[sudo-discuss] Incorporation

[Eddan Katz]

I am a lawyer, but this still isn't legal advice.

Following up on the excellent info Sudo folk have been sending around on this thread (thx, Yardena, for starting it), I wanted to hone in on a newly emerging variant - the cooperative corporation. I will be meeting someone from the East Bay Community Law Clinic (EBCLC) who specializes in setting these up. I'll report on what exactly this entails after my meeting - seems intriguing.

Also, I wanted to add to the overall description of what considerations need to be taken into account in making our decision(s). I think there are 3 axes that may help folks compare the options: (1) Cost/Time; (2) Decision-making structure; (3) Tax exemption.

1. Cost/Time
Regarding cost/time - we should consider the fact that any LLC has to pay an annual fee to the Secretary of State. 501(c)(...) are exempt from this. Non-profits take a while to get approved though, as has already been mentioned - though this waiting period can be shortened if there is an active donor looking to donate (like a philathropic org). The fact that Sudo Room is not your average non-profit would, on the other hand, make the application process less striaghtforward.

2. Decision-Making Structure
I think we may be underestimating the significance of this prong. Existing corporate and non-profit structures are not well-equipped to handle non-hierarchical horizontal decision-making, as we have tried to develop it. Notably, regarding B Corps and the like, there is nothing different about their decision-making structure from any other corporation - except for the threshold of social values that motivate business decisions according to the "triple bottom line."  This is what I am most interested in learning about from the EBCLC & the Sustainable Economies Law Center (SELC). I'm doing a semester-length series workshop with Janelle Orsi of SELC on the various aspects of what she calls "sharing economy" law.

3. Tax Exemption
I think it would be useful to think about the non-profit tax exemption status as being relevant not only for its cost, but also for the accounting reporting requirements attached to non/profits (&/vs.) LLCs. It's not just getting donations, it's also about what financial (& political) transactions need to be reported to the Secretary of State. Many of the transactions in Sudo Room's brief history so far have not been recorded nor kept track of in any useful way for reporting.


Finally, as I've tried to suggest when the subject has come up before - I think we'd be best off if we thought of the various groups and projects under different incorporation frameworks. This tax structure diversity could make the way our different initiatives develop more flexibly and appropriately for their more specific objectives.


sent from eddan.com

On 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?
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