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.
For-Profit corporations have to pay tax on all gross receipts, personal property, and are required to pay sales and use tax. From the perspective of maintaining Knoxville Makers Guild, that would mean that the group would be required to pay taxes on all dues collected, as well as pay tax on any refreshments KMG sold to members, or any items that were made by the group and sold to raise funds. Personal property tax would be a tax paid on all assets owned by KMG. That would mean any cash in the treasury and any equipment or supplies owned by KMG would be taxed annually. Finally, for any purchases made by KMG, sales tax would be required to be paid. In addition, federal taxes must be paid in addition to state and local taxes.
The upside of a For-Profit corporation is that there are no restrictions or requirements related to sources of revenues. This becomes an issue for Non-Profit corporations. Additionally, a For-Profit corporation is permitted to distribute excess funds to its owners and executives.
- For-Profit Pros
- No restrictions on revenue sources
- Can distribute excess funds to owners/executives
- For-Profit Cons
- Must pay sales and use Taxes on all purchases
- Must pay tax on all gross receipts (dues collected, etc.)
- Must pay personal property tax on all assets
- Must pay federal taxes
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/images/7/70/Noisebridge-form-1023-application_for_exemption.pdf