[hackerspaces] LLC to non-profit - who's done it?

[Jerry Isdale]

I've started investigating this myself and found that 
(disclaimer: IANAL)
1) S Corp is preferred starting point over LLC
  this is from both my lawyer here in Hawaii and some of the spaces I've talked with that are converting.  You need an S-Corp to be the non-profit anyway, so you might as well found that first. It may also give some better liability protections to member/owners. 

2) while IRS gives you 18 months to file, but you should file well before that, as they have 1 office that processes all 1023 apps.  
 It may take 3-5 months from when you file till they START the review process. Then they may ask a bunch of questions to clarify your answers on the form, perhaps asking for revisions to supporting docs, etc. Once (if) satisfied, they grant non-profit status.  They have toughened up rules and review process lately because people were setting up scams that would charge 90% of donations to management costs and only pass 10% to the non-profit operation.  Some spaces (eg. HacDC) said they would post their completed, approved app when it was approved. I would like to see these as well as the clarification question/answers from any other spaces that could share.  As I understand, the app is mostly about how you raise $ and how you spend it.  You need to provide them with good examples and details.

The cost difference between LLC and S-Corp doesnt seem that much and might make accounting a bit easier. The LLC requires you divvy up any 'profits' and losses between the partners who then have to report those on their personal returns.

3) supporting corporations
  Some ideas I've been looking into are creating some supporting companies that would own some of the equipment (especially that owned before S-Corp founding) and lease it to the S-Corp/non-profit. This would give an extra level of liability protection and also protect ownership of expensive capital should the non-profit go bust.  If the NP owns the equipment, then it must be disposed of in accordance with IRS rules. If the leasing corp owns it, then you can retain the laser, cnc, etc and use them for the next space startup.  
   This may allow you to use the equipment for profit making operations without involving the non-profit.  There could be issues with IRS if the NP's equipment is used (by dues paying members or otherwise?) to do short run production jobs, art sold for profit, etc.  I'm not sure about rules on this - perhaps if the member is paying the NP some usage fee for the equipment, then there wont be a problem?  Anyone have experience with this?

Jerry Isdale
Maui Makers
http:.//www.mauimakers.com

> Date: Wed, 18 Aug 2010 22:40:29 -0700
> From: Mike Outmesguine <mikeout at gmail.com>
> Subject: Re: [hackerspaces] LLC to non-profit - who's done it?
> To: Hackerspaces General Discussion List
> 	<discuss at lists.hackerspaces.org>
> Message-ID:
> 	<AANLkTikhRFDORYje9Znrp+HgKepesLEUBc63EJ8S+2O6 at mail.gmail.com>
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> 
> As I recall, for the IRS*, it's something like 26 months from the last
> day of the month of incorporation. If you file before that deadline,
> your non-profit tax status is retroactive to the date of
> incorporation.
> 
> On the other hand, if you file after that deadline, your non-profit
> tax status starts (I think) from the date of the filing.
> 
> You can still file years after you form up, but if you file early you
> get the benefits back to day 1.
> 
> Good idea to talk to a lawyer and accountant familiar with non-profits
> about ongoing corporate and tax responsibilities to keep your
> non-profit status. A major concern for us is the additional paperwork
> and overhead to stay legit.
> 
> -Mike
> 
> *State rules on filing time lines may differ. Check your local listings.
> 
> 
> 
> 
> On Wed, Aug 18, 2010 at 5:53 PM, John Duksta <john at duksta.org> wrote:
>> 
>> IANAL, but I seem to remember from a conversation with an attorney friend that once you organize into an LLC, it starts a clock ticking (18? 27? months... something like that) for you to get your non-profit status. I also think if you've started as a for-profit organization, at least in the eyes of your state's attorney general and the IRS, you're stuck as such, despite how you run your organization internally.
>> 
>> If you have intention of going non-profit, you should probably get headed in that direction, otherwise you'll probably have to dissolve the current organization and start from scratch anew.
>> 
>> Find yourself a friendly geek attorney and accountant to help you out. Search your network of friends, someone's got to know someone that can help you all navigate the waters.
>> 
>> -j
>> 
>> 
>> On Aug 18, 2010, at 4:37 AM, dosman wrote:
>> 
>>> I would like to know of hackerspaces which started as a for-profit entity and either attempted or successfully converted to a non-profit later in life? (US based).
>>> 
>>> I understand the reasons to go straight to non-profit rather than start as an LLC, but that only works for groups with enough man-power and money up front to do that. Our space is now an LLC operating internally as a non-profit for lack of better wording. Our intent is to keep the door to conversion open for use down the road, if things fall apart the loss of financial investment to the founders is minimized. Yea it will cost more money to convert, but if we've been operating successfully then there will be cash reserves stockpiled and earmarked for the conversion, no additional burden on founders and members. No money? No worries, we keep on trucking as-is or close the doors.
>>> 
>>> I've heard a rumor of a space that was very successful as an LLC and then dissolved and disbanded for good when they went to become a non-profit. Fact or fiction?
>>> 
>>> Thanks,
>>> -dosman