Protecting Your Paranormal Group – Liability, Taxes and More

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Like almost everyone in the field, paranormal investigation is my hobby, my primary passion is in business, specifically marketing and entrepreneurship. From my experience in education in that field I’ve learned a lot of the tips, tricks and pitfalls of protecting your organization from lawsuits or being pursued by feral agencies like your state labor board or the IRS.

This is not a simple or straightforward subject and I recommend anyone that has a current investigation group or is planning a new one research these topics carefully. Also note that I am not an attorney and the content of this article represents my personal understanding of these topics. I highly encourage you to do your own independent research and even talk to a legal counsel that practices business law. Lastly, if you aren’t from the US most of this guide will not apply to you. 

Privacy
Your first concern when operating an organization should be privacy. You are obligated to maintain the privacy of your volunteers and your clients. Failing to do so can open you up to liability. Plus people that contact you and work with you do not expect you to share their personal information unless you notify them in advance. It isn’t just a good practice for legal reasons, it is also the courteous thing to do. 

Personal identifying information can include names, addresses, email addresses, phone numbers, websites, social media profiles and the details of their communications with you. Personal details, secrets, and even beliefs can also be considered private. People may share certain information with you in confidence. Belief in the paranormal can be perceived as a negative and clients or volunteers may want to restrict who finds out about your communications and association.

Keep in mind even partial information could get you in trouble. Also pay close attention to any pictures, text descriptions, videos, audio, or other media you post online. These may contain people, places or clues that can be considered private information.

Now of course most groups will want to share some of this information. Many groups post the names of their members, an email address, and a short bio. And when you are working with clients chances are if you find a piece of interesting evidence you will want to share it with the community. There’s nothing wrong with this as long as you get permission first. I recommend creating some Use of Information statements for volunteers and clients. This document should specify what information you can share and how it will be shared. This can also include what information you will not share unless you have additional permission. 

If you intended to share emails and communications from clients with other members of your organization, and most groups would, add a disclaimer stating these on your websites contact form, or notify the client in advance that their case details will be shared with others.  

Lastly make sure your other members understand that nature of private information and what they can and can’t do with it. As the owner of a paranormal investigation group you could be liable for negligence or a similar charge if one of your volunteers discloses personal information that negatively affects a client or another member. Develop a policy for handling this type of information, train new members on it, and train all members annually. After training have volunteers sign a statement that says they understand the privacy policy and understand it is their responsibility to ensure private information stays private. 

Retain all of these privacy statements, waivers and copies of your privacy policy in a secured location. Better yet scan them and keep digital copies too. I like to keep sensitive items on an external hard-drive. This hard-drive stays in a fire safe except when I update it with new info. This will help protect your docs and keep them from being accessed by a hacker or unauthorized user. 

 

Type of Organization
You have 4 options I recommend for forming your investigation group:

1). Hobby
You can classify your group as a hobby. This is the simplest way to start a new investigation group but it does not exempt you from taxes! If you collect dues, donations or gifts, advertising revenue from your website, or any other type of income, you will need to report this on your tax return and may owe taxes. But save those expense receipts! You can deduct expenses directly related to your hobby against any income like dues and donations to reduce or eliminate your tax liability. But wait there’s more!

In most cases your investigation group should qualify as a hobby, but if you collect a lot of dues, or make income from selling goods or services the IRS will probably consider you a business for tax purposes. To avoid getting a nasty audit and fine check out this IRS page to determine if your group can be classified as a hobby. It will depend on your specific circumstances. 

Also you need to check with your state regulations. Some states require you to file for corporate income tax even if you have income of $100 or possibly less. Check with your state corporation commission for more information. 

Plus check with your county and city to see if you need a permit to operate. I doubt any county or city would require a permit for a hobby group to operate but it is always good to check. 

The two big downsides to this type of structure is it provides you with absolutely no protection against lawsuits (liability). If someone sues you for wrongdoing and they win you and your members will be paying out-of-pocket. The other down-side 

2). Unincorporated Business
If you don’t meet the IRS requirements for a Hobby you may be able to call your organization an unincorporated business. Incorporation requirements are manged at the state level so check with your state’s corporation commission to determine if you need to form a business (Sole Proprietorship, Partnership, LLC, S Corp., C Corp., etc.). 

Federal taxes will be paid by you, the individual. There are some minor differences in the way taxes are handled for an unincorporated business vs. hobby. Talk to an accountant if you have questions. 

Bear in mind that even if your state doesn’t require you to incorporate you may still have to pay corporate income tax. And be sure to check with you county and city to see if you have to purchase a license to operate. 

Just like a Hobby, as an unincorporated business provides no protection against lawsuits and does not allow you to accept tax-deductible donations. You can accept donations but the donator cannot deduct them on their taxes and may even have to pay a gift tax. 

3). LLC (Limited Liability Company)
I highly recommend incorporating as a Limited Liability Company at a minimum. In many states this can be accomplished with less than $500 a year and offers substantial benefits over the first two types of organizations. 

Just like a Hobby or an Unincorporated Business, you will pay taxes for the business through your individual tax return. This makes handling taxes much easier! Understand that this is different from state income tax. You will still have to file for corporate income tax at the state level, but for federal taxes you can handle everything with your individual tax filing. 

The big benefit to using an LLC. is you and other members are shielded from personal liability. If someone sues you or the group for something related to the organization, even if they win at most you will only pay out the company’s assets. In other words they cannot go after any members personal assets like bank accounts, houses, vehicles, etc. The worst case scenario with an LLC. is you lose all of the assets like your cash and equipment. That’s a small price to pay to keep someone away from your home, cars and savings account. But keep in mind there is an exception to this: If you commit fraud you are no longer shielded from liability. Some types of fraud are not straightforward and I discuss this in more detail later on. 

Now running any type of corporate structure (LLC., S Corp., C Corp.) can be a bit complicated when you consider volunteers. If your group is like the thousands of other paranormal groups everyone in your organization is a volunteer. While you can simply call yourself 100% owner or the corporation and bring in volunteers this may put you in some legal trouble. Recently the US Department of Labor has been investigating and fining for-profit companies that use volunteers. There is some debate about the legality of this and there is at least one challenge in court but it is something to be aware of. Legally differentiating between an employee and a volunteer is complex and I recommend you avoid getting wrapped up in this issue all together by giving every volunteer a percentage of ownership in the corporation.

When you form your LLC. give all the owners 100% ownership of the corporation. As you bring in new volunteers file an Amendment for your Articles of Incorporation and give each volunteer an ownership share. Even 1% should do. By giving them an ownership interest you can escape a lot of the issues with having volunteers and a for-profit organization. 

Now this means every volunteer will have voting rights so you will need to hold at least annual meetings to discuss and vote on big changes in the group. Also when you add a new volunteer someone or everyone will have to give up some of their ownership interest. And lastly when someone leaves the group you cannot generally force them to give up their ownership interest. 

The last thing you need to know with a corporation is how profits are treated under an LLC. This can also be a bit confusing. Say for one year you bring in $10,000 in dues and in that same year spend $6,000 on equipment and other deductible business expenses. This will leave you with a net income of $4,000. You may be tempted just to put this back in the bank account for next year, this is called retained earning, but you can’t do this for an LLC! Be careful! The $4,000 will have to be disbursed to every member based on their share of ownership. This is called dividends. For example someone with a 10% ownership interest would receive $400. The member is then responsible for reporting this to the IRS on the annual tax return and must pay any applicable taxes. After these dividends are paid out members can re-invest the money back into the organization, but only if they choose too; you cannot force them to re-invest their dividends. 

The easy answer is to spend as much as you earn to avoid paying dividends. In most cases you’ll be fine using this method but keep in mind some items are subject to depreciation. This is when the IRS forces you to deduct the expense of an asset over several years instead of the year it was purchased. Most corporations use depreciation to records expenses from assets, but IRS exempts most small businesses under section 179. Read more about IRS section 179 here. If you have questions talk to a local CPA (Certified Public Accountant)  

4). Non-Profit Corporation – 501(c)3
Starting a non-profit organization is the most costly and complex of the options but it offers some great benefits too. If you can afford the time and money to get one up and running, this is a great choice!

It will probably cost you at least $1,500 to get your non-profit running and that is if you handle all the documents yourself. It can also take several months to process your application unlike a simple for-profit LLC. which can be established in under a month.

You will need to incorporate as an organization with your state corporation commission then file for tax-exempt status under 501(c)3 with the IRS. States may have different regulations on which type of corporation you can use for a non-profit. Some may allow you to incorporate as an LLC., but other may specify that you must have an S Corporation or C Corporation. The differences in these arrangements are beyond the scope of this article. You should consult with an attorney that specializes in business law to help you understand the differences and requirements of each.

Like an LLC. members and volunteers will be shielded from personal liability as long as no fraud has been committed. Unlike the for-profit LLC. above, when you get your tax-exempt status you can simply have volunteers: You do not need to make volunteers members since you are a non-profit. Plus as a non-profit any donations to your organization are tax-deductible. That’s a huge incentive to get people and other organizations to donate to your business. You can even do fundraising events and chances are that income will not be taxable either. Check with a CPA for details. 

For taxes you will no longer record income on your individual tax return. You will have to file a separate Federal Corporate Tax Return for the organization. Keep in mind most of your income like dues will not be taxable but you still have to file financial statements. This can be a bit complicated and I recommend you pay a CPA to handle this for you. You will also have to file for State Corporate Income Tax too. And don’t forget to check with the County and City to see if you need to purchase any permits or licenses. 

Expenses are treated the same as under an LLC. Most purchases can be deducted completely in the year you start using them but there are certain assets that must be depreciated. View IRS Section 179 for more information. But also remember that this is a non-profit so you can NEVER pay out money to owners or members in the form of dividends or disbursements. If you have net income at the end of your fiscal year it will be treated as retained earnings and must remain in the organization. Note that this is very different than a for-profit LLC.  

Update: I vaguely remembered an exemption but had to do some research to find it. Organizations that receive less than $5,000 in gross receipts annually qualify for non-profit status automatically. In other words if your paranormal group brings in less than $5,000 a year in donations, contributions, gifts, sales etc, you can operate as a non-profit. You will still have to incorporate in your state but your don’t have to seek approval and file with the IRS. There are more exceptions too which can be found here. 

Other Formation Types
There are other types of organizations that I didn’t include. Sole Proprietorship and Partnerships are cheap and easy to make, but they do not offer any protection from liability. Since you organization probably won’t be bringing in significant sums of money these types of businesses are pointless for the paranormal investigation group. 

There are also S Corporations and C Corporations. While these offer great benefits they are also complex and expensive to setup and operate. You may have to use one of these if you plan on starting a non-profit, but if you don’t save yourself some headache and go with an LLC. 

 

Lawsuits and Liability
In the Type of Organization section I discussed how forming an LLC., S Corporation or C Corporation can shield you and your members from liability. Another way to help protect yourself and your members is with liability insurance. There are multiple types of liability insurance designed for specific purposes. Talk with several companies and multiple agents to discover prices and what types of insurance coverage are available to protect your members. Even if you have a corporation like an LLC., liability insurance can save you from having to sell off your organizations assets to settle a lawsuit. Many liability insurance plans are very inexpensive depending on the type of investigations you do, your training and vetting program and how many volunteers you have. 

 

If You Are Threatened With Legal Action
First understand that anyone can sue you for anything. Just because someone has an attorney does not mean they have a solid case! Don’t get me wrong, anyone threatening legal action against you should be taken seriously, but don’t freak out! Take some time to calm down and review any claims against you and your group carefully. Do not send any replies yet! Make sure you are calm and have had time to fully assess the situation before sending any correspondence back. You can make the situation worse by admitting guilt or disclosing information in a reply. 

You could be faced with any number of suits but common ones for this line of work could include defamation (libel and slander), fraud, damage to property, negligence, or copyright infringement (especially if you publish a lot of content online).

Carefully evaluate the claim and the demands. Does the claim have any merit? How much are they asking for? Is the plaintiff (the party suing you) looking for a few hundred dollars or more? After evaluating these questions it is time to consider whether you should seek legal counsel. This will depend on how much is at stake and how well you know the law in question.

For example in the couple years this blog has been online I have faced a couple copyright infringement claims. I understand Fair Use Law very well and was prepared to take these claims to court alone if necessary. But after responding to the allegations in a professional manner and justifying my use of the content under Fair Use law these claims were dropped. This may be the case for you too. Some people may sue you because they feel you wronged them even though they are on the losing side of the law. There are also attorneys called trolls that attempt to scare people into out-of-court settlements for things like copyright claims when the case has no merit. 

Attorneys are expensive and if the claim is small and you are confident in your knowledge of the law facing your accuser without legal counsel may be a good option. But be careful with this. Remember you can always pay an attorney for 1-2 hours just to hear your case and give you a consultation. Also you may be able to get free legal consultation. Many cities have attorneys that offer free legal help to certain groups and individuals. Do some investigation to see what options are available.

If you decide to face your accuser alone try to stick with written communication. Certified letters are probably best but emails work too. Avoid phone calls and face-to-face meetings. Written communication gives you the chance to carefully think through your reply and provides a permanent record. Save all correspondence including copies of any messages you send. Keep your messages as short as possible. Be professional and keep emotion out of it! It is ok to justify why you believe their claim is invalid but keep it short and sweet. Relate your explanations to applicable law and legal jargon if possible. This will demonstrate that you have done your research and may make them back down. This method has worked well for me in addressing copyright infringement claims. But don’t fake it! If you fake understanding of the law chances are the plaintiff’s attorney will see right through it and be encouraged to pursue the case. 

 

Taxes
We discussed taxes a bit earlier in the article but here are some more details.

Dues
Under most conditions dues paid by members will be taxable unless you have a non-profit 501(c)3. Check with a local CPA or bookkeeper if you have questions on how to handle dues.

Donations and Gifts
In most cases gifts and donation received by your organization are not taxable by the IRS, but this isn’t an absolute. Depending on the source and purpose of the donation you may be liable for taxes. If you plan on accepting donations or gifts I strongly recommend consulting with a local CPA to determine how to handle that income. 

Also keep in mind that gifts donations made by individuals to your group are not tax deductible unless you have a 501(c)3 non-profit. Whats-more, the donator may have to pay additional taxes on the donation or gift they made to you. This is called the gift tax.  Read more from the IRS about the Gift Tax here. 

To learn more about how the IRS treats donation and gifts click here. 

Depreciation
You will be able to deduct most of your expenses in full the year you start using them but there are exceptions. Check IRS Section 179 for more details. If you still have questions talk to a CPA. 

Business Use of Your Home
You can deduct expenses for the use of your home, vehicle or other personal property if it is related to the actions of the organization. Check out the simplified option for home office deduction and consult with a CPA for more information. 

 

Training and Vetting
Don’t underestimate the importance of vetting and training for your members. A great training and vetting program can shield you from negligence claims if a volunteer does something illegal. 

Background Check
Background checks are a very good idea. If your members will be doing investigations on private property, most owners would not be comfortable with convicted criminals or sex offenders being a part of the investigation. Also if a volunteer does something illegal while working with the group you could be held liable if a background check would have highlighted incriminating details. I highly recommend requiring new member to pay an application fee that covers the cost of a criminal background check. Create a clear policy that describes what is and isn’t acceptable for this background check. For example criminal convictions will lead to a rejection of the application. Make this clear up front. 

These checks usually cost less than $30. Intelius is one of the better online background checkers. Many background check providers offer additional options beyond criminal history check to include past addresses, phone numbers, debt history, and more for a higher fee. 

Policy and Training
It is very important for you to develop written rules of conduct and standard operating procedures. Make thes rules written and teach them to new volunteers religiously. Also every volunteer should go through refresher training on all policies at least once per year. Whenever you make policy changes review them with your members and have them verify that they understand the changes. 

Make sure along with the written policies members sign statements at least once per year stating that they understand the policies and understand their responsibilities under the policies. Include a date on these documents and keep them filed somewhere safe. 

Finally you should have a discipline system for policy violations. This can include verbal warnings, written warnings, probation and dismissal for serious or continued violations. You must enforce policy violations! It is not enough to say volunteers shouldn’t do this, there needs to be consequences for violations. If you have these policies but don’t punish violators you can still be liable for negligence since your policies effectively don’t exist. 

 

Fraud
Earlier in the article I highlighted how forming a corporation like an LLC., S Corporation or C Corporation can shield you and your members from liability. The exception is if fraud is committed. If a fraud is committed your personal assets including house, cars, and bank accounts can all be seized to pay for any wrongdoing. This is called piercing the corporate veil.

The old adage “honesty is the best policy” applies well here. If you are honest and transparent this will help you avoid fraud in many instances. For example inflating traffic numbers for your website to attract advertisers is fraudulent behavior. Be honest!

But there are other types of fraud that are less obvious. Keep in mind this is just a brief guide on a few issues. 

Equipment Ownership
Pay close attention to who owns equipment. If equipment was purchased with dues or other money that was given to the organization that equipment is owned by the organization. Make sure the equipment is accessible to members. Don’t sell the equipment for your own profit, take the equipment for you own private use, or unreasonably restrict the use of the equipment.

Also if equipment is used for both business (official) and personal use you cannot count the entire purchase price as a business expense. Talk to a CPA for more details on this. 

Dues
Members will pay dues to your organization with the expectation that the money will go to the purchase of new equipment and ensure their participation in investigations. If you collect dues and then take that money as income, or you don’t arrange investigations for your members, this could be considered fraudulent activity. If something happens and you are no longer able to run the group, try to find a new owner or consider refunding dues for that year to avoid legal issues. Plus it is just the honest thing to do! 

Donations
Make sure when you solicit donations you are clear about how the donations will be used. Also be clear about whether the donator can deduct their donation. Remember, unless you are a IRS registered non-profit, the donator cannot deduct their donations. Offer receipts for all gifts and donations. lastly make sure you report donations made to your group to the IRS. 

Withdrawals
Remember your organizations accounts are not a personal piggy bank. Even if you are 100% owner you cannot withdraw money or use your groups account to pay for personal expenses. This is fraudulent behavior and can get you in trouble. Talk to a CPA if you have questions. 

Co-mingling of Funds
This is an important issue most people don’t know about. It is a very good idea to keep a separate bank account for your group’s funds. If you have an type of official business structure this is often a requirement! Keep the funds for your organization separate from your personal accounts. Don’t transfer money back and forth or use business credit and debit cards for personal purchases. 

 

Starting an Organization Checklist
1). Outline How You Want Your Org. to Operate
2). Research and Discuss Options with CPA and Business Attorney
3). Incorporate as LLC., S Corp., or C Corp if Applicable
4). Apply for an EIN (LLC., C Corp., S Corp.)
5). Open a Separate Bank Account
6). Do you Need to File State Corporate Income Tax?
7). Apply for Tax-Exempt Status – 501(c)3 – for Non-Profit
8). Check With Your County and City for Additional Licensing or Permit Requirements
9). Consider Purchasing Liability Insurance
10). Find a CPA to Discuss Tax and Filing Requirements – Consider Paying Them to Handle Your Taxes and Financial Statements

 

Additional Resources
SBA (Small Business Administration) – Articles and Free Assistance for Small Businesses

IRS (Internal Revenue Service)

EFF (Electronic Frontier Foundation) – Offers Assistance in Copyright Disputes

Free Legal Services 

US Department of Labor

Free Online Legal Advice

 

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