may or may not need anything else – do your research here. You may also (but probably not) be required to publish your intent to form an LLC; this is an outdated practice, and other than New York, I’m not sure which states still uphold this step. If needed, newspapers will be happy to take your money to publish your statement of intent to incorporate.

You may want to apply for an Employer Identification Number (EIN) if you’re going to open a dedicated business bank account, host multiple members, or hire employees. An EIN is easy to apply for, free, and assigned quickly. Apply here.

Voila! You’re a business owner! Now that you have filed a little paperwork and spent some of your start-up cash, it’s time to actually serve your community, keep organized records, file taxes on schedule, and grow! To maintain your LLC you will have to file an annual report, which means paying the state another fee every year. I also encourage you to set aside at least 20% of your monthly income to prepare for taxes. Study your state tax obligations here. As your business earns more revenue, you may save money by electing for your LLC to be taxed as an S Corporation. Treated as a corp will mean a little more paperwork, but after paying yourself a reasonable salary, surplus income can be distributed through dividends to reduce the amount subject to self-employment tax. 

The internet and bookstores are full of incredible resources, your familial and social networks may be better guides than you expect, and legal professionals are always available. As you study accounting, learn which expenses are deductible, improve your clinical prowess, boost your business acumen, etc., you will become a stronger clinician, a bolder entrepreneur, and a proud business owner.

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Sole Proprietorship

A sole proprietorship is the easiest and cheapest business entity to own. To begin a music therapy sole proprietorship, just get out there and start providing services. So long as you are an MT-BC meeting any state licensure or permitting requirements, than you’re good to go; if you currently provide therapy sessions, music lessons, or anything else unaffiliated with another business, than you already are a sole proprietor! This is because there is no legal distinction between you as “one natural person” and the business entity. You are the sole (single, as opposed to partnerships) proprietor (“owner” or person with exclusive rights) of your business services. This means you are entitled to all profits, but also burdened with “unlimited responsible” for all debts and liabilities. All business income (or losses) is taxed as your own direct income (or losses), and along with your business expenses, is filed through a Schedule C on your personal tax return (Form 1040). So keep good records and receipts of all money coming in and going out to prepare yourself for income taxes. You would be wise to set money aside (I suggest at least 20%) as soon as you earn it, and be sure to pay the IRS in total by April 15th, or preferably in quarterly estimated filings by the 15th of April, June, September, and January. For more information, see the U.S. Small Business Administration (SBA) and the Internal Revenue Service (IRS) websites. Accountants may provide a free consultation to help you understand these responsibilities, and offer reasonable rates to help you file taxes.

What about a better name? You and the business are a single entity, but you may prefer not to market your personal name. While carefully crafting a business name, check to make sure it isn’t already registered in your state nor trademarked nationally. You may also want to peruse social media and find available URLs before committing to a name. Each state will be a little different, but the brief paperwork and minimal costs of filing a “DBA” (Doing Business As, also known as a fictitious name) are a snap.

For example, Jennifer Sokira was sole-pro for several years: “Before I began CTMTS (Connecticut Music Therapy Services) I was a sole proprietor. I had a regular full-time music therapy job at a school and I didn’t really spend a lot of time thinking about the “after school” clients as a business. I took on some extra clients because I needed extra money. When I was ready to take the next step and leave my full time job, I just opened an LLC to create a separation of filled up my clinical hours via word of mouth. I plugged along for a couple of years with my main focus on music therapy, my clients and being a clinician, but I didn’t spend a great deal of time focusing on my identity as a business owner. This changed as my business grew and my vision for my business expanded, however I’m glad that I focused on my clinical work during those first few years. I needed that time to grow into the role of a business owner. This allowed me to become a good mentor to my employees and to develop a trustworthy reputation as an effective therapist, which is a great asset in growing my company now” (Pizzi & Guy, 2015, p. 23).

Any questions or corrections? Comment below, or e-mail RileyMTBC@gmail.com. This is the second part in a serial about music therapy business legal tax structures. Follow on Twitter @rhythmNreason or check out our website tag “Business Legal Structures.”

BizFilings. (n.d.). When to File a DBA. Retrieved from http://www.bizfilings.com/learn/file-dba.aspx.

IRS. (n.d.). Estimated Taxes. Retrieved from https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estimated-Taxes.

IRS. (n.d.). Form 1040, U.S. Individual Income Tax Return. Retrieved from https://www.irs.gov/uac/About-Form-1040.

IRS. (n.d.). Schedule C (Form 1040), Profit or Loss From Business. Retrieved from https://www.irs.gov/uac/Schedule-C-(Form-1040),-Profit-or-Loss-From-Business.

IRS. (n.d.). Sole Proprietorships. Retrieved from https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Sole-Proprietorships.

Pizzi, M. & Guy, J. (2015). Leading The Way: Music Therapy Businesses of the Future (e-book). Available through the AMTA bookstore at https://netforum.avectra.com/eweb/shopping/shopping.aspx?site=amta2&prd_key=65654da6-2fa6-49ff-8f59-fe5382ba6d69.

SBA. (n.d.). Sole Proprietorship. Retrieved from https://www.sba.gov/content/sole-proprietorship-0.

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Music Therapy Business Structures

When dreaming of and preparing for your own private practice, read everything available and talk to anyone you can about… everything! For this serial, let’s explore which business structure is right for you. Let’s say you want to keep it simple and work under your own name as a sole-proprietor, perhaps filing a “doing business as” (DBA) or fictitious name. If you’re seeking some legal protection and a sense that clients will perceive you as a “legitimate” organization, filing as an Limited Liability Company (LLC) may be a good fit. As your revenue ramps up or if you plan on hiring more employees, perhaps you will file for a C Corporation, or elect to be taxed as an S Corporation. Do you aim to run on donations and/or grants? Consider opening a tax-exempt non-profit organization (NPO).

Stay tuned! The Rhythm & Reason Blog will share basic info on those legal structures most common among Music Therapy businesses using the tag “business legal structures.” Please note that this serial is for educational purposed only, and can not substitute for independent research and consultation of a legal professional.

Internal Revenue Service. (n.d.) Starting a Business. Retrieved from https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Starting-a-Business

U.S. Small Business Administration. (n.d.). Starting & Managing. Retrieved from https://www.sba.gov/category/navigation-structure/starting-managing-business

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