discuss: Thread: LDP can't get non-profit status without incorporating

On Tue, Apr 17, 2007 at 03:24:06PM -0700, David Lawyer wrote:
> On Tue, Apr 17, 2007 at 02:32:42PM -0700, Rick Moen wrote:
> > Quoting David Lawyer ####@####.####
[snip]
> Right now it seems that we likely qualify for tax exemption as either
> charitable and/or educational except that for charitable it says you
> must be incorporated (like you posted).  I haven't found such a
> statement for educational but it might exist.

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 ?".

			David Lawyer

Quoting David Lawyer ####@####.####

> 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??

To the best of my current understanding, the latter simply doesn't work.
(You keep saying it's possible.  If you can find some citations, I'd be
glad to discuss particulars.)

> 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 ?".

I'll do my best to answer your question, but please note:

I'm not an attorney.  This has a couple of consequences.  1.  I might or
might not have an adequate understanding of the relevant law, but you
have no assurance of that.  The conventional way to get that assurance
is to seek legal advice from an attorney who's accredited to the Bar in
your jurisdiction -- which, of course, costs money.  2.  Like all
non-lawyers (and also lawyers who are not accredited in a particular 
jurisdiction), I'm prohibited from giving out "legal advice", a term of
art that basically means advice on matters assigned by statute to
attorneys, concerning an actual specific situation, given to one or more
of the people involved.  (Your hypothetical is thus not something where
I risk giving "legal advice", whereas if someone were suing, it might
be.)

Anyway:

In practice, people often have a choice of venue, when they file
litigation.  Plaintiff must have a defensible reason why he/she claims
the chosen venue is appropriate, or else risk having the case moved
(change of venue motion) or the suit dismissed.  Defensible reasons
might include some showing that the alleged tort (civil wrong)
substantively occurred at a particular location, for example.  So, a New
York State resident might claim in his complaint filed in Albany that
he/she was wronged _in_ New York State, by a defendant in California.

By contrast, a plaintiff who is resident in California filing a suit
against a fellow Californian would normally be constrained to litigation
in a local court.  

It's not a settled question of law where a tort committed via a Web site
occurs, if that's what you're asking.  

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

 

Quoting Stephanie Erin Daugherty ####@####.####

> 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.

This is a common misconception, and in fact I did address it in the "Common 
Misconceptions Debunked" section in the User Group HOWTO's  Legal and
political issue, Organisational legal issues coverage.

   The "liability shield" one can get from incorporating 
   _doesn't protect volunteers from legal liability_. All 
   it does is prevent any plaintiffs from suing individual 
   shareholders (LUG members, in this case) for tort damages 
   merely because they _own the corporation_, if the corporation
   itself is alleged to have wronged the plaintiff. Plaintiff's 
   maximum haul in damages from suing the corporation is 
   limited to the corporate net assets, in that one case. 
   However, volunteers are still fully liable for any personal 
   involvement they're alleged to have had.

If you'll think back about past decades' examples of corporate
malfeasance, you'll find many instances of corporate officers or
directors being named as defendants or co-defendants, because of actions
in which plaintiff claims they participated, and which plaintiff alleged
were tortious (wrongful).  This is also why corporate officers and
directors often carry umbrella insurance policies against tort
liability.

The corporation has a moral obligation to underwrite the officer's legal
expenses if he/she was acting within the scope of his/her job (and, of
course, in some cases a contractual obligation), but that's the limit of
the corporation's "shielding" of such people.  If they can be proved to
have done the deed, then they run the risk of being sued for it, even if
they did it for the Dear Old Firm.

> 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.

Er, that's exactly the same burden of proof required for _any_ tort
litigation, against anyone, anywhere, at any time:  You (as plaintiff)
must show that the defendant, rather than someone else, was proximately
responsible for the act that you claim was a tort.  Joint and several
liability is often sought, with the degree of responsibility of each
party decided by the judge or jury.

In such a case, in case you were thinking otherwise, the corporate
officer cannot get off by saying "I'm not responsible for ramming that
station-wagon full of nuns with the company van, and should be dropped
from this lawsuit, because the company CEO sitting next to me ordered me
to hammer down on the accelerator."  Sorry, doesn't work.


> 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.

1,  As a practical matter, LDP is miles away from having to worry about
having (USA) income taxes assessed against it -- which should be
apparent from the fact that IRS doesn't even want to get reports from
groups bringing in less than $25,000/year in gross revenues.

2.  Many of the individuals and groups who might consider making
monetary (and similar) contributions to LDP don't need it to be
501(c)(3), for those contributions to be tax-deductible, because they
are claimable as some other type of expense, e.g., marketing expenses or
some other business category.


> A corporation also provides one other benefit - continuity of
> operations.

It's a misconception that it even helps.  Groups that don't have their
acts together aren't necessarily rendered any stronger by incorporation,
and in fact it adds an extra layer of burdens on the staff, in the form
of the annual mandatory IRS filings. 

> 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. 

1.  Corporations by definition can act _only_ through their agents. 

2.  Believe me (as I've seen it happen), a corporation whose primary
agents walk away will generally tend to be pretty much screwed, just as
that same group would be without incorporation, and for the same
reasons.

> A corporation also provides clear oversight and control of assets,
> including intellectual property.

Gosh, I really wish that _weren't_ basically a non sequitur.

> 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.

1.  Er, this doesn't prevent the assets from being misused.  It just
means they can for all practical purposes be misused only by the parties
who control the corporation.

2.  Begs the question of whether similar group ownerships of assets are
not possible without incorporation.  For the most part, they are.  The
most desirable form of asset ownership, just like the most desirable
form of organisation, depends, of course, on what you are trying to do.

> I guess to proceed you need to look at a few factors:

How about them deciding _what they're trying to accomplish_ in the first
place?  All of this preceding discussion was dictated by some
misconceptions about VolunteerMatch.com's procedural requirements.  A
more rational discussion would start with articulating what LDP's goals
are.

And I continue to be dismayed at computerists' frequent tendency to leap
towards incredibly baroque organisational forms, based pretty much
entirely on bad guesses about business realities, law, taxation,
insurance, and so on.  (I say that as someone whose former occupation,
before he became a computer network consultant, was being a staff
accountant and auditor at CPA firms.)

Sorry that this message is 2 weeks old, but it's one that got lost.
It happens all the time when I leave the computer terminal before I've
finished an email and then my wife turns off the power, and then
something else come up and I forget that I hadn't finished the letter.
It reappears when I attempt to recover a file using vim from ~/tmp.
So here it is.

On Tue, Apr 17, 2007 at 11:24:26PM -0700, Rick Moen wrote:
> Quoting Stephanie Erin Daugherty ####@####.####
> > 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.
> 
> 1,  As a practical matter, LDP is miles away from having to worry about
> having (USA) income taxes assessed against it -- which should be
> apparent from the fact that IRS doesn't even want to get reports from
> groups bringing in less than $25,000/year in gross revenues.

The $25,000 exemption is for 501(c)3 organizations.  It's only $5,000
if you are not 501(c)3 but would be eligible to become 501(c)3.  At
least this was my take on it and I don't have the citations.  I've
seen others assert $25,000 even if you're not 501(c)3 but I think this
is in error.  An interesting question is what a non-501(c)3
unincorporated organization is supposed to do if they have over $5000
gross income?  I suppose that they need to pay income tax on it but
what form needs to be filed and what is the venue?

> 2.  Many of the individuals and groups who might consider making
> monetary (and similar) contributions to LDP don't need it to be
> 501(c)(3), for those contributions to be tax-deductible, because they
> are claimable as some other type of expense, e.g., marketing expenses or
> some other business category.
> 
> > A corporation also provides one other benefit - continuity of
> > operations.
> 
> It's a misconception that it even helps.  Groups that don't have their
> acts together aren't necessarily rendered any stronger by incorporation,
> and in fact it adds an extra layer of burdens on the staff, in the form
> of the annual mandatory IRS filings. 

Amen.  I was a member of a mismanaged but incorporated church.  When
key people died, got fired, or resigned under threat of being fired
(including ministers) there was serious loss of continuity.  The
organization even forgot that it partly owned certain parcels of real
property and eventually lost them without even knowing they had lost
them (were it not for me when I later tracked them down from info in
the archives).  Even now almost no one knows this happened since this
info was suppressed.  One parcel turned out to be worth millions.

[snip]
			David Lawyer

Quoting David Lawyer ####@####.####

> Sorry that this message is 2 weeks old, but it's one that got lost.

Not a problem.

> The $25,000 exemption is for 501(c)3 organizations.  It's only $5,000
> if you are not 501(c)3 but would be eligible to become 501(c)3.  At
> least this was my take on it and I don't have the citations.

That's not correct.  Here's a FAQ on the subject by the GuideStar
people, who are a useful information resource for non-profits:
http://www.guidestar.org/news/features/990_myths.jsp

> An interesting question is what a non-501(c)3 unincorporated
> organization is supposed to do if they have over $5000 gross income?

File a form 990 return, and pay income tax if any is owed.