Subject:
Re: [discuss] LDP can't get non-profit status without incorporating
From:
Stephanie Erin Daugherty ####@####.####
Date:
18 Apr 2007 01:58:10 -0000
Message-Id: <46257B10.3060808@sosdg.org>
David Lawyer wrote:
[snip]
> Unfortunately it does exist at the start of Ch.3 of Publication 557.
> So that puts an end to my proposal to get non-profit status without
> incorporating. Note that recreational and social clubs don't need to
> incorporate to get non-profit status but charitable and educational
> organizations do.
>
> So I apologize for wasting everone's time with this "wild goose chase".
> There are still a couple of options: 1. Incorporate or 2. Get an EIN
> no. to open an investment account and to perhaps: get members exempted
> from liability??
>
> Perhaps Rick Moen has some ideas about this. If someone were to sue
> LDP and we had only an EIN with a California address, would the venue
> be California? Or would it be N. Carolina where our main website is
> located? This is important since I've been led to believe that the
> California laws limiting lawsuits against members of unincorporated
> nonprofits is more than just trivial. And of couse another question
> is "just who is a member ?".
>
First of all, IANAL, and I'm pretty much an outsider here and one of the
lurkers on the list, but I've been looking into this for another group,
so may be able to share a few insights:
A corporation is a legal entity. The actions of it's officers and
employees on it's behalf are actions of the corporation, and not of the
people acting for the corporation, with a few important exceptions for
gross negligence and criminal conduct. In order to go after an agent of
the corporation as an individual, one must first bear the burden of
showing to the courts why the individual and not the corporation is at
fault - which is difficult to show for actions made in good faith.
There are volunteer protection laws in some states, but they vary, and
they are rarely as strong as the laws protecting officers and employees.
What this means in practical terms is that officers and employees should
be the ones on point, and should be seen as the ones making decisions,
so that anything potentially litigious is done under their direction and
not on a volunteer's own initiative. If I understand right, the only
area where LDP is likely to be sued is in the area of intellectual
property in the event someone contributed something they didn't have the
rights to contribute, or there are allegations of plagiarism from an
incompatibly licensed source, etc, so logically, the procedures for
securing permissions etc would need to be developed and implemented by a
board, officers, or authorized employees. You'd also want some sort of
legal advisor at the board level to tell you where other exposures to
litigation are.
Other than copyright violations, contributors are mostly shielded by the
disclaimers of warranty and fitness for a particular purpose contained
in most documents. Of course, anybody can sue, even if they have no
legal ground to stand on, but at least someone sued for damage caused by
inaccuracies in a document would be easily defended.
As for other benefits, the LDP once incorporated would be free to pursue
501(c)3 status, allowing it to take tax deductible donations and
exempting it from income tax. Here again though, a proper examination of
the laws is a must, as a non profit has to pay special attention to how
it operates, is governed, and is funded. Proper accounting becomes a
must. Further, to fully benefit from non-profit status by seeking grants
and donations, it is helpful, and sometimes almost essential to have
fully audited financial statements, audited by someone entirely
independent of the corporation - doing this from the beginning will make
it easier to find funding in the future.
A corporation also provides one other benefit - continuity of
operations. If god forbid something happen to one or more of the
leaders, the corporation itself is not crippled, and can continue to act
and operate normally without having to wait months for assets to be
released, estates to be settled, etc. A corporation also provides clear
oversight and control of assets, including intellectual property. In the
case of organizations like the Apache Software Foundation and Mozilla
Foundation, this has allowed copyrights to be held by the corporation
itself, without the fear that said copyrights would be misused - this
greatly simplifies the license situation, allowing the corporation to
adopt different licensing terms as needs change - avoiding the
logistical nightmare of obtaining permission from every contributor to
change versions of the license.
I guess to proceed you need to look at a few factors:
1) What are the business risks, particularly for litigation. Who's
currently exposed, and how could they be better protected?
2) Will this help to obtain more volunteers and funding sources?
3) Which state has the most favorable laws (costs, legal protections,
etc) for the needs of the LDP.
4) If the LDP incorporates, how will the corporation be governed, and
how does this affect it's nonprofit status?
5) Do the benefits outweigh the time and effort that will be spent
pursuing and maintaining a corporation and it's governance?
I'd also recommend that you look closely at the provisions used by
various globally-oriented non-profits to avoid the need for physical
presence - for example, provisions for conducting meetings and official
business online and by phone, and for executing contracts by fax, etc.
It's also necessary to look from the beginning at financial and
organizational controls so that the actions of the corporation are above
reproach - financial scandals in particular can destroy faith in a
nonprofit, and essentially are a death sentence to such an organization.
Again, IANAL, so please find a lawyer or other qualified person before
proceeding too far. There's a lot of research to be done, and a lot of
effort required, but ultimately it may be worth doing. Just don't jump
blindly into it.
--Stephanie
