[sudo-discuss] Legal Status
Eddan Katz
eddan at clear.net
Thu Jul 18 12:23:13 PDT 2013
I think this is really helpful. And I think it's clear that there are
different advantages to different tax structures - as people have been
articulating quite well already.
I've suggested before that we look more seriously into 501(c)(7)
because of the relative advantages regarding tax emption, more like a
public-facing community space, and more consistent with the kind of
governance we've chosen. I don't know how long it takes to get that
process going, but would be happy to look into it.
A significant disadvantage of 501(c)(3) most applicable to our
predicament is that it would require naming a Board of Directors. How
would we go about deciding that? Who would they be?
People have then replied - well then we can put whoever on there and
it doesn't really matter. Well then we're in a much worse spot than
we're currently in. Those people are way more on the hook both in
terms of financial liability and insurance liability, and therefore
credibly in charge.
The situation now, as I understand it, is even less exposed than Bill
mentions below. The bank account is not under anyone's name. it is
under Sudo Room. In order to give us this account, without having a
federal tax ID (& thus choose corporate structure), the bank wanted to
have someone or some people - connected to the account only by way of
having another, separate account in the bank under their own name.
Part of what was convincing to the bank was the fact that we had
detailed in the Articles of Association already the priority of how
funds will be reinvested and a commitment to accounting transparency.
This is separate from anything related on the insurance end, because
that has to do with the entity renting the space, not the bank account
anyhow.
It seems to me that in order to reap the benefits of the different
advantages of the different structures, we go ahead and pursue all of
them. Sudo Room should contain, or be connected to a 501(c)(3) to
receive charitable donations for that kind of work. An LLC enables
those thinking about the SEC provisions, recently announced to go into
effect in ~60 days - to organize themselves in a way that allows them
to offer equity in future profits to the crowdfunding public. All of
the interest in local politics and clear public policy purpose of Sudo
Room-related entities like Oakland Wiki, Hack the Budget, Code for
America, etc. - suggests that a Sudo PAC organized as a 501(c)(4)
would make a lot of sense for some of the projects that are being
hatched at Sudo Room. Seem like some clusters of people would be best
organized as an LLP (Limited Liability Partnership).
That's why it has seemed to me like we should keep this core kernel
agnostic on tax structure, and narrow in its purpose. Early stage
innovation projects and ideas have many different ways in which they
could be optimally funded. If we are to repurpose these structures to
to allow for the kind of exchange of ideas and structural commitment
to the maintenance of diversity, then just doing whatever is fastest
or easiest or what everyone else does can't be enough.
my 2 bitcoins.
On Jul 18, 2013, at 11:29 AM, Rachel McConnell wrote:
> I'm a founding member of both Noisebridge and Ace Monster Toys, and
> have been through the incorporation and 501(c)(3) process with
> both. I just want to clarify that incorporation and federal tax
> exemption are two separate designations. Incorporation, either as
> an LLC or a full corporation, is something you do at the state
> level, so the state can identify, tax, and regulate you. The 501(c)
> (3) is an IRS designation, which gives you the ability to accept tax
> deductible donations. You do have to be incorporated in order to
> apply for 501(c)(3) status. I don't think an LLC is eligible as
> it's a for-profit type of incorporation; I think you have to be a
> California Non-Profit Corporation before the IRS will grant 501(c)
> (3) status, but this should be verified.
>
> Also, once incorporated, the 501(c)(3) can be applied for
> immediately. It did take both Noisebridge and Ace longer than 10
> months to receive approval. At Noisebridge it was because the IRS
> was apparently baffled at the concept of a hackerspace and had a lot
> of follow-on questions. I think Ace just took a while to file, but
> also it took over a year for the IRS to respond. It's an annoying,
> tedious, and time-consuming process but not really that hard.
>
> Cheers,
> Rachel McConnell
>
> On 7/18/13 11:07 AM, mark burdett wrote:
>> I'd say talk to a lawyer about this first, because the typical
>> 501(c)3
>> is a corporation - the usual route is incorporating and then awaiting
>> tax exempt status for the corporation.
>>
>> (On the other hand, an LLC could make sense if sudoroom wants to keep
>> around a non-501(c)3 entity that doesn't have all the restrictions
>> of a
>> tax exempt org... I know some enterprising (literally) artists who
>> have
>> created both LLCs and non-profit orgs so they can get grants and also
>> operate as a business....)
>>
>> See also
>> http://www.nolo.com/legal-encyclopedia/nonprofit-tax-exempt-status-501c3-30124.html
>>
>> This section requires that you attach a copy of your articles of
>> incorporation and your bylaws
>> <http://www.nolo.com/legal-encyclopedia/nonprofit-formation-documents-articles-incorporation-bylaws-minutes-30311.html
>> > to
>> the application form. (Most nonprofits seeking 501(c)(3) status are
>> corporations. If your entity is an LLC
>> <http://www.nolo.com/legal-encyclopedia/limited-liability-company>,
>> unincorporated association
>> <http://www.nolo.com/legal-encyclopedia/five-reasons-incorporate-nonprofit-association-30266.html
>> >,
>> or nonprofit trust, you should seek the help of a lawyer
>> <http://www.nolo.com/lawyers> with experience in nonprofit tax law to
>> complete your Form 1023 application.)
>>
>> --mark B.
>>
>> On Thu, Jul 18, 2013 at 10:50 AM, Marina Kukso
>> <marina.kukso at gmail.com
>> <mailto:marina.kukso at gmail.com>> wrote:
>>
>> thanks bill, very helpful!
>>
>> what are the advantages to filing as an LLC?
>>
>> also, i think that jenny recently had a call with james from the
>> school factory - jenny, could you possibly share some of what you
>> both discussed?
>>
>> - marina
>>
>>
>> On Thu, Jul 18, 2013 at 10:43 AM, William Budington
>> <bill at inputoutput.io <mailto:bill at inputoutput.io>> wrote:
>>
>> Hey all,
>>
>> I talked to Danny O'Brien (Noisebridge's financial
>> functionary)
>> yesterday about the sudoroom legal status. I know this has
>> been an
>> ongoing discussion so I'm going to summarize the options we've
>> already
>> looked into and present the new information Danny has
>> brought to my
>> attention.
>>
>> *Why do we need a legal status?*
>> Over the past few months we've found various challenges to our
>> normal
>> operations since we don't have a legal status. We aren't able
>> to sign
>> up for services like Stripe without having a federal tax
>> id. In
>> addition, since we are formally under one person's name, he is
>> liable if
>> anything happens at sudoroom. Also, we aren't able to sign up
>> for most
>> banks -- only the Community Bank of the Bay will actually give
>> us a bank
>> account with our status as a DBA. And as we've seen,
>> Community
>> Bank of
>> the Bay is not the most web-savvy organization, and so it's
>> hard
>> for us
>> to actually check our balances.
>>
>> *What we've looked at*
>> Our eventual goal has been to get 501(c)3 status for sudoroom.
>> This is
>> a status that would allow us to accept tax-deductible
>> donations
>> and be
>> incorporated formally as a nonprofit. A lot of Hacker
>> Spaces go
>> this
>> route, and it seems like a reasonable long-term goal. One
>> of the
>> problems we've been warned of is that it takes a long time to
>> actually
>> be granted 501(c)3 status - upwards of 2 years, which can as I
>> understand be expedited to 10 months.
>>
>> Because of this delay, we've looked into some other options --
>> namely
>> being umbrella'd under another organization's 501(c)3
>> status. This
>> would involve 10% of our revenue going to said umbrella
>> organization to
>> cover costs of the books. I've been in contact with Danny at
>> Noisebridge and Jenny has been in contact with (Steve?) at the
>> School
>> Factory and discussing if this is a possibility. It is
>> certainly one
>> way to go, but as for Noisebridge they've only umbrella'd
>> Noisetor, and
>> they didn't need a separate account for that.
>>
>> *What I've learned recently*
>> Danny mentioned that his partner is looking into nonprofit
>> status for a
>> new feminist hacker space in SF, and has investigated these
>> options as
>> well as others. In order to have a certain degree of
>> autonomy,
>> it is
>> probably in our interests to actually not go the umbrella
>> route and
>> pursue separate legal status altogether. He also mentioned
>> that
>> there's
>> no reason why we couldn't incorporate as an LLC or other
>> corporate
>> status before pursuing 501c3 status, and that even if it
>> takes a
>> number
>> of years to be granted non-profit status we can transition
>> from
>> an LLC
>> without much of a problem. There's no real disadvantage to
>> having LLC
>> status in the meantime, as I understand it. The main
>> advantage of
>> nonprofit status is tax deduction, but that is usually
>> superseded on
>> most peoples taxes by the standard deduction. The main place
>> where it
>> does make a difference is when employers do matching donations
>> for their
>> employees, then it can make a difference.
>>
>> *The plan*
>> It makes sense to me to pursue the options that would
>> resolve our
>> short-term problems without impeding the path to our long-term
>> goals.
>> It seems to me reasonable as a short-term goal to register
>> as an LLC
>> (Jenny tells me this can be done in an afternoon and with
>> $50 with a
>> drive to Sacramento), and as a longer term goal actually
>> pursuing
>> nonprofit, 501c3 status.
>>
>> *Disclaimer*
>> There may be caveats to this plan and I'm not a lawyer.
>>
>>
>> Bill
>>
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