Incorporation

I've started and deleted this thread several times over the past couple of months, wanting to bring up the topic of incorporation but feeling that it was premature. Since we are now profitable and are on the verge of expanding (with a name change), I thought now would be an excellent time to suggest that we incorporate as a nonprofit entity.

I've be doing a lot of reading in the Nolo book on How to Form a Nonprofit Corporation in California and I think we're eligible and ready to file as a 501(c)(7) as a social/recreational club in California. When filing as a nonprofit, it means that any profits we make will be untaxed, provided those profits are distributed to members of the group as club benefits.

Before we can incorporate, we'll have to agree on a new name for our extra-Neualtenburg endeavors (Neualtenburg, Inc.?), fill out some documents, and pay a very modest fee (US$40). As the official documentation monkey, I will happily put together the forms and submit them for your review before submission.

Let me know what you think and what questions you have.


My replies to posts will be a bit delayed. My family and I leave for Istanbul, Turkey tomorrow morning quite early and I'll be out of contact until I arrive many hours later. If you don't hear from me by the 29th, divide up my stuff.

~Ulrika~

Don't forget that if we incorporate, there will have to be a Board of Directors and regular (annual?) board meetings. Can Non-California/Non-US citizens serve on the corporation board? Can the meetings be virtual, or must they be face to face? It might also be good to invesigate the long term paperwork requirements.

With those reservations, I think it's on the whole a good idea and would help keep us transparent and possibly provide additional legal protection to citizens should the city get RL sued over something. Note that I am not a lawyer

There are substantially more formalities and fees called for to maintain a California Non-Profit than you may have yet found.

The California Association for Family Child Care (http://www.cafcc.org/) maintains a website with detailed information about forming a non-profit corporation in that state, which includes step-by-step checklists on what state and federal forms (and fees) need to be filed in order to preserve the tax-exempt status. Count on at least another $175 in fees to process state and federal tax authority filings. Also, plan on having someone regularly file forms required by various other California authorities. This is on top of the issues of organizing and conducting member or board meetings.

These procedures can be daunting to someone not familiar with the processes of incorporation. They can be done (and usually are done) by skilled paralegals working under the supervision of licensed attorneys. They also can be done by laypersons, but that does increase the chances of unanticipated legal problems emerging downstream that could cost more than the routine cost of prevention.

Will Neualtenburg pay a market rate for these services, or depend upon the kindness of volunteers? If the volunteer resigns the task, are you prepared to dissolve or hire someone to maintain the effort?

Also, have you considered incorporating in another jurisdiction, such as Delaware, which in some respects has more liberal incorporation laws? As you will not have a physical location (even though the physical server owned by the host is in California), you may have options that only an experienced attorney familiar with non-profit corporation work can see.

"Frank Lardner" is not an attorney and this does not constitute legal advice but recitation of publicly known information and educational guidance.

For better or worse, I wear a lot of hats. One of them in RL is Treasurer of a not-for-profit corp which I formed in 1978 with 3 other people. Ours is an arts-related organization, and thus a 501(c)3 rather than a 501(c)7, and also is incorporated in New York rather than California, but I suspect that the requirements are fairly similiar.

I'll leave aside the start-up procedures. Frank and Claude have commented on these, and my experience is many many years ago. In New York, it certainly did require an attorney to draft the incorporation papers, since the IRS qualifying approval depended entirely on how they were written. But as to fees and other tech start-up procedures, I don't recall.

But on-going reporting, I am intimately familiar with. As both have mentioned, there must be officers and regular meetings; considering the way we have stretched the definition of a regular meeting in RL, the RA meetings are *far* more "regular". I feel it would surely be an exciting project to defend that if it were challenged.

More importantly, tho, is that both the IRS and the local state want on-going and fairly rigorous documentation to prove that indeed you are complying with the purposes for which you were awarded the tax-exemption in the first place. With the IRS that takes the form of an annual Form 990, kind of a corporate tax return for non-profits. Outs is a tiny organization in the scale of things... and I would never consider preparing this myself. It is quite substantial. If one of us fills it out, and there's a mistake, well... let me just say that the IRS is not the kind of organization which is *understanding*. Penalties for mistakes are severe. There is, however, no fee paid with this return.

State returns, in the case of New York, is just a mini-version of the 990, which usually gets attached. Unlike the 990, there are fees, but for a small organization, they're pretty small, maybe $20.

Thats pretty much it. We did have an IRS audit to determine if we were classified under the right sub-chapter of the IRS code, based on the kind of revenues we receive. If was a lot of hassle, but resulted in no problems.

Apart from the need to hire an accountant to do the annual returns, the only other burden might be that of having the IRS pay any attention at all to Neualtenburg. Some folks might wonder why I say this, but, really, the IRS is not staffed by the most "bright" people in the world. Their job is to collect money. The Form 990 demonstrates to them that we deserve not to have money collected from us. Their frame of reference is to determine any way by which it can be shown that our demostration is inadequate or incomplete or in error, so that they can indeed collect money from us. In RL its a necessary burden. In SL I would question whether we want that burden before it is in fact necessary.


Sudane

Excellent input from everyone!

I have an additional question. Given that we're making approximately US$100 per month now and, if we get to 9 sims, we would be brining in US$900 per month, when do we have to start worrying about taxes? In other words, when will our evasion become significant enough that we attract the attention of the IRS?

~Ulrika~

I'm sure that we can find ways of spending that $100/month/sim such that we'll have no income at all.

Perhaps we should just name our next Sim "Cayman Island"

Kendra, actually, setting up the next sim as an economic colony with a business-friendly environment, open and sunny climate and some dispute-resolution services for those vendors who base on the island would make a very interesting offering ... I think more of Bermuda, but the Cayman Island analogy works too.

I agree that once you start actually compensating people for the "grunt work" they now do for free, you'll not have to worry about accumulating revenue or budget surpluses. Right now, the only reason you have a surplus is because so much is done for free. The people who get the compensation may need to remember to report it on their individual income tax, but if Neaualt is not incorporated, it is not a taxpayer ... any net taxable revenues may just flow to the participants who actually receive it and convert it into US Dollars ... but this does not constitute tax advice.

So, incorporating may turn out to be more trouble than its worth, unless there is some prospect of real legal liability for the sims operations.

Wow! I can't believe the hoops CA and NY goes through to make an Inc! My wife and I had two Inc's when we lived in Florida, both set up online on the State of Florida's website using their default Articles of Incorporation. One was a for-profit and the other non-profit. The fees were deducted from the business debit cards and we printed out our official Florida documents about one hour after we started. They even handled the trademark searches and tax registrations. The only thing I had to do was call the IRS 800# and get an EIN automatically that took about 2 minutes.

Don't know what it is in California, but in Florida, the required annual board meetings can be teleconferenced or "virtual."

I recently created an LLC the same way here in Ohio, and I could have went the Inc. route again, but I didn't want the board requirement again.

Also, here's California's fee pages for Incs, the second link for non-profits:

http://www.ss.ca.gov/business/corp/corp_formsfees.htm

http://www.ss.ca.gov/business/corp/corp_artsnpinf.htm

Sure! That's great! But regardless, the IRS is going to expect a tax return from your "entity", and, in order not to pay taxes on any net which you might have, you'll have to file with them for tax-exemption.

Please be careful and don't be fooled by those "simplified" procedures. Creating a corp can be every easy, getting an EIN, etc.. Receiving whats called a "Letter of Determination" from the IRS, stating that they have indeed determined that you are exempt from payment of taxes, is quite another matter. It can take many many months.


Sudane

Well we did have it for 3 years, so we know the ropes.

That said, Florida is simplified in some respects in regards to taxes. I know there's no personal state income tax (having lived here 3 years) but I'm unsure what the situation for a corp might be. I'll have to look.