Subject:
Re: [discuss] EIN advantages (was" LDP can't get non-profit status ...)
From:
Rick Moen ####@####.####
Date:
19 Apr 2007 21:22:42 -0000
Message-Id: <20070419212239.GJ18750@linuxmafia.com>
Quoting David Lawyer ####@####.####
> You must mean an investment account.
Actually, no, by "the latter", I was referring to your phrase "get
members exempted from liability".
(Sure, it makes sense that they'd want an EIN to open a bank or
equivalent account for a group, as that functions as the TIN = Taxpayer
Identification Number for the group, for which role US individuals
provide their Social Security numbers.)
> As for exemption from liability, *if* the venue was California, then
> the members are exempt to about the same extent that they would be if
> LDP were a corporation. See California Corporation Code section
> 18605: no liability based solely on status as member, director, or
> agent of nonprofit association.
OK, that clears up our misunderstanding. That statute _doesn't_ exempt
members from legal liability; it just prevents them from assigned
liability for deeds (of others in a non-profit association) in which
they had _no personal involvement_, over which they had not personal
control, and from which they received no contractual benefit.
Note carefully the broad areas cited (in my foregoing summary) that
still leave the member potentially on the hook, and also these catch-all
phrases in sections 18620(a)(3) and 18620(b):
18620.
(a) A member, director, officer, or agent of a nonprofit
association shall be liable for injury, damage, or harm caused by an
act or omission of the association or an act or omission of a
director, officer, or agent of the association, if [...]
(3) The member, director, officer, or agent is otherwise liable
under any other statute.
(b) This section provides a nonexclusive list of existing grounds
for liability, and does not foreclose any common law grounds for
liability.
"Nonprofit association" is defined in section 18020. It means what you
think it means. ;-> (Oh, I see you found that.)
When I said that the only state liability provisions I found were not
worth a damn, I _was_ in fact including the cited California statute.
Why? Because of the large number of exclusions, and because the
liability it purports to ban is not realistic in the first place. I'll
explain:
Imagine you're a member of an unincorporation nonprofit association....
Wait, I've already gone through this exercise once in private mail for
the President and VP of the Silicon Valley Linux User Group, so let me
just quote that mail in its entirety:
From: Rick Moen ####@####.####
To: Paul Reiber ####@####.####
Cc: Mark Weisler ####@####.####
Subject: Re: Can't Make It Saturday
Quoting Paul Reiber ####@####.####
> Hi, Mark! I've been chatting on the phone and via IRC with Rick about
> his understanding of 501c3 et al. His understanding is that SVLUG
> wouldn't even need to file unless we're receiving in excess of
> 25K/year in donations.
>
> We need to verify that to be the case, as Rick has said to me a few
> times that he's not 100% positive.
See in particular the IRS instructions for form 990.
> Also we might want to learn what are the pros/cons of keeping the
> organization at it's current state - unincorporated, no insurance,
> etc. - my guess is that this gives us freedoms which we could very
> well lose if we take certain steps, but I'd like to be sure.
Incorporation gets you something called a liability shield, which is
frequently badly misunderstood by computerists. In _no_ way does it
shield the officers or volunteers from being sued. All it does is
prevent any plaintiffs from suing individual shareholders for tort
damages merely because they own the corporation, when the corporation is
alleged to have wronged the plaintiff. Plaintiff's maximum haul in
damages from suing the corporation is limited to the corporate net
assets.
Plaintiff can _also_ sue as co-defendents any officers or volunteers
whom he can credibly claimed were involved in the wrongful act. If
successful in his lawsuit, he can go after those individuals' assets
without mercy.
It is traditional (and might be required by their employment contracts)
for corporations to reimburse the legal expenses of corporate officers
who get roped into lawsuits against the company as co-defendents -- but
nothing requires this. That obligation also assumes that the
corporation has assets. ;->
Here's a hypothetical.
With incorporation:
We incorporate. SVLUG Corporation accepts donations
and soon has $800 in the bank. However, you go crazy and post to
####@####.#### that Fred User is a child molester (and you're
posting as "SVLUG President"). I'm similarly deranged, and I print up
posters quoting your message, w/a header proclaiming the poster an
official SVLUG publication, and nail it up around town.
Fred sues for libel, naming SVLUG Corp., Paul, me and Mark Weisler.
He claims his reason for including Mark is that he's one of SVLUG's
owners (a shareholder). Fred wins his case, but the judge strikes
Mark from the defendent list on grounds that the corporate liability
shield statute guarantees that Mark can't be held responsible for what
the corporation does without any better justification than his being a
shareholder. (If he'd been _involved_ in the deed, that would have been
different.)
Paul and I get ordered to pay immense damages to Fred. SVLUG
Corporation is morally obliged to reimburse us, but unfortunately the
lawsuit burned up its $800 in about the first ten minutes. The shield
means that Fred can't dig deeper via member assets; all he can get from
the corporation is what the corpooration itself owns.
Without incorporation:
Fred sues for libel Paul, me, and (if he's really pissed off) all of the
names of anyone he's able to identify as an SVLUG member. The judge
looks at the long list of names and says "Er, what did all of these
people have to do with the posting and flyer?" Fred's lawyer tries to
explain why, and everyone else's lawyers give their respective versions
of "My client had nothing to do with it." Everyone but Paul and me
gets dismissed quickly. We (Paul and I) lose, and pay damages to Fred.
Not a lot of difference, really. The people who really benefit from
incorporation are the shareholders, as they don't even have to fight to
get excluded from lawsuits like Fred's: They're immune automatically.
In a non-corporate context, you're not immune _automatically_, but
just file a motion saying "Your Honour, I simply wasn't one of the guys
who did this bad thing", and thus get dismissed from the suit.
To clarify, even non-profit corporations have shareholders: In that
case, they're the membership. Legally, they're shareholders even if
they'll never see any dividends or annual reports.
SVLUG VP Mark Weisler, who (like me) works closely with attorneys in
business, replied to Preident Paul Reiber that "Rick's analysis matches
what I consistently hear from expensive attorneys." FWIW. ;->
> The protection of members from liability would likely be better if
> LDP were incorporated, since if it's not incorporated, the state laws
> like California's 18605 vary from state to state and the venue might
> be a state without such laws.
Just to be clear about this, the only liability shield incorporation
affords is against being found liable for actions of the group with
_no better reason_ for being included than merely being a shareholder
(who, in the case of non-profit corporations are its members).
And if you're hauled into court as a co-defendant on a deed you had
no personal involvement with, your lack of a "liability shield" means
merely that you have to file a motion to dismiss you from the suit
because, hey, you had no personal involvement. (See Fred User example,
above.)
