[sudo-discuss] Incorporation

Sat Oct 5 21:33:14 PDT 2013

Having just gone through the same process with Counter Culture Labs (we
filed our articles, finalized our bylaws, and will be voting on our initial
board this coming Wednesday), I have to agree with J.D.: going for a
California non-profit public benefit corporation seems to make most sense
to me for Sudo Room. LLC or C-corp are typically used for for-profits, and
I'm not sure they would even be compatible with 501(c)3 status, if you want
to pursue that.

Both Noisebridge and Ace Monster Toys have a pretty decent bylaws. They
both have voting members who get to elect (or kick out, if necessary) the
directors of the corporation. Ditto for Counter Culture Labs.

Patrik

On Sat, Oct 5, 2013 at 8:06 PM, J.D. Zamfirescu <zamfire at gmail.com> wrote:

> I had just started to write something similar to G's email, having gone
> through the incorporation process a few times for C-corps and non-profits
> in the past couple years -- I'm certainly not a lawyer and this is
> definitely not legal advice.
>
> G's notes match mine on all points but one: My understanding is that in a
> 501c3 non-profit, decision-makers *are* allowed to receive pay from the
> organization, however, they should recuse themselves from discussions of
> their own pay. (That pay also has to be "reasonable".)
>
> Just to add a few more thoughts to the mix:
>
> On B-Corps: A "B Corp" isn't actually a separate legal structure, so we
> would be a B Corp *in addition* to a C-Corp or LLC or non-profit or other
> structure we chose, not *instead of*.
>
> On non-profit status: Being a non-profit bring advantages beyond just
> being exempt from federal income tax:
> + Many foundations and charities only give to non-profits, if we were one,
> we could apply for grants and stuff.
> + Individuals can deduct donations to non-profits from their own income
> taxes
> + California waives the $800 annual minimum franchise tax for non-profits
> + Many companies have donation matching programs, where employees who
> donate $XXXX to a non-profit will see that contribution matched by their
> employer, yielding 2*$XXXX for the non-profit.
> + No one owns the organization in a non-profit. There are no shares, and
> no issues with valuing those shares if the organization owns property and
> that property appreciates in value. There can be members, and the rights of
> the members would be chosen by us, and are described in the bylaws of the
> organization. (Noisebridge's bylaws<https://www.noisebridge.net/images/4/47/Noisebridge-bylaws-as-filed.pdf>,
> for reference.) One-member/one-vote is quite typical.
>
>
> My best guess would be that sudoroom should probably be a non-profit. In
> this structure, there would be a Board of Directors, whose actions could be
> constrained by the by-laws to act as the members direct.
>
> I'm happy to answer any questions folks might have. The wednesday meetings
> have been tough for me to attend over the last few months, but I hope to
> make it to more in the future!
>
> Best,
> J.D.
>
>
>
> On Sat, Oct 5, 2013 at 7:40 PM, GtwoG PublicOhOne <g2g-public01 at att.net>wrote:
>
>>
>> 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?
>> > _______________________________________________
>> > sudo-discuss mailing list
>> > sudo-discuss at lists.sudoroom.org
>> > http://lists.sudoroom.org/listinfo/sudo-discuss
>> >
>>
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