[sudo-discuss] Incorporation

Sat Oct 5 19:40:46 PDT 2013

A few things about incorporation (I am not a lawyer, this is not legal
advice):

S corps: Last I checked these were limited to 35 owners, all of whom had
to be US citizens. 

C corps: The entity most people think of when they say "corporation." 
No limit to the number of owners, and owners may also be persons other
than US citizens.

B corps: A "B-corp" is a corporation that states a set of intrinsic
values & principles as part of its structure, supplementing or
supplanting the default assumption that the primary purpose to be served
is to increase shareholder value.

In each of the above structures, ownership shares are equal to dollars
invested, and the vote inheres in the shares rather than in the persons
(thus you can have unequal voting power based on share ownership). 

There are possible mechanisms for a one-person/ one-vote system, based
on having two or more classes of shares, such as "preferred shares" and
"common shares."  This enables you to have one class of shares that has
voting power, and one class of shares that does not have voting power
but has preference in allocation of dividends when profits are earned. 
Thus for a one-person/ one-vote system, you'd sell only one share of
voting stock to each person, and as many shares of non-voting stock to
each person as matches their financial investment.  Setting up this type
of system requires an attorney to ensure that it meets legal
requirements to protect the owners and investors.

In addition there are three types of co-operative structures, which are
also incorporated entities that confer the same "limited liability"
protections as other types of corporations:

"Consumer coops" also include most worker-owned coops, where individual
persons are the members and owners. 

"Producer coops" serve individuals and companies that produce goods &
services, such as a dairy marketing coop that serves dairy farmers.  In
this case, the members have some common interest in shared productive
resources such as infrastructure. 

"Central organizations" are coops that have other coops as members, such
as a network of coops in a geographic area or common field of business,
or sharing infrastructure in the manner of a producer coop whose members
are coops.

In each of these cooperative structures, you have membership shares,
allocated one share to each member for a fixed price, such that each
member has one share and one vote.  Thus the one-person/ one-vote
principle is built into the structure without need of multiple classes
of shares.

LLCs:

LLCs were originally designed as hybrid structures to accommodate groups
of professionals such as doctors and lawyers engaged in group practice,
but have since become used for other types of business, real estate
ownership, etc.  LLCs were deliberately designed to be flexible in their
legal structure and methods of governance.  In an LLC, the vote is also
separate from the investment share, such that you can create a
one-person/ one-vote system, with less complication than in a C-corp or
S-corp. 

One thing to be careful of, for any type of legal entity, and this will
require legal advice to get it right, is to make sure that your share
price or membership price does not increase in a manner that you can't
control, such as to make it impossible for new persons to buy in. 

This can occur when the primary asset is real estate, as the "assessed
value" of the property increases over time.  This was historically a
problem in some forestry coops in the Pacific Northwest, and some other
cases that are known in the literature.  I'm inclined to believe that
setting up a property as a "land trust" or similar entity, may be a
mechanism to hold the asset value of property more stable against
speculative increases in nearby property prices, and so reduce these
risks, but this needs to be checked with a lawyer. 

Corporations and cooperatives, and possibly LLCs, have Boards of
Directors elected by the shareholders or members, and have three
positions that are required by law (any person may hold one or more of
these positions):

= Board of Directors: Elected directly by vote of the shareholders or
members (typically every two years).  Makes policy decisions and selects
the positions below.  For practical reasons the number of Directors
should be small enough to be able to meet without scheduling
difficulties, for example 5 - 7 people.

= CEO: Chief executive officer.  Signs most legal documents for the
entity, can make other routine decisions per authority delegated by the
Board.

= CFO or Treasurer: Chief financial officer.  Responsible for the
entity's financial documents and statements.

= Secretary:  Responsible for receiving and for filing of routine
documents with various state agencies, and for maintaining
legally-required records of the organization.

= Attorney of Record, or Agent for Service of Process:  This is not a
"CXO" type position, but is typically required to ensure that any
documents relating to legal processes, can go to a specific person at a
specific address. 

All of the above structures, when configured for one-person/ one-vote,
are representative democracies. 

To configure as a direct democracy of the members, Bylaws would be
enacted by the initial incorporators or first Board of Directors, such
that on specified issues, the Board is bound to act only in accord with
the direct votes of the members. 

Thus you could empower the Board to make certain types of decisions on
its own, and other types of decisions only in accord with direct
democratic votes of the members.

When deciding on a structure, it's useful to consider the distinction
between the types of decisions that can be handled by "delegated
authority" such as by the Board, CEO, CFO, and Secretary, and the types
of decisions that you'd prefer to handle by direct vote of the members. 

It's also useful to consider the threshold of direct vote required to
pass a proposal.  The default options in most types of structures are
50%+1 for most types of decisions, and 2/3 majority for changes of the
Bylaws and other structural decisions.  On the other hand, pure
consensus sets a 100% threshold, and varying degrees of near-consensus
can set other thresholds such as 80% for specified purposes.

One thing to keep in mind for Federal 501 tax-exempt organizations
(religious, scientific, educational, or charitable entities) is that the
law prohibits persons in decision-making capacities from receiving
monetary benefits from the entity.  In discussions of
democratically-managed entities, this is usually interpreted to mean
that workers/employees/contractors of an entity, are not allowed to have
voting power, since they receive wages/salaries/etc. from the entity. 
So to the extent that the entity expects to pay any of its members for
services they provide, or pay out any kind of dividendsre or
retained-earnings distributions, this issue will need to be considered,
and it also requires input from an attorney to get it right.

-G.

=====

On 13-10-05-Sat 6:13 PM, Yardena Cohen wrote:
> This was meant to get sent out after Wednesday's meeting. Sorry it took so long.
>
> In short, we are coming close to filing Sudoroom as a California
> corporation. We want to do this as consensually and horizontally as
> possible, but also soon. As in, the next few weeks. Let this e-mail
> thread be your official opportunity to lobby objections, concerns and
> desires. Here is some background for clarity, and some homework.
>
> PROFIT vs NON-PROFIT: this is the distinction that gets talked about
> most often, but actually seems to be the most remote/non-issue
> question right now. 501 (c3, c5, c*) is a chapter of the Federal IRC,
> meaning it ONLY relates to Federal income taxes. You ask the IRS to
> recognize you, and they take a few years to start letting you keep
> your money. But we're NOT AT THIS STAGE YET because legally we DON'T
> even EXIST YET.
>
> INCORPORATION: this is how you exist. It is not a federal process -
> you ask your U.S. State to recognize you. Each state does it a little
> differently. Generally the old traditional type of corporation is a
> C-Corp, and newer types are LLC and B-Corp. This is something we all
> need to learn more about! We need to decide the pros and cons of each
> type. That is our homework assignment #1.
>
> WRITING OUR ARTICLES: when we file papers we will have to submit
> Articles/Bylaws. This will be a legal document describing who we are
> and what the terms and rules of our incorporation are. It is
> OPEN-ENDED meaning very hackable but also intimidating. It's been
> proposed that we use Noisebridge's articles as a starting point and
> edit them to our liking to make them most Sudo-appropriate. It's on
> our wiki now: https://sudoroom.org/wiki/Bylaws_in_progress  Reading,
> understanding, and hacking at this document is homework assignment #2!
>
> MEMBERSHIP: observant readers will note incorporation implies there
> are "owners." We have to figure out once and for all how to decide
> membership. This is it, folks. Time for us all to step up and ask "who
> the fuck are we?"
>
> So, in summary, the next steps are:
>
>    1) Decide on LLC vs C vs B Corp
>    2) Write articles/bylaws to file with
>    3) who the fuck are we?
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