Types of Corporate Structures
Creating a corporation in Tennessee is a process involving filling certain legally required documents with the Secretary of State of Tennessee. Corporations are subdivided into two categories: For-Profit and Non-Profit. There are further categories of For-Profit corporations, with each having slightly different filling requirements and annual fees, but having largely the same tax burdens. There are two categories of Non-Profit corporations in Tennessee, Public-Benefit Corporations and Mutual-Benefit Corporations. Pros and cons of For-Profit and the two Non-Profit corporations will be examined below.
Non-profit corporations are subdivided into two categories by the state of Tennessee: Public-Benefit and Mutual-Benefit. These are based on federal definitions of Non-Profit corporations as described in 26 USC 501(c). According to IRS Publication 557, there are 28 defined categories of Non-Profit corporations. Of those, only two are possible options for KMG: 501(c)(3) - Publicly Supported Charities and 501(c)(7)- Social and Recreational Clubs. In terms of the Tennessee Nonprofit Corporation Act, the former is a Public Benefit corporation and the latter is a Mutual Benefit corporation.
501(c)(3) Publicly Supported Charities
The IRS provides guidance in Publication 557 on determining if a corporation is publicly supported. There are five primary tests: percentage of financial support, sources of support, representative governing body, availability of public facilities, additional factors pertinent to membership organizations. To summarize these briefly, the requirements are: more than one-third of the total financial support of the organization must come from public or government sources, sources of support from "public sources" must be sufficiently representative of the public and cannot be limited to a small group, the organization must have directors composed of public officials or community leaders, the organization must generally provide serves directly for the benefit of the public, and lastly, specific tests have been added to make sure that the publicly-supported doesn't benefit its members more than the general public.
If a corporation can pass these tests to prove itself a Publicly Supported Charity, the benefits are substantial. The organization is exempt from all taxes related to its non-profit mission. The downside would necessarily be trying to maintain the corporation to ensure that it complies with the tests to remain a publicly supported charity.
(editorializing a bit here: While I have to admit that the benefits to this type of organization are tremendous, after reviewing all this information, I'm surprised that any hackerspace would attempt to try for this classification. When a new organization initially applies for this classification, the IRS will make a decision based on what the group says it intends to do since there is no history to review. At some point, though, an organization must be able to pass the tests based on what they've actually done. It would seem that it would take a substantial amount of effort to try to maintain this classification. It seems that the support test would require a tremendous fundraising effort at the very least.)
Note: Section is incomplete.
List of Hackerspaces with 501(c)(3) status
- Noisebridge in San Francisco https://www.noisebridge.net/wiki/Noisebridge
- Copy of their Application https://www.noisebridge.net/wiki/501c3app
- Santa Barbara Hackerspace http://sbhackerspace.posterous.com/santa-barbara-hackerspace-has-achieved-501c3
- Hartford Hackerspace in Baltimore http://harfordhackerspace.org/2010/02/we-got-our-501c3-status/
- HeatSync Labs in Arizona http://www.heatsynclabs.org/heatsync-labs-a-501c3-hackerspace/
- HacDC in DC http://www.hacdc.org/content/hacdc-officially-public-charity-under-501c3-provision-tax-code
- i3 in Detroit http://www.i3detroit.com/
- Their primer and advice on 501(c)(3) http://www.i3detroit.com/hacker-business-series-non-profit-basics
- Makers Local 256 in Huntsville https://256.makerslocal.org/
- Ace Monster Toys in Oakland http://acemonstertoys.org/
- Pumping Station One in Chicago http://pumpingstationone.org/about/
- Freeside Atlanta http://blog.freesideatlanta.org/
Pros of 501(c)3
- Tax Deductibility for Donors
- Eligible for Government & Foundation Grants
- Eligible for Bulk Mailing Permit
- Gambling Permits (in some jurisdictions)
- Free or discounted advertising cost
Cons of 501(c)3
- Keep Adequate Records
- File Required Returns
- Provide Donor Substantiation
- Obey Disclosure Laws
- Generate Public Support
- Avoid "Excess Benefits" for insiders
- Shun Political Activity
- Limit Legislative Activity
- Limit Unrelated Business Activity
- More expensive and lengthier process
- Items must be redonated if nonprofit closes, as opposed to distributed among members
Other Stuff Important for a 501(c)(3)
- If non-cash donations exceeds $500 in value, the donor will need to fill out form 8283, and Knox Makers will need to maintain a record of the donor's information.
- If such properties is disposed of within 3 years of the donation, a form 8282 will need to be submitted by Knox Makers.
- Consider looking at Pub 526, which covers charitable contributions.
- Any Quid pro quo donation over $75 requires Knox Makers to provide the donor with a "Disclosure Statement", which will include a good faith estimate of fair market value of the goods or services the donor receives in exchange for the donation.
- Any donation of over $250 requires Knox Makers to provide an acknowledgement. The required information is included in IRS Pub 1771.
- Knox Makers must make their tax exempt application as well as all annual information returns submitted to the IRS available for public inspection.
- It will be critically important to make sure that activities performed by Knox Makers match up with its exempt purpose. Any income from sources not related to our purpose will be considered "Unrelated Business Income". It must be tracked separately and taxes must be paid on it accordingly.
501(c)(7) Social and Recreational Clubs
This organization type is not being considered at this time.