Introduction
In our first post, we posted a checklist of steps for starting a Kendo or Iaido legal entity. In our second post, we explained why step was important. This time, we will talk about what needs to be done in order to maintain good standing.
About the Authors
Mark Kerstein and Shamina Chang are attorneys at The Law Office of Mark A. Kerstein, based in Houston, Texas. They instruct and practice Iaido and Kendo at the Houston Kenshikan, LLC, a 501(c)(3) non-profit organization. They have helped create legal entities for several Kendo and Iaido organizations, as well as have helped those organizations achieve 501(c)(3) status.
State Responsibilities
File Annual Franchise Tax Report and the Annual Public Information Report
To maintain an entity’s “good standing” in the state in which it is organized, there are usually two forms that need to be filed with the state government. Once again, we will use the State of Texas as the example, but each state will have similar reporting requirements. In Texas, entities need to file an Annual Franchise Tax Report and Annual Public Information Report before May 15. The forms and instructions to file for 2022 are found here.
First, each State has an annual tax report filing requirement. In Texas, most entities need to file a “No Tax Due Report” with the State Comptroller’s Office. Entities have to pay franchise taxes if they exceed the threshold of $1,230,000.
The second document that must be filed is the Annual Public Information Report. This is a simple one page report that identifies the organization’s officers and its registered agent.
What Happens if You Don’t File on Time
If these reports are not filed on a timely basis, the State will assess a $50 late fee if the documents are filed in the first calendar year after they are due. However, the penalty increases significantly and can range up to $1500 if filed after the first calendar year. The problem of getting reinstated can be tedious.
The State will also suspend the entity’s right to do business after that first year. This can be very problematic. The entity wouldn’t be able to take or respond to legal action. For example, the Dojo could continue to practice under a lease, but wouldn’t be able to handle issues with the current lease or sign a new one. In addition, the Dojo could use its existing bank account, but wouldn’t be able to open a new one.
Further, abandoning the legal entity and creating a new one will not resolve things. State governments look at this as a type of fraud or tax evasion. Therefore, if you get into a situation where the entity is not in good standing, we highly recommend engaging with legal counsel.
Federal Responsibility
File a Yearly Form 990-N Postcard
In order for an exempt organization to maintain its status, the organization needs to do an annual filing. A Dojo would likely be considered a small tax exempt organization, with annual gross receipts of less than $50,000, and therefore, would need to file a simple 990-N postcard. Larger organizations, those with annual gross receipts of less than $200,000 need to file a 990-EZ.
Failure to file for 3 years in a row will result in an automatic revocation of tax-exempt status. If this happens, you will have to apply for reinstatement.
Check your organization’s status using the Tax Exempt Organization Search.
Conclusion
The process to keep your entity in good standing is not difficult. If you follow our recommendation and engage counsel to form the entity for you, ask for a step-by-step guide to follow for your State. Then try to follow the proper procedures on time or it will be problematic and costly. In our next post, we cover the final important step for Dojo legal formation: joining the All United States Kendo Federation.
Disclaimer
Please understand we are not your lawyers and the contents of this post are not legal advice. This is a very basic guide and meant to inform based on publicly available information. We can, and have, helped people form entities in a number of states and can assist with the process, but to do so we would need to enter into an attorney-client relationship. Nothing about this post creates that relationship.