Related link: http://www.xiph.org/press/2003/nonprofitspeex1/
Today the Xiph Foundation announced
that they have completed their application for their 501(c)3 tax exempt status and are now fully recognized as non profit and tax exempt by the IRS. The creation of a non-profit corporation and the immense amount of paperwork required to file for the tax exempt status are a significant investment of time and money -- the Xiph folks should be commended for their efforts.
As far as creating a legal shelter and a business entity for an open source venture is concerned, there is no better match. As Open source projects get larger the developers tend to expose themselves to greater liabilites and should seriously consider some form of legal shelter for their project. Normal for-profit businesses are easy to setup (at least here in the U.S.) but often are not a good match for the projects they house. The open source community tends to be mistrusting of for profit companies and would rather support a business that is more closely aligned with the underlying philisophies of open source.
The philosophies of most open source projects are not about making money, but about providing a product or service to the public, which matches the IRS' description of a tax exempt venture perfectly. However, non profit does not mean not earning money -- on the contrary. Non profits are free to earn money as a regular businesses do and to use the proceeds from this business support the people who work for the company. Non profits do not have shareholders and thus cannot pay dividends and therefore any excess money generated must be plowed back into the company or donated to other non profits.
Unfortunately, in order to qualify for tax exempt status an ungodly number of confusing and contradicting requirements need to be met. The public support test for qualifying for a Public Charity (which is what open source projects would want to do) are confusing and in most cases hiring a lawyer is advisable.
Despite the hassles and costs of creating a tax exempt non-profit corporation, the number of open source non profits is on the rise. The Xiph Foundation is probably one of the most prominent recent creations that fits into this category. The FreeNode folks have also taken this route to provide IRC services to open source community. Brandon Wiley's Foundation for Decentralization Research is another good example.
Personally, I think that the trend towards non-profit corporations in the open source world is a positive sign that the open source movement is evolving to the next step. And evolving into the antithesis of everything the .com world stood for cannot be a bad thing. :-)
Are you thinking of creating a non-profit? What have you learned so far?
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Comments (1)
Read More Entries by Robert Kaye.
Sheesh, it's not _that_ hard
I do have the Nolo Press book -- your suggestion is right on the money, its a good book. But a chapter and a half of text explaining how to qualify for a public charity and my head is spinning. :-)