LLC, Financing and Moving Forward
Sean T Evans
incubator process, the PMC has been discussing the possibility of
forming an LLC or otherwise formalizing the legal existence of Habari.
The reasons for this include limiting individual liability and insuring
funding for infrastructure and other expenses related to developing and
marketing Habari.
The issues that are involved with this process are very complex and will
require much research and discussion. When we decide what route to take,
it has been suggested that the members of the PMC should fund the costs
of incorporation, in essence putting their money where their mouths are.
Some of the issues that have been brought up:
* Jurisdiction of Incorporation
* LLC vs S-Corp
* Corporation Membership (All PMC vs Subset (including implications for
minors and non-US Citizens)
* motivations (financial, liability protection)
* for-profit vs non-profit (these have _very_ specific legal definitions
and implications)
* Taxation
I think this is a good time to reiterate the voting policies as well.
Only PMC member votes are binding but community votes are welcomed as an
advisory guide. It's not a technical issue so a -1 is a vote against,
not a veto.
The conversation that led to this discussion can be viewed at:
http://drunkenmonkey.org/irc/habari/2009-05-25#T14-12-01
and was summarized by Owen Winkler as follows:
CJD: We should talk about making Habari into an LLC.
OW: Yes. <code code>
CJD: The PMC should help fund this.
OW: Yes, my credit card is maxed out. <screencast of code>
CJD: Wish there was a foundation that did this.
OW: Bunch of hippies. <code code>
CJD: Let's patent some stuff.
Moeffju: Black t-shirts are cool.
OW: <code code>
CJD: Let's get monies from users into Paypal.
OW: Beggin' for cash might make us look bad.
CJD: 501(c)3's are tax deductable!
OW: I am not interested in going through non-profit gyrations.
CJD: We should sell Habari stock!
OW: We should move plugin/theme info to Pluggable and break everything!
CJD: There are lots o' taxes in an LLC.
OW: "Earnings == -$1200 in hosting." $0 taxes?
CJD: More people should know of this LLC talk. I is emailing -cabal
gsnedders: Habari smokes WP in apachebench.
Blake Johnson
> Some of the issues that have been brought up:
> * Jurisdiction of Incorporation
http://www.myllc.com/which-state-to-form-llc.aspx
> * LLC vs S-Corp
I think the only compelling reason to form an S-Corp is if we want to
file for non-profit status. However, I am told that the non-profit
filings are rather onerous and time-consuming. Otherwise, the S-corp
suffers from additional taxes and filing requirements as compared to
an LLC.
> * Corporation Membership (All PMC vs Subset (including implications for
> minors and non-US Citizens)
report Habari income and expenses on their personal tax returns. This
is a non-trivial addition to tax prep that I would not wish upon
anyone, let alone a large group of people. For this reason, I am in
favor of limiting the LLC membership to a small subset of people
(perhaps the founding four?).
LLCs may file articles of organization which create a larger pool of
managers. I propose making all PMC members managers of the Habari LLC.
Changes to the management board would also be easy to specify in
"meeting minutes" rather than in state filings which declare changes
to the LLC membership.
> * motivations (financial, liability protection)
others do not try to claim copyright of our code).
> * for-profit vs non-profit (these have _very_ specific legal definitions
> and implications)
--Blake
Arthus Erea
never stopped me from giving it. :)
I definitely think it is a good idea to create some sort of legal
organization for Habari, especially since we're probably not going to be
getting anyone elses protection, for the following purposes:
1) Financial management (being able to organize events, etc.)
2) Legal protection (limit committer/PMC responsability)
3) Copyright protection (some prevention against others claiming our code)
However, I think our focus should be on keeping the bureaucracy to a
minimum. Therefor, a LLC is probably the best option. Since non-profit
status would really be the only compelling reason for S-Corp, and that
would require excessive paperwork, an LLC is probably the best option at
thus juncture.
In terms of management, I think I agree with Blake. It would be
excessive to include every PMC member, especially as there are other
options. However, I don't think we should make arbitrary distinctions
based solely on date of joining (all PMC members are supposed to be
equal). Instead, make it as simple as this: any PMC member who wishes to
be legally a member can request and be granted such status. In light of
the difficulties associated with such (especially taxes), that should
keep numbers manageable. Others can be dealt with as Blake suggested.
Thanks for getting the ball rolling on this.
~Morgante Pell
Written on a crappy Ubuntu desktop, while my MacBook Pro is repaired.
Rich Bowen
On May 27, 2009, at 17:22, Blake Johnson wrote:
> Every member of the Habari LLC will have to receive a Schedule K-1 and
> report Habari income and expenses on their personal tax returns. This
> is a non-trivial addition to tax prep that I would not wish upon
> anyone, let alone a large group of people. For this reason, I am in
> favor of limiting the LLC membership to a small subset of people
> (perhaps the founding four?).
Um ... seriously?
My taxes are way too complicated already. Why would I have to receive
any kind of schedule anything, if I don't receive any actual
compensation from the corporation?
What baffles me about all this stuff is that the ASF has 200+ members,
and *none* of them have any such requirements. What's the difference?
Is it because it's a 501?
Isn't there something less complicated?
--
Being in politics is like being a football coach. You have to be smart
enough to understand the game, and dumb enough to think it's
important. (Eugene McCarthy)
rick c
> On May 27, 2009, at 17:22, Blake Johnson wrote:
>
> > Every member of the Habari LLC will have to receive a Schedule K-1 and
> > report Habari income and expenses on their personal tax returns. This
> > is a non-trivial addition to tax prep that I would not wish upon
> > anyone, let alone a large group of people. For this reason, I am in
> > favor of limiting the LLC membership to a small subset of people
> > (perhaps the founding four?).
>
> Um ... seriously?
>
> My taxes are way too complicated already. Why would I have to receive
> any kind of schedule anything, if I don't receive any actual
> compensation from the corporation?
>
http://smallbusiness.findlaw.com/business-structures/llc/llc-basics.html
As I understand (speaking without benefit of a lawyer), an LLC is like
a sole proprietership in that profits/losses are claimed on individual
partners' tax returns, not on a corporate tax return.
> What baffles me about all this stuff is that the ASF has 200+ members,
> and *none* of them have any such requirements. What's the difference?
> Is it because it's a 501?
>
<snip>
To the point of non-US citizens, according the LLC FAW on the site
referenced above, non-US citizens can be partners in the LLC. See
http://public.findlaw.com/abaflg/flg-13-3d-1.html
Rick
Christian Mohn (h0bbel)
In case it isn't 100% clear, I have no idea on this nor do I really have an
opinion. While I see the need for us to form some kind of organization for
liability issues, I have a hunch that it really doesn't apply all that to me
personally.
Christian
Blake Johnson
>
> > Every member of the Habari LLC will have to receive a Schedule K-1 and
> > report Habari income and expenses on their personal tax returns. This
> > is a non-trivial addition to tax prep that I would not wish upon
> > anyone, let alone a large group of people. For this reason, I am in
> > favor of limiting the LLC membership to a small subset of people
> > (perhaps the founding four?).
>
> Um ... seriously?
>
> My taxes are way too complicated already. Why would I have to receive
> any kind of schedule anything, if I don't receive any actual
> compensation from the corporation?
>
> What baffles me about all this stuff is that the ASF has 200+ members,
> and *none* of them have any such requirements. What's the difference?
> Is it because it's a 501?
>
> Isn't there something less complicated?
>
where gains and losses are reported on the owners' individual tax
returns. You distribute Schedule K-1s to the owners to declare what
portion of gains/losses they are responsible for.
I looked into how the ASF is organized. It is a member corporation
(aka a non-stock corporation) which operates as a non-taxable non-
profit under 501(c)(3). Since a non-stock corporation has members
rather than shareholders, the members cannot receive distributions or
dividends, thus they do not need to report anything on their
individual tax returns. On the other hand, the corporation does need
to make annual filings to the IRS to continue to receive 501(c)(3)
status. If the corporation generates revenue in excess of $25,000, it
also needs to file its own tax return.
Looking at this now, it seems to me that the annual paperwork
associated with an LLC would not be that different from the paperwork
for a 501(c)(3). In both cases you need to file forms with the IRS
breaking down the revenue, expenses, and assets of the LLC/corp.
Given this, might it make more sense to form a membership corporation?
--Blake
Andrew Hagen
qualify under 501(c)(3) of the tax code.
It's not too difficult to set up and keep running. There are many
examples of non-profit open source companies. The LLC organization is
intended for profit-oriented companies.
The advantage of non-profit status is that the project will always
remain what is stated in its charter, perhaps "develop and distribute
Habari software."
By way of negative example, there is no possibility of the following
scenario. An interloper might appear after a few years, create
confusion, breed resentment, drive out non-aligned voting members, and
seize control of the LLC for the purpose of generating profits to
himself. Instead, the organization will by law be non-profit and will
remain devoted to its stated mission.
Other free and open source organizations have acquired intellectual
property such as trademarks. Imagine that the organization trademarks
a graphical logo and it gains great popularity. It would be for the
best if a non-profit organization devoted to Habari software owned
that trademark, and not an LLC.
Let me speak of a different situation: the history of Wordpress. What
has happened there is not optimal. First, it started with the gloss of
a free software project. Eventually, the lead developer opened up a
for-profit web site called wordpress.com. There was some spam
associated with that site for short time. While Wordpress remains free
software, I just have to wonder why Wordpress software has not
advanced more technologically. Wordpress does not utilize PDO or even
PHP 5 . My main problem with Wordpress today is that the software's
development has stagnated.
If Wordpress had been directed by a non-profit organization all along,
wordpress.com would have been much different. Perhaps the software
wouldn't be stagnating the way it is today.
While Wordpress is nice in it's own way, I believe we should go in a
slightly different direction.