The following comes from a much larger piece
called "Legal Structures for Communities" by Dave Henson,
which details the specific legal procedures for creating intentional
communities He lists the various options (Sole Proprietorship, Co-Ownership,
Land Trusts...) and summarizes their advantages and disadvantages.
This particular reprint (with permission from the author) focuses
on Corporate Ownership, which appears to be the way to go for most
intentional communities. For more information about the author (as
well as about these legal matters) see the end of this reprint.
Corporate Ownership
There are several corporate forms that should be considered by
a group of individuals who want to hold real property together and/or
conduct a for-profit or non-profit business as a community.
1) Corporation
A corporation is a legal entity consisting of one or more shareholders,
but having existence separate from the shareholders. Over the course
of American history, the corporation has been considered by courts
to have the legal status of a "natural person," meaning
that it has many of the constitutionally protected rights of we
flesh-and-bones people, including free speech, rights to standing
in federal courts, rights to due process, and extensive private
property rights. This has led in recent decades to court decisions
that deny voters the right to limit political campaign contributions
by corporations, because it would limit their free speech rights!
Courts also have, for example, allowed corporations virtually unlimited
rights to barrage our minds with ads ("free speech"),
and have severely limited the access that environmental and labor
rights regulators have to inspect corporate property and records
("unreasonable search and seizure"). At the same time,
unlike we real persons, corporations enjoy limited liability and
enormous tax breaks (e.g.: fines for environmental crimes can be
written off as a business expense).
The unreasonable authorities that corporations have acquired from
courts have put the very foundation of our democracy at risk. Corporate
lobbying and campaign contributions have so warped our political
process that corporations have swindled enormous tax breaks on their
profits. This has led to the pauperization of our schools, health-care
and welfare systems, family farms, and inner cities. Further, large
multinational corporations have recently succeeded in effectively
detaching themselves from the control of any particular nation state,
and have their own 'lowest common denominator' self-regulation through
the World Trade Organization.
There is a growing grassroots movement dedicated to getting at
the root of the illegitimate corporate authority to rule our economy,
political process, culture and minds, which has caused so many of
our social, economic and environmental problems.
With that off my chest, let's get back to the business of creating
alternatives to corporate control of the world: building intentional
communities! The basic corporate form is not the best legal form
for a community. Compared to a Limited Liability Company (LLC, see
#3 below) or a partnership, the disadvantages outweigh the advantages.
Advantages: A corporation is a common way to raise capital. It
is familiar to investors, and legal precedence has been established
for every possible sticky situation. Ownership is transferred easily,
and the corporation lives forever: it continues until terminated,
surviving the departures and deaths of the shareholders. The main
advantage is limited liability. A corporation can often also accumulate
earnings over the years and distribute them when the tax advantages
are best for the shareholders.
Disadvantages: Profits are taxed twice once as corporate
taxes, then again as shareholder personal income. There is somewhat
stringent government oversight, and there are many legal requirements
(keeping records, holding meetings, keeping minutes, and filing
reports). Incorporation costs, legal fees and annual registration
fees ($800/year in California, for example) should be considered
too.
2) Chapter S Corporation
This form is essentially like a corporation, but with the tax advantages
of a partnership or an LLC. In fact, tax filing is based on a partnership
return. The tax implications of an S Corporation are the most complex
of any of the similar legal forms; one should consult a tax attorney
or accountant about the specifics. I'm not aware of any reason to
form an S Corporation over an LLC.
Advantages: An S Corporation eliminates the double taxing of the
corporation, keeps limited liability advantages of the corporation,
and allows pass-through of losses to offset income from other sources.
It is a common way to raise capital. Ownership is transferred easily.
Like a regular corporation, this entity continues until terminated,
outliving its shareholders of any one time.
Disadvantages: All profits must be distributed and taxed annually.
You can't have over 35 stockholders. There are lots of rules, more
than a regular corporation., and specific limits on who can join
as shareholder.
3) Limited Liability Company (LLC)
All 50 states have enacted LLC laws since 1988. There is a move
in Congress to make a uniform LLC law so states can have common
LLC rules. For many communities who are holding real property and
are conducting any kind of for-profit business, this is likely the
best legal form to use.
The initial filing fees vary in states from $50 to $500 most
states are around $100. The annual tax is $0 in most states, but
$800 in CA, $500 in MA and less than $500 in a half-dozen other
states. An LLC is controlled by an "operating agreement,"
and the participants are called "members." The LLC is
similar to S Corporation, with its limited liability and pass-through
taxation status, but the LLC has substantially fewer restrictions
than an S Corporation.
An LLC is treated as a partnership for tax purposes instead of
as a corporation, if it lacks a majority of the following corporate
characteristics:
1) limited liability
2) continuity of life
3) centralized management
4) free transfer of ownership
Advantages:
Like a partnership or S Corporation the LLC avoids double taxation
of a corporation. Unlike an S Corporation, there is no limit on
the number of shareholders. Unlike a partnership, LLC members are
not liable for LLC debts. Unlike a corporation, there is no statutory
necessity to keep minutes, hold meetings, or make resolutions. The
operating agreement can allocate different decision-making rights
to different kinds of members (for example, the community could
decide that LLC investors are limited to voting only on expenditures
which exceed a certain dollar amount, keeping day-to-day decision
making in the resident group). Admitting new members is easy, and
any type of legal entity can join an LLC, including a person, a
partnership, a corporation, another LLC, trusts, and foreigners.
Disadvantages:
An LLC cannot accumulate earnings like a partnership can. It must
distribute them the year the earnings are made. Annual fees are
typically greater than for corporation (as noted above).
Research and Resources
As your community meets to craft your legal and organizational
structures, focus your discussions on making decisions! It is common
to have a two-hour discussion on these topics where real progress
and agreements are made, but leave the room without writing the
exact decision down. It is impossible to structure the legal organization
of your community in one or two meetings, so save the last 15 minutes
of each meeting to get down in that special binder exactly what
was agreed upon, what the nature of the questions are on the issues
where no decision was reached, what was left to discuss, and what
the next steps you all will take to continue to move the process
along.
My best research advice is for you to form a committee of a few
people in your community to take on a research project. After doing
some work, have the committee present the best options for community
legal structures to the whole community for extensive discussion.
This may be the one area to break down and pay for some legal advice
but do it after your committee has become literate about the
questions and options. Ask around for an attorney with experience
in tax and real estate law. You want someone who will really understand
the "alternative" nature of your endeavor. A certified
public accountant (CPA) can often be very helpful on the tax questions.
Remember, an attorney or CPA works for you their advice on
organizational questions is only as good as the community's clarity
about what your economic and organizational goals are.
Try the legal clinic at a law school near you. They often offer
legal advice inexpensively or for free, and may be able to hook
you up with a law student looking for a research project.
The World Wide Web is an excellent place to get free legal advice.
In doing research for this article, I found many sites with very
clear and lengthy legal notes about the options discussed here.
Particularly helpful for this article were "Legal Issues for
Communities," by Rob Sandelin (1997) at www.infoteam.com/nonprofit/nica;
"Methods of Taking Title to Real Property," by David V.
Lis at www.masteryinc.com;
and "LLC FAQ" at www.bizfilings.com/frgllc. Search for
"Limited Liability Company," "Partnership,"
etc, and you will find more than you can read!
Nolo Press, in Berkeley, CA, puts out some great self-help legal
books, including step-by-step books on how to set-up a corporation,
partnership, LLC or non-profit. Some come with the papers you need
to file on a computer disk: Nolo Press, (510) 549-1976, 950 Parker
Street, Berkeley, CA, 94710.
The Institute for Community Economics puts out the "Community
Land Trust Handbook" and other resources on land trusts: (413)
746-8660; 57 School Street, Springfield, MA 01105.
Dave Henson is the Director of the Occidental
Arts and Ecology Center (OAEC), a 501(c)3 non-profit educational
and rural retreat center near the coast in Sonoma County, California.
Dave is also a founding member (July, 1994) of the Sowing Circle
Partnership and intentional community that holds the title to an
80 acre property, including four acres of organic gardens and orchards
and over 25 buildings. OAEC leases from Sowing Circle the use of
most of the buildings, gardens and wildlands to operate the learning
center.
Since 1994, Dave has also been a principle activist
with the Program on Corporations, Law and Democracy (POCLAD). Most
recently, he is a founding member of the Northern California Genetic
Engineering Network working against genetic engineering and
life patenting in agriculture. In over 20 years of social justice
and environmental activism, Dave has worked with various local and
national organizations including the Highlander Center in Tennessee,
the National Toxics Campaign in Boston, Earth Island Institute and
the Environmental Project on Central America in San Francisco, Greenpeace
in New York, and the anti-nuclear power and weapons movements in
California. Dave studied ecology and political sociology at the
University of California, Santa Barbara, and law at New College
in San Francisco. Dave is not an attorney.
Dave also leads weekend workshops at OAEC called
"Creating and Sustaining Intentional Communities," and
is available for phone or in-person consultation with your community
about legal and organizational structures, group process and facilitation,
and setting-up non-profit educational centers. For consulting information,
or to receive a catalogue about the Occidental Arts and Ecology
Center, call OAEC at (707) 874-1557, write to OAEC, 15290 Coleman
Valley Road, Occidental, CA, 95465, or visit www.oaec.org.
