[Noisebridge-discuss] incorporating a nonprofit in california

[r. scott lamorte]

hi folks,

i'm at my nonprofit office this week and got down off the shelf our  
copy of "how to form a nonprofit corporation in california" by nolo  
press. it's interesting stuff, and it corrects a piece of  
misinformation i posted to this list a few days ago. more on that later.

the book suggests that forming a nonprofit is not that hard nor  
expensive; it's some forms and paperwork and about $200 in fees.  
federal tax-exempt status is possible but not automatic and is a  
separate process. all the talk below about the different 501(c)  
classes are secondary to getting california nonprofit status, although  
the book strongly promotes the desirability of attaining tax-exempt  
public charity status.

there are three classes of nonprofit corporation in california: public  
benefit corporation, religious corporation, and mutual benefit  
corporation.

to qualify as a public benefit corporation, the standard is that a  
"reasonable person" must find that the group's purpose is either  
"charitable" or "public." scientific, literary, and educational groups  
fit this definition and also qualify for federal 501(c)(3) tax-exempt  
status. however the benefits of the group need to be targeted towards  
the public (i.e. not just group members) but can be narrowly defined:  
for instance, we exist to serve the "scientifically needy" and anyone  
can use the services of our organization if they meet that criteria.  
"advancement of education or science" and "promotion and development  
of the arts" are two IRS clauses of acceptable 501(c)(3) group  
activities that noisebridge could meet that also fall in the  
california public benefit class.

"civil leagues" and "social welfare groups" also fall in the public  
benefit class but are federal 501(c)(4) groups and are not allowed tax- 
deductible donations. this normally applies to volunteer fire  
departments and some housing associations but might also apply to a  
club or hobby group.

the irs also has a 501(c)(10) class of "domestic fraternal societies"  
operating under the lodge system and which devote their earnings to  
religious, scientific, educational, literary, charitable, and/or  
fraternal purposes, but which do not pay insurance or other benefits  
to members. these groups are allowed tax-deductible donations but i  
think you have to show a secret handshake to qualify.

unless we form as a branch of the church of the flying spaghetti  
monster or jedi knights or something we probably would not fit in the  
religious corporation category (but it would be fun). you don't need  
to be a church to get this designation, but could be a group organized  
to "promote and study the practices of a particular religion."  
pastafarians, for example, are really keen on studying science,  
statistics, global warming, and pirates (would the later category  
include hackers?). california won't question your religious practices,  
but the federal government will if you apply for religious tax  
exemption. the federal test is pretty vague; the group must have  
"truly and sincerely held beliefs" and not engage in a lot of  
commercial activity (like selling bibles, but i guess bake sales are  
ok). "celebrating the divine presence in all natural phenomena" would  
be enough religion to qualify.

to qualify as a mutual benefit corporation you form a group the exists  
to exclusively benefit its members. this is a catch-all and includes  
all california groups that are not public benefit or religious. groups  
in this category generally cannot qualify for 501(c)(3) tax exempt  
status and can't get benefits like nonprofit mailing rates, personal  
property tax exemption, etc. organizational gains and profits cannot  
be distributed to members, but members can benefit from things like  
services and facilities. noisbridge might fall in this category but  
the books makes it sounds like you probably wouldn't want to.

there's also a special kind of california corporation called a  
cooperative corporation that is comprised of "producers or consumers"  
organized for their mutual benefit. basically a "co-op," like a  
grocery store. noisebridge could conceivably be a co-op since it  
exists to help member produce things and some of those could be  
marketable. i'm not sure this is a good fit however as it seems that  
the group's major function is more about education or resource sharing  
than production.

the books lists five benefits of nonprofit corporations status, and  
those are possible tax exemptions, limited liability, perpetual legal  
existence, employee benefits (access to special health care rates,  
etc), and formality (such as bylaws, minutes, articles, etc.). this is  
where i was wrong: the board of directors is NOT financially liable  
for the organization's actions, and limited liability means the staff  
and board are protected from having their personal assets seized. any  
organizational debt stays organizational debt. the only exemption is  
if an officer fails in his/her "duty to care" and harms the group,  
then they can be compelled to personally pay the organization for  
damages. this also got me thinking that if the nonprofit has  
employees, would san francisco require the group to pay health  
insurance? this could be a major reason to become a corporation but  
NOT hire any staff for work (paying contractors to do certain jobs is  
ok, and board members can be paid for their time within some limits).

disclaimer: IANAL but i can retype legalese. i'm posting this for the  
group illumination and discussion and whoever decides to bottom-line  
this process should get their own copy of the book. :-)

i also see that the noisebridge nonprofit could be narrowly defined  
and created for the sole purpose of rent and insurance, and leave the  
group itself alone to organize more informally; i.e. rules on space  
access, membership, projects, etc. are not covered by the nonprofit's  
bylaws. noisebridge would be a club with no legal existence and some  
members would serve on the board of the nonprofit that exists to  
assist the club. or the nonprofit can be more largely defined to  
include formal bylaws for how the organization and space is structured  
and run, and members have certain duties (like fees) and rights (like  
voting for board members and bylaws). i'm sure there are pro and cons  
to each approach.

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