Some questions for the lawyers, accountants, and other experts...

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Riggerjack
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Some questions for the lawyers, accountants, and other experts...

Post by Riggerjack » Sat Aug 24, 2019 11:07 am

Disclaimer: This is a public website, any information in this thread will be run past appropriate council. Establishing who that council should be is part of the reason for this thread.

According to this website:
https://www.inc.com/magazine/20110501/t ... brids.html
for profit companies can be paired with nonprofit corporations. So that the nonprofit secures regular funding, and can focus on it's own mission, rather than fundraising.

The for profit company, gains a competitive edge, in that it is associated with a cause that garners public support. ie, if a bid for services is competitive, the company associated with the nonprofit mission could be chosen simply for where the money goes.

Is my understanding correct? If so, why doesn't this happen more? It seems like a natural fit.

1. I'm interested in this on the theoretical level, as in possible combinations, of business structures and financing possibilities.

2. As a practical exercise. I'm getting out of residential rental real estate, and when I sell the last house, plan to roll the proceeds into funding Permanent Development, a construction company, to fund my Permanence Project, a nonprofit dedicated to developing best practices and designs for building infrastructure with extreme durability as a primary design consideration. "Seven Generations" is way too low a bar for our existing tech, but nobody is focused on fixing this issue, so I will.

I know how to build. I know how to solve the technical issues I'm interested in. :ugeek: What I don't know is the legal and administrative aspects. :oops:

What do you know/think? Where should I be looking for more information?

suomalainen
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Re: Some questions for the lawyers, accountants, and other experts...

Post by suomalainen » Sat Aug 24, 2019 1:36 pm

I'm not entirely sure what you're asking. As a general thought, this is the important part of the "hybrid model":
Hybrid arrangements can get complicated fast. They require separate boards and management staffs, given that significant crossover in leadership might signal a conflict of interest to the IRS. Any time there is a service transaction between a nonprofit parent and a for-profit subsidiary, both boards have to approve it and be able to show that the for-profit paid actual market rates for the product or service (proving that the parent and subsidiary are conducting arm's-length transactions and not receiving special favors). What's more, because hybrids are fairly new, there are no IRS rules on the model.
You can't get around IRS rules with form over substance. Why doesn't it happen more often? Well, it's a basic cost/benefit analysis. It's much, much easier for a non-profit to have a corporate benefactor without anyone really caring; it LOOKS much more suspicious if a "non-profit" is funneling contracts/money to an affiliated for-profit. Going through all of the structuring and trying to maintain the corporate separateness etc, isn't worth it to the legitimate person, unless there's a real reason to have two separate entities that have a reason to exist outside of the other. And if it isn't a sham, there's no "natural fit" because the affiliated for-profit could be outbid by a non-affiliated company for a non-profit's contracts. Again, one-way transactions won't raise eyebrows at the IRS, round-trips WILL raise eyebrows.

Specifically, I don't know why you're asking about the profit/non-profit hybrid model for funding your Permanence Project. If what you're saying is that the Permanence Project will be a non-profit that will hire Permanence Development to build stuff and, in turn Permanence Development will effectively donate all of its profits to Permanence Project...ehhhhhh...that's probably an invitation for an audit. If you're willing to bear an audit (I know how you LOVE government "inspectors"!), then go for it, but keep all receipts, etc., and having the for-profit do its work for the non-profit at market rates or below (at cost?) would probably be persuasive to an auditor in the end (not that it'll save you from the "inspection"). Note: not a tax lawyer, but I work with tax lawyers pretty often, and they're a conservative bunch.

TL;DR - these types of things are not susceptible to generalities. I suggest you hire a tax lawyer who will set you on the right path for what you're trying to accomplish with both entities.

Riggerjack
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Re: Some questions for the lawyers, accountants, and other experts...

Post by Riggerjack » Sat Aug 24, 2019 7:04 pm

First, thanks for the detailed response.

But no, tax avoidance isn't what I am interested in.

The construction company would operate as a for profit construction company should, including paying all licencing, insurance, and taxes, and a bookkeeper.

But the proceeds, the profits, beyond operating funds, would normally go in my pocket. Well, mine and the IRS's. But my goal is to get the nonprofit funded. And this seems to be an efficient way to do just that.

As for an audit, I am fine with that. This whole mess is going to need a book keeping service. Better that auditors and bookkeepers work that out between themselves.

The advantage, as I see it, of the hybrid approach, is being able to take donations, passively, and have another, independent source of income in the form of the development company. Just best to keep the focus on effectively developing practices, rather than fund raising. I have too much experience with non-profits who need to focus too much on fundraising, and I don't want to make yet another.

Couple this with a construction company that is focused on the same goals, and donates a portion of profits to the foundation. The foundation is good for business, both for raising awareness of the construction style, and as a form of advertising. Those interested in the style of construction I am proposing, will be looking for someone who has experience building that way.

This seems like a natural fit, as each organization can focus on it's own mission, which compliments the other. Nothing nefarious, simply good business.

My goal is to get these up and going, and pass them on to people who want to run them. I have other goals and projects that will benefit from these organizations being in place.

zocab
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Re: Some questions for the lawyers, accountants, and other experts...

Post by zocab » Sun Aug 25, 2019 7:52 am

The Firefox people do this. Last I heard they have a non-profit org which owns the company actually making Firefox. I don't know the specifics, but it could be relevant. (Contrary to popular expectation, a lot of open source software does produce money, which is probably why they need the company to receive the income.)

Riggerjack
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Re: Some questions for the lawyers, accountants, and other experts...

Post by Riggerjack » Sun Aug 25, 2019 9:22 am

Yeah, there have been several examples out of silicone valley. But it's not common.

Which seems odd. It doesn't seem like the market would ignore this advantage.

Augustus
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Re: Some questions for the lawyers, accountants, and other experts...

Post by Augustus » Sun Aug 25, 2019 12:33 pm

There's irs guidance about this, my wife was doing her master's of accountancy and made me read up on it with her to double check her work. I can't recall the specific rules, but lots of people tried to game non profits by pushing a bunch of for profit money into a nonprofit, then using the "benefits" of the nonprofit in daily life. Things like buying real estate or property with donated funds and using it in their private lives.

Google private interest and excess benefit for nonprofits, there are a bunch of papers and examples that provide more clarity. From what I recall, if you own or are even related to owners of major donor companies, there are a bunch of hurdles.

https://www.irs.gov/pub/irs-tege/eotopich01.pdf
https://www.irs.gov/pub/irs-tege/eotopicc90.pdf

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Ego
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Re: Some questions for the lawyers, accountants, and other experts...

Post by Ego » Sun Aug 25, 2019 1:57 pm

Not an expert, so take it with a grain of salt.

I seem to remember you mentioning this before along with the goal of getting deep pockets to fund the non-profit after they see the benefits of the building technique. Is that right? If so, would it make sense to focus on building and generate interest in the technique first? The funders are going to have strong opinions on how they want their money used. It may not be how you are anticipating today. What if they see the value and want a piece of the action rather than a tax write off? What if they don't like the makeup of the non-profit board? What if they want a B-Corp?

Mrs. Ego worked for a non-profit for a while. The big donors did not just dump a bunch of money into the general fund. They insisted on very specific goals that unlocked future funds and came with a lot of strings attached. She's a people person and she would come home from board meetings ready to pull her hair out. Are you prepared to give up that much control?

RealPerson
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Re: Some questions for the lawyers, accountants, and other experts...

Post by RealPerson » Sun Aug 25, 2019 2:27 pm

Could you start a new "Church of Permanent Construction"? No taxes forever, virtually no rules, no audits, no nothing. Just have regular meetings with your "congregation". Forget that non profit stuff. Only saying that partially tongue in cheek, because the IRS rules are very loose in regards to churches.

Seriously, a non profit is a big hassle with lots of possible pitfalls. I looked into it once and decided it was not worth the headaches. But a church.... now you're talking.

chenda
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Re: Some questions for the lawyers, accountants, and other experts...

Post by chenda » Sun Aug 25, 2019 3:22 pm

Paul Newman's salad dressing ?

I also recall a coffee company which is owned by a climate change denier think tank. Not endorsing but sounds like a comparable structure 🤔

suomalainen
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Re: Some questions for the lawyers, accountants, and other experts...

Post by suomalainen » Sun Aug 25, 2019 3:37 pm

Separateness is a key legal concept, and so I assume it is also a key concept for the IRS when looking at non-profits and their for-profit affiliates. So long as they are two entities with two different (even if complimentary) corporate purposes and are operated as separate stand-alone entities, you should be fine. There's just such a temptation to "save time and money" by getting sloppy and not keeping separate books, separate board meetings, etc., that it's fairly easy to get tripped up in the rules.* I think administrative hassle is correct, but, you know, if you believe strongly enough in the mission of each entity to keep things clean, having multiple entities is generally not a problem.

* It also brings to mind the basically fraudulent advice that Robert Kiyosaki gave about creating a family foundation and having board meetings in Hawaii so you could deduct your vacation expenses. Stay away from dumb shit like that.

Riggerjack
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Re: Some questions for the lawyers, accountants, and other experts...

Post by Riggerjack » Mon Aug 26, 2019 8:10 am

@augustus, thanks for the links, I will read up on them.

@Ego, yes, same general project. I plan to sell the last house in a few months, then I plan on clearing some land, and build a workshop using this technique.

The funds from the sale will pay for the workshop, so creating a business structure that can lock in the costs of the workshop as R&D loss seems reasonable. But perhaps it is best just left as part of the residential property, and that cost becomes part of the basis of the house when I sell, long down the road...
The funders are going to have strong opinions on how they want their money used. It may not be how you are anticipating today. What if they see the value and want a piece of the action rather than a tax write off? What if they don't like the makeup of the non-profit board? What if they want a B-Corp?
That's the goal, find donors that have agendas. If they want a different structure, with good reason, I am open to any suggestions. I just need it to do a job, not to feed my ego. I'm not intending to retire so I can run a construction company and a nonprofit. That hardly seems like retirement, to me.
Could you start a new "Church of Permanent Construction"? No taxes forever, virtually no rules, no audits, no nothing.
Well, I have been an ordained minister for years now. But no, I don't want this to be any form of church. Playing fast and loose with the rules will certainly cause me more trouble than I could avoid, and money isn't that tight.


@ suomalainen:
There's just such a temptation to "save time and money" by getting sloppy and not keeping separate books, separate board meetings, etc., that it's fairly easy to get tripped up in the rules.* I think administrative hassle is correct, but, you know, if you believe strongly enough in the mission of each entity to keep things clean, having multiple entities is generally not a problem.
This is a concern for me. Not getting tripped up by the rules, and avoiding getting sloppy, in the name of saving time or money.
* It also brings to mind the basically fraudulent advice that Robert Kiyosaki gave about
everything he wrote. :roll:

Riggerjack
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Re: Some questions for the lawyers, accountants, and other experts...

Post by Riggerjack » Mon Aug 26, 2019 8:24 am

I seem to remember you mentioning this before along with the goal of getting deep pockets to fund the non-profit after they see the benefits of the building technique. Is that right? If so, would it make sense to focus on building and generate interest in the technique first?
The plan, as it stands today, is to build a workshop, and use that to get performance data, and work out some of the practical details. Then, after I retire in a few years, I will build a house, with a Kickstarter (or similar) to help with the funding. Having a completed building, so I can have pictures and video seems like the way to go. I'm not as good at making myself clear in writing as I like to think I am... I plan to operate it as a vacation rental for a year or so, allowing people who are interested, to actually experience the place, and submit an offer, if they are interested.

Then I will sell it. With luck, the Kickstarter and the sale fund future projects, and keep the ball rolling for the next step.

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Ego
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Re: Some questions for the lawyers, accountants, and other experts...

Post by Ego » Mon Aug 26, 2019 9:15 am

@Rigger, that sounds like a very exciting plan. I hope you share it here or direct us to where you'll be posting info.

Riggerjack
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Re: Some questions for the lawyers, accountants, and other experts...

Post by Riggerjack » Mon Aug 26, 2019 9:20 am

When there is something to show and tell, I will definitely show and tell. In the meantime, I seem to be thinking so far outside the overton window, I may simply be mad. :shock:

Judging by the looks I see when describing my plan, I need to show, as tell has been a complete failure. :oops:

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Ego
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Re: Some questions for the lawyers, accountants, and other experts...

Post by Ego » Mon Aug 26, 2019 9:39 am

I'd say you should do both. Practice using different explanations and see which sparks peoples interest. It may be the planned obsolescence angle since people feel it with their phones and computers.... BIF7L home. It may be the maintenance-free angle since people are starting to see the benefits with automobiles. It may be the historic angle..... Go back 200 years and see how people lived... now extrapolate into the future 200 years, try to anticipate how things will change and build for those changes today. Personally, I find that idea fascinating.

ETA, doing anything out of the ordinary causes funny looks from people who are dug into the traditional. Keep at it!

daylen
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Re: Some questions for the lawyers, accountants, and other experts...

Post by daylen » Mon Aug 26, 2019 10:12 am

If telling is hard, then perhaps you are targeting too big of an audience. Try narrowing down the message to a select few. Eventually, the message can be expanded with the help of a small but passionate minority.

Riggerjack
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Re: Some questions for the lawyers, accountants, and other experts...

Post by Riggerjack » Mon Aug 26, 2019 1:04 pm

Try narrowing down the message to a select few. Eventually, the message can be expanded with the help of a small but passionate minority.
This has certainly been a success for cults. The problem I am facing is I neither want to found a cult, nor do I want to be a leader, in particular, not a cult leader.

My current plan involves narrowing the information bandwidth to some easily understood videos, since we have become so good at spreading ideas thru that medium. I suppose a blog will be necessary before then, to flesh out the details.

But first, I need to have something worth seeing, and that falls after selling a house, creating a business, clearing the land, and building a workshop. After all that, when I can be sure of what works, I can worry about the nonprofit, the house and going public.

So today, I am focused on getting step 2 right, because this is the area I know the least about, and soon some decisions need to be made...

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