[sudo-discuss] Legal Status
Rachel McConnell
rachel at xtreme.com
Thu Jul 18 11:29:16 PDT 2013
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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