Reconsidering Non-Profit Status of Career Institute

The Career Institute of America Inc (CIA) is a non-profit corporation that provides online and classroom training to students, generating revenues from fees paid by students. However, the CEO is reconsidering CIA's non-profit status due to the receipt of a one-time grant from the U.S. Department of Labor. The key issues for the business are the most appropriate form of business organization for CIA and how to reflect the status of instructors as independent contractors, rather than employees. Analysis suggests that CIA should consider changing its business structure to a Limited Liability Company (LLC) or Corporation, with LLC being a better option due to its flexibility in matters such as taxes and appointment of managers.

To: Supervisor
From: Employee
Re:Career Institute of America, Inc. (CIA)
Date: December 6, 2016
Summary of Applicable Facts:
The Career Institute of America Inc was formed as a non-profit
corporation under the Delaware non-profit association Act. It provides
online and classroom training to students and the revenues are
generated from the fees paid by the students. The company has also
received a onetime grant from the U.S. Department of Labor available to
non-profit organizations. The CEO therefore is reconsidering CIA’s non-
profit status.
The training courses at CIA are currently conducted by independent
contractors who are not under regular employment in the organization.
Although the agreement between the company and the trainers does
not clearly indicate the status, CIA now needs to communicate to its
instructors that their status is that of independent contractors and not
that of employees.
Issues:
The key issues for the business currently are
 What is the most appropriate form of business organization for
CIA?
 How can the contracts reflect the status of instructors as
independent contractors and not that of an employee of the
company?
Law:
Business Law
The current laws relating to The General Corporation Law is designed to
provide the ease of carrying out of business, change the status of the
existing business and also allow change in the business structure.
Business owners wanting to incorporate their businesses in Delaware
may do so by registering as corporations, Limited Liability Companies,
non-profit associations or as professional service corporations. Other

than the above discussed the options available are sole proprietorship
or partnership. Given the fact that all business owners would want to
protect their personal assets from being used to pay business debts,
Limited liability is a key to protect the interests of all business owners. If
in a circumstance where the business lacks funds to pay off company
debt, or creditors, a lawsuit, the owners cannot be held liable for the
same.
Independent Contractor Law
What differentiates the status of an employee from that of an
independent contractor is the extent to which the employer has control
over the means and methods, process of completing the work. An
independent contractor determines how the work has to be done
whereas an employee is guided by an employer as regards performing
their job. Employers are required to pay payroll taxes, provide
unemployment insurance and workers compensation benefits for the
employees. Independent contractors are governed by their own working
hours, paying their own income tax, employment taxes and providing for
their benefits. (NIFB 2015)
Analysis:
Business Organization
CIA should give up its status of a non-profit. The company earns its
revenues on fee basis and does not meet the criteria of non-profit. CIA
may therefore choose to organize its business as a Limited Liability
Company or a Corporation under the Delaware corporation law (Fox
Horan and Camerini LLP 2006). By doing so, the CEO will benefit from
its Limited Liability protection. The company can register by filing its
Articles of Incorporation and have their owner’s draft bylaws (in case of
a corporation) and Articles of Organization along with an operating
agreement (in case of LLC). This details the duties, responsibilities and
powers of officers, owners, corporate shareholders, LLC members,
managers and the board members. This involves certain amount of
documentation and filings as required under law. Having a status of a
corporation or LLC will ensure that the CEO retains majority control over
the business.
However, considering the ease of business and flexibility in matters
concerning taxes, appointment of managers etc., it is recommended

that an LLC would be a better option for CIA and be called as CIA LLC.,
instead of the current status of inc., as required under Delaware Code
§18-102 (State of Delaware 2016). In case of a corporation, formalities
such as holding annual and other scheduled meeting of board of
directors, shareholders or officers have to be complied with. Similarly
under IRS Tax Code, (IRS 2016) a corporation can be doubly taxed
unless Sub S status is elected, as the corporation is taxed based on the
profits it earns, and the owners, shareholders are taxed based on the
profits they earn. In case of an LLC, there are no obligations placed on
the company to hold regular meetings, or on the shareholders. In case
of an LLC, the owners have flexibility to manage business and taxes.
Profits are taxed only at personal income tax level without selecting Sub
S Status, (Toolkit Staff 2008) which involves restrictions on ownership
and the need to complete annual K-1 filings.
Independent Contractor Contracts
The CIA contract must clearly stipulate the fact that CIA does not control
the means the instructors complete their work for CIA. (Oregon
Government 2015). However, CIA can specify the choice and standard
of material to be used for training, and thereby indicate that the
independent contractor is given free hand to determine how she meets
the job requirements. The contract agreement should also indicate that
the instructors are free to pursue employment with others while working
with CIA, as long as they are fully able to meet their CIA job
requirements (FLSA). The Fraud Act describes independent contractors
as the one who is customarily engaged in an independently established
trade, occupation or business.(Reibstein 2015)It is vital for the company
to specify the following terms before employing trainers as independent
contractors:
 The contractor shall be solely responsible for all taxes, social
security contributions
 The contractor shall have sufficient expertise, training and
experience to accomplish the services
 The contractor shall carry out the work during the hours specified
by him/her independently.
 That the relationship with the company shall be that of
independent contractor and shall not construe the company to be
its partner, agent or principal.

References:
Feig, ER 2009, Employee vs. Independent Contractor: Differences You Need to Know,
viewed 3 November 2016, <https://www.legalzoom.com/articles/employee-vs-
independent-contractor-differences-you-need-to-know>.
Fox Horan and Camerini LLP 2006, Memorandum on Limited liability Companies,
viewed 2 November 2016,
<
http://brazilcham.com/sites/default/files/documents/legacy/41328.39_@_brazilc
ham_memorandumonu.s.llc's_0.pdf>.
IRS 2016, Corporations, viewed 10 November 2016,
<https://www.irs.gov/businesses/small-businesses-self-employed/corporations>.
NIFB 2015, NFIB Guide to independent contractors, viewed 10 November 2016,
<http://www.nfib.com/Portals/0/PDF/AllUsers/legal/guides/independent-
contractors-guide-nfib.pdf>.
Oregon Government 2015, IRS 20 Factor Test – Independent Contractor or
Employee?, viewed 3 November 2016,
<
https://www.oregon.gov/ODA/shared/Documents/Publications/NaturalResources
/20FactorTestforIndependentContractors.pdf>.
Reibstein, RJ 2015, The 2015 White paper on independent contractors, viewed 04
November 2016, <http://delcode.delaware.gov/title19/c035/index.shtml>.
State of Delaware 2016, Chapter 18. Limited Liability Company Act, viewed 03
November 2016, <http://delcode.delaware.gov/title6/c018/sc01/>.
Toolkit Staff 2008, LLC Electing S Corp-Best of both worlds, viewed 10 November
2016, <http://www.bizfilings.com/toolkit/news/tax-info/llc-plus-scorp-equal-best-
of-both.aspx>.