[Community] Notes from 2006/8/16 IC2 telecon

Wed Dec 13 18:51:13 PST 2006

Thanks for the input, Scott. I don't think any decisions the Stewards
Council has made since then has changed anything. I asked the question on
the call today whether any individual supporters were planning on making
contributions for which they wanted a tax deduction, because as you say all
the contributions from businesses are deductible as a business expense. No
one said anything, although Dan Perry was not on the call and he made one of
those pledges so he should weigh in.

Otherwise, I think we're close to being able to get the process underway -
Dan and Mary were supposed to talk offline and consult with you and come
back with a formal proposal for how to proceed with forming the Swiss corp.
I look forward to it.

=Drummond 

  _____  

From: community-bounces at idcommons.net
[mailto:community-bounces at idcommons.net] On Behalf Of Scott Blackmer
Sent: Wednesday, December 13, 2006 3:28 PM
To: 'Mary Rundle'; community at idcommons.net
Subject: RE: [Community] Notes from 2006/8/16 IC2 telecon

I don't see a need to incorporate in the US as well as Switzerland, unless
you want to qualify as a 501(c)(3) nonprofit for purposes of accepting tax
deductible contributions from individuals (companies will be able to deduct
their payments or contributions as a business expense, anyway).

Mary provided good templates for a Swiss nonprofit last summer.  As she
says, the governance structure would need to be tweaked based on decisions
since then, and some of those details could be put into the bylaws rather
than the "statute" (articles of corporation).

-- Scott Blackmer

W. Scott Blackmer

Technology Law & Consulting

Tel:  1.801.495.1503

Mobile:  1.801.953.3858

Fax:  1.801.553.0118

E-mail:   <mailto:sblackmer at blackmerlaw.com> sblackmer at blackmerlaw.com

Web:   <http://www.blackmerlaw.com/> www.blackmerlaw.com 

i-name:  <http://xri.net/=scott.blackmer> =scott.blackmer

If you received this email in error, please notify me by replying to sender
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  _____  

From: community-bounces at idcommons.net
[mailto:community-bounces at idcommons.net] On Behalf Of Mary Rundle
Sent: Tuesday, December 12, 2006 3:28 AM
To: community at idcommons.net
Subject: Re: [Community] Notes from 2006/8/16 IC2 telecon

Regarding Eugene's "Question for our resident legal minds: Was the plan to
only incorporate in Switzerland, or to incorporate both there and in the
U.S.? If not, are there good short-term reasons to incorporate in the U.S.
as well?":

1.	Please see Drummond's notes from the conference call of August 16,
2006 (below).
2.	Scott Blackmer has good expertise on matters of US incorporation.
3.	I am happy to help in practical ways for incorporating in
Switzerland. The draft Statutes and Bylaws that I drew up over the summer
were suitable for that jurisdiction and tried to reflect Identity Commons'
interests as of that time (documents attached). If you wish to use these
documents, it would be wise to go through them to check where they need
modifications, given additional matters that may have cropped up in the
Stewards Council. (For example, the decision-making structure and process
should be refined, and there may need to be a reference to a separate
Memorandum of Understanding with the former Identity Commons, which should
be drafted and agreed.)

Many thanks,
Mary
P.S. It would be good for Identity Commons to benefit from a law firm
offering pro bono services; perhaps Scott can offer some tips along this
line. As I hope I've made clear previously, I am happy to help with Identity
Commons but do not feel I have the expertise to be providing the kind of
legal advice that is needed generally. (My background is in a very different
type of law, and I don't have the time that a law firm offering pro bono
services affords for researching areas.)

Drummond Reed wrote: 

Following are the notes from the Identity Commons 2.0 telecon held at 9AM PT
Wed. Aug. 16th 2006.

EXECUTIVE SUMMARY:

* Consensus is emerging that a Swiss-based international non-profit
organization is the best option as a legal form.

* This form fits the model of Identity Commons as an "upside-down umbrella"
organization that serves to unite and share common resources among a set of
self-organizing, self-determing working groups that assume their own legal
forms (or not) as required by their own objectives and governance models.

* The complexity and legal liability of the umbrella organization is limited
by its lack of control over the actions of the working groups.

* Any IPR (besides the Identity Commons brand itself) that is not simply
held in trust, but needs active need licensing, brand management,
certification, etc., is probably best managed within a working group that
takes the appropriate organizational form to do this.

* Identity Commons can still hold shared resources in trust for working
groups that do not need their own legal form.

* The next step is researching the details and making the final decisions
about the form and bylaws for a Swiss-based non-profit.

PRESENT:

Drummond Reed

Dan Perry

Mary Rundle

Andrew Shikiar

Scott Blackmer

Dick Hardt

Kaliya Hamlin

DETAILED NOTES

The key topic was the organizational form and locale of jurisdiction.

Scott's first point was non-profit status. His July 11 email (appended
below, which Mary complimented before Scott joined the call) explains these
options in great depth. 

Scott explained that some international non-profits are set up as Swiss
corporations and then have local affiliates in each country in order for
individuals to be able to make tax deductible donations, which are subject
to local jurisdiction. (He explained is possible to do that without setting
up a local affiliate, but that is so difficult that most organations almost
always set up a local affiliates or national non-profits.) He cited World
Wildlife Fund as an example of a Swiss corporation set up this way. However
he clarified that if we're not planning extensive individual donations, or
not planning to have a large capital base, then these considerations do not
apply, and a single Swiss-based non-profit may suffice.

Mary summarized the case for a Swiss-based association:

* IC2 is geared to a user-centric model, and thus users should be
represented all over the world.

* A Swiss corporation has the neutrality (and perception of neutrality) that
supports this model.

* Geneva in particular courts international non-profits and provides a very
supportive environment for their operation.

Mary asked about the role of intellectual property, and whether it would
play a major role, as this might affect the decision. Scott asked about the
kind of IPR activities that the organization may be involved. For example,
OSI (Open Source Initiative) considered an OSI-compatible certification
program for products compatible with OSI-principles but that requires the
infrastructure to operate such a program.

Dick explained that Sxip has gotten active in the OpenID community, and in
discussions there, the case is growing for OpenID to be formulated as its
own organization that functions as working group and member of Identity
Commons.

Andrew made the point that if there are any marks, it should be clear where
to whom they belong, and how they are made available to the community..

Mary asked about the legal liability that officers of Identity Commons of
the umbrella organization would have for actions of the member working
groups. Scott explained that this liability should not "flow up" provided
that the umbrella organization does not have any direct or control of the
operation of a member organization, but only has the power to admit or expel
a member organization. The International Association of Boy Scouts and the
International Congress of Industrial Organizations both operate this way.
They do not have direct guidance or control over the member organizations,
and thus the umbrella organization does not have liability for the actions
of a member.

Mary pointed out that this means an Identity Commons working group does gain
any separate legal status by being a member of the Identity Commons. 

Dan pointed out that the working group can and should indemnify the umbrella
organization in its charter.

Scott summarized that if the umbrella organization is not holding "serious"
IPR, is not doing licensing, and is not taking extensive personal
contributions, then the choice of jurisdiction for purely legal reasons
matters much less. He also pointed out that a Geneva organization will
operate in French and English, which are languages generally accessible to
the current active participants. Mary explained that Geneva explicitly
welcomes and assists non-profits to organize there. The transaction costs
will amount to roughly several thousand dollars per year - Scott suggested a
$10K annual budget would be sufficient. A local accounting firm will be
required, however this is true no matter where the organization was located.
Dan pointed out that even if this was double what the non-profit would cost
in the USA or another country, the difference is diminimus.

Dan said that after his conversation with Mary prior to the call, he is
persuaded that Geneva is particularly attractive as a jurisdiction, largely
for its international reputation for neutrality, specifically for
intellectual property. Besides the brand and Internet addresses, the
organization is essentially "virtual", with servers as the primary asset,
and there would be no requirements on where those were located. Scott agreed
- the organization would contract for (or accept contributions of) the
operation of the servers anywhere in the world.

Scott pointed out it that member working groups could still incorporate
anywhere in the world.

Dick asked, as a sanity check, "Is a legal organization really needed". He
cited the IETF, which is not a legal entity, however it is closely with
ISOC, which is. While he agreed it's clear that International Boy Scouts
coordinates what it "means to be a Boy Scout", he asked whether Identity
Commons will serve that same role for Identity Commons working groups?

Drummond pointed out this is precisely the purpose of the Identity Commons
Purpose and Principles
(http://wiki.idcommons.net/moin.cgi/PurposeAndPrinciples), and in fact one
of the most important functions of the organization. Dan added that from a
legal perspective, the real "teeth" of an umbrella legal organization is the
ability to control affiliation. So it really does mean something to
"coordinate what it means to be an Identity Commons working group". 

Dan pointed out another benefit to a legal entity, which is that it protects
Stewards Council members from individual liability. Scott pointed out that
in many jurisdictions those protections are even stronger for the directors
of a non-profit.

Dick summarized this thread by saying that have a legal form for Identity
Commons provides:

* A mechanism of control for member participation.

* A mechanism for ownership of shared property when it does not need more
localized ownership/governance.

* A shared bank account for working groups who do not want/need to manage
their own funding (a specific example cited was Internet Identity Workshop
and Identity Open Space).

* A mechanism for obtaining insurance and protecting liability.

The concensus was that a Swiss-based international non-profit corporation
was the best option due to:

* reputation of this jurisdiction for international non-profits.

* perceived neutrality (Switzerland is not a member of the EU, so it is not
seen as being to EU centric, nor is it even a member of the EEA (European
Econonic Association)).

* potential for outreach among the international community.

Scott, Mary, and Dan recommended the following steps to guide final
decisionmaking regarding this action:

1) Look at the draft provisions that Mary has sent out.

2) Look at the model of other umbrella organizations that operate similarly.
Scott agreed to send an example of the labor and charitable models.

3) Identify the specific final tasks and responsible parties required to
complete the incorporation by 9/11.

=Drummond 

*********************

APPENDIX

Following is an email Scott sent on 7/11 to the Community list explaining
the options for organizational form/jurisdiction.

  _____  

From: Scott Blackmer [mailto:sblackmer at blackmerlaw.com] 
Sent: Tuesday, July 11, 2006 10:54 AM
To: 'Drummond Reed'; 'Daniel Perry'
Cc: community at idcommons.net
Subject: RE: [Community] re: organizational structure

Speaking very generally, the organization could be incorporated (or set up
as a trust or foundation, although those entities often entail more
reporting and transaction costs) in any US state and in many other trading
nations with well-established nonprofit laws and tax exemptions.  These
include Canada (particularly Ontario and British Columbia), the UK, The
Netherlands, Switzerland (a federal system, where nonprofits seem to be
centered, like business corporations, in the two cantons containing Geneva
and Zurich, respectively), and Belgium (Flanders in particular, in Belgium's
federal system).  The annual fees and accounting costs are typically higher
than in the US, however, and you will need to pay a corporate agent service
if you don't have a resident member who can host the organization
in-country.  Jaco points out that Costa Rica offers some advantages to an
international nonprofit organization, since transaction costs and litigation
risks are lower than in the US, but there is less experience with that
choice so far.

The statutes governing nonprofits in the US states are broadly similar to
each other, and nonprofit practices are heavily influenced by US federal tax
law.  As a result, the articles, bylaws, and membership agreements for the
most common kinds of nonprofits are essentially similar regardless of the
state of incorporation.  Many of the state laws are based on the American
Bar Association's Revised Model Nonprofit Corporation Act, but there are
enough peculiarities that you should always consult local legal counsel with
experience in handling nonprofits in the chosen state.  If you incorporate
as a nonprofit in a state where one of your directors, officers, or leading
participants resides, that individual or company may be willing to serve as
agent for service of process and also provide a site for your "principal
office" so that the organization can avoid paying an annual fee to a
corporate agent service in the state.  

You can also set up as a nonprofit association rather than a corporation,
but in most states that means there will be more uncertainty about
governance and liability.  Your directors and officers will typically be
better protected if you organize as a nonprofit corporation, and you will
find it easier to purchase insurance.

In the US, New York and California probably have the largest number of
registered nonprofits.  They are relatively expensive for fees and reporting
costs compared to some other states (the amounts aren't enormous, though -
typically a few thousand dollars a year for filings, accounting, and legal
advice until the organization gets big and complex).  If the most active
identity commons folk today are located in California, it's probably easiest
to incorporate there, designating one of them as the agent for service of
process and principal office in the state.  Later, as the organization
grows, it may be worthwhile considering setting up an international umbrella
organization with national affiliates.

"Industry associations" and "standards bodies" are well-recognized for tax
exemption purposes in the US (IRC sec. 501(c)(6)) and in the countries
mentioned above.  "Social welfare" or "community benefit" tax-exempt
organizations (IRC sec. 501(c)(4)) are a little trickier, since the legal
standards differ more from state to state and country to country.  The key
is defining the community to be benefited.  In the US, federal and state tax
laws typically require for tax-exempt status that the nonprofit's activities
"inure to the benefit" of the designated community as a whole, as opposed to
just a few members.  Expenditures on an activity that chiefly benefits one
or a few companies can result in an excise tax, as well as sales and income
taxation of revenues and possibly property taxes on facilities.  So, as
Kaliya mentioned, care must be taken to avoid the appearance of favoring a
particular company's technology or solution in a way that principally
benefits only that company.  

If you set up a 501(c)(4) or (c)(6) tax-exempt organization and later decide
to solicit tax-deductible donations from individuals, you could then
consider establishing a separate 501(c)(3) organization.  Thus, for example,
the national League of Women Voters is a 501(c)(4) organization, but it
created a separate Education Fund (LWVEF) approved as a 501(c)(3)
organization that solicits donations from individuals.  This keeps
compliance and accounting cleaner.  Also, note that a 501(c)(4) organization
(generally unlike a 501(c)(3)) can engage in legislative lobbying activities
in its areas of interest, another good reason for separating the
organizations if you have some potential interest in lobbying.

Apart from tax exemption, the main differences between nonprofit and
for-profit organizations are in ownership and governance.  For-profit
corporations have shareholders ("members" in the case of LLCs, and general
and limited partners in the case of partnerships).  They have an equity
interest in the assets of the organization and also certain statutory
rights, as well as rights provided by bylaws or agreements -- for example, a
right to vote on major decisions at annual or special meetings and to
receive a share of the net assets on liquidation.  

A nonprofit doesn't have shareholders or equity members.  No one gets
dividends, and if the organization is dissolved the remaining assets
typically have to be placed with another nonprofit engaged in similar
activities, either by the last board of directors or by a court, or else
they revert to the state.  A nonprofit may be organized in many
jurisdictions as a membership organization, where dues-paying members have
some statutory notice and voting rights.  But most nonprofit corporations
are run by directors who are initially designated by the incorporators, with
some procedure for electing their own successors to staggered terms.  The
directors operate similarly to the board of directors of a for-profit
corporation, but their objective is to further the tax-exempt purposes of
the nonprofit rather than to enhance share value and pay dividends to
shareholders.  Even if the organization is not set up as a membership
organization, subject to statutory membership rights, the bylaws can define
voting and other rights for members.  This gives a nonprofit a great deal of
flexibility in determining the most representative and efficient form of
governance.

Bottom line suggestions, for what it's worth (not given as specific legal
advice but simply as a list lurker and occasional contributor):  Incorporate
initially as a California nonprofit, with a designated initial board of
directors under a mandate to develop bylaws that provide for a form of
governance that suits your constituency and purposes.  Avoid 501(c)(3)
status unless and until you really expect a lot of individual donations, and
consider doing that later through a separate but affiliated organization.
Choose 501(c)(4) or (c)(6) depending on whether the principal focus is
social or business development, respectively, and then carefully define your
aims and the social or business community you are trying to benefit.  Keep
unrelated commercial activities out of the organization, although you could
provide related services for a fee or, for example, manage open-standard IP
licenses, conformance testing, or trademarked logos.

-- Scott

W. Scott Blackmer

Technology Law & Consulting

Tel:  1.801.495.1503

Mobile:  1.801.953.3858

Fax:  1.801.553.0118

E-mail:   <mailto:sblackmer at blackmerlaw.com> sblackmer at blackmerlaw.com

Web:   <http://www.blackmerlaw.com/> www.blackmerlaw.com 

i-name:  <http://xri.net/=scott.blackmer> =scott.blackmer

This email is not intended as legal advice and does not establish a
lawyer-client relationship.

  _____  

From: Drummond Reed [mailto:drummond.reed at cordance.net] 
Sent: Tuesday, July 11, 2006 12:57 AM
To: 'Daniel Perry'; sblackmer at blackmerlaw.com
Cc: community at idcommons.net
Subject: RE: [Community] re: organizational structure

Scott, you are a treasurer. I agree with Dan that this really sums up the
options well.

Let's flip it around into a question: if the basic criteria were:

1) Keep it as lightweight as possible.

2) Make it non-US-centric and as international as possible.

3) Donations would mostly just be for small amounts and be a business
expense for the donor.

What avenue would you recommend?

=Drummond 

  _____  

From: community-bounces at idcommons.net
[mailto:community-bounces at idcommons.net] On Behalf Of Daniel Perry
Sent: Monday, July 10, 2006 3:36 PM
To: sblackmer at blackmerlaw.com
Cc: community at idcommons.net
Subject: Re: [Community] re: organizational structure

Thanks, Scott. This is one of the best summaries I have ever read regarding
issues of setting up nonprofits.

On Jul 10, 2006, at 1:42 PM, Scott Blackmer wrote:

A couple of thoughts from the perspective of an attorney who represents some
nonprofits:

501(c)(3) status is really only useful if you want to solicit donations from
individuals who are US citizens or residents, or from charitable foundations
that donate only to other 501(c)(3) entities. You must get an approval
letter from the IRS, which takes a few months, and in most US states you
must also register subsequently with the state tax authority and get a
license to solicit charitable donations, in a manner that is typically
regulated (such as requirements as to what you can say in solicitations,
what accounting reports must be made to the state or made publicly
available, etc.). It's generally not worth the trouble unless you really
expect to solicit donations from thousands of US individuals, and the story
is similar in Canada and Europe.

If you want to set up an international organization, such as a charitable
foundation in one of the Swiss cantons or a Dutch stichting, and you still
want to solicit tax-deductible donations from individual Americans, then you
either have to set up a nonprofit company in the US affiliated with the
foreign nonprofit or register the foreign nonprofit as a 501(c)(3).  Most
organizations avoid the latter for a variety of tax, accounting, and legal
reasons.  That's why some nonprofits (Red Cross, Greenpeace, etc.) set up an
international foundation in, say, Switzerland, with national affiliates to
which individuals make contributions.  The national affiliates are then
assessed membership or licensing fees to fund the international
organization.  This all involves some accounting, administrative, and legal
costs, as well as annual corporate filing fees in each jurisdiction, so
again there's little point in doing it unless you want to make mass appeals
for donations.

There are other kinds of tax-exempt organizations that may be better suited
to your needs and that are typically less regulated and may not require a
letter of authorization from the IRS before soliciting funds.  Eric
mentioned the 501(c)4, for "social welfare organizations,"  "civic leagues,"
and other organizations devoted to some "community benefit."  Your
homeowners or condominium association is probably organized as a 501(c)4; so
is the League of Women Voters.  The state and federal requirements for
soliciting contributions are in many respects similar to those for 501(c)(3)
charitable organizations but are not always as strict.  

If you are looking for financial support chiefly from companies interested
in your field, consider setting up as a 501(c)(6) "business league" or
"industry association,"  which is the category chosen by most IT standards
bodies.  You don't need a letter from the IRS, and the companies can deduct
their fees or grants to you as business expenses.  

Of course, whatever form of nonprofit organization you decide on, and
whatever tax-exempt category you fit into, you have to try to avoid the
dreaded "UBI" (unrelated business income).  You will be taxed just like a
business corporation on income generated through  "trade or business"
activities that are "regularly" carried on and are not sufficiently
"related" to your tax-exempt purposes.  For tax, accounting, liability, and
insurance purposes, it's better to push any such business into a for-profit
corporation.

-- Scott Blackmer

W. Scott Blackmer

Technology Law & Consulting

Tel:  1.801.495.1503

Mobile:  1.801.953.3858

Fax:  1.801.553.0118

E-mail:  

 <mailto:sblackmer at blackmerlaw.com> sblackmer at blackmerlaw.com 

Web:   <http://www.blackmerlaw.com/> www.blackmerlaw.com 

i-name:  <http://xri.net/=scott.blackmer> =scott.blackmer

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