Posts Tagged with “non-profit”

Last weekend I had an extra half day in San Diego while waiting for a gymnastics meet (entry level boys competition) to start. I had an experience that makes me feel even more strongly that we should be telling everyone we touch that Mozilla is a public benefit organization, existing to build the Internet as a global resource; open, accessible and “hackable” by all. I’d like to see most or all Mozilla websites make this clear, and I’d like to see our products make this very clear as well.

At the hotel I saw a brochure for “Quail Botanical Gardens” in a rack with brochures featuring San Diego’s many visitor attractions. I love gardens so I took a look. It sounded potentially interesting but I was also wary of finding a “tourist trap” where someone has planted a few basic plants and is trying to find newbies who will pay to see them. So I went poking around their web site.

The first thing I noticed after the photos was the statement, “The mission of the Garden is to inspire people of all ages to connect with plants and nature.”

“Hmm,” I thought, “that sounds a lot like a non-profit mission statement.” It soon became clear that this is the case – the garden is a non-profit organization. My worry about the tourist trap immediately decreased, and I felt better about the chances of something worthwhile coming of a visit. Non-profit organizations can make mistakes. They can be boring and ineffective just like anything else. But the chance that the whole thing was just something dumb designed to get people there to extract money felt much, much lower.

As it turns out, the garden is great. Lots of bamboo, subtropical fruit, cactus and other fun items, and I’ll go back next time I am in the San Diego area.

I’m often asked various questions about non-profits. Many people have a general idea of what “non-profit” means but very few have a specific, technical understanding. This makes perfect sense. The technical understanding is a legal and accounting mix, and specific to legal jurisdiction as well.

Here’s a brief outline of what “non-profit” means — in the technical, legal sense — to the Mozilla Foundation. It’s pretty dense stuff, and I’ll provide only the most basic summary. I think about this a lot but in this post I’ll try to stick to describing the structure.

I. “Non-profit” status

The Mozilla Foundation is legally identified as a “non-profit public benefit” organization under California law. Its property is “irrevocably dedicated to charitable purposes.” The Mozilla Foundation is governed by the California Nonprofit Corporation Law, which is somewhat different from California’s General Corporations Code. I’ve found that the distinctions between the general Corporations Law and the Nonprofit Corporation Law include structural elements — members instead of shareholders and so on, and a set of distinctions which I think of as designed to ensure that the organization is pursuing a non-profit goal rather than pursuing private gain.

II. “Tax-exempt” status

The Mozilla Foundation is also a tax-exempt organization as determined by the U.S. Internal Revenue Service. To be a tax-exempt organization one should be a non-profit organization (as described above), and the purpose of the organization must fit within additional specifications. Once this status is granted, a tax-exempt organizations is governed by a body of regulations and policies determined by the IRS. These regulations are in addition to any requirements imposed by the Nonprofit Corporation Law. These regulations identify permissible purposes for a tax-exempt organization. They also limit the kinds of activities in which a tax exempt organization can engage, especially for activities that generate revenue or that involve advocating for particular laws. In exchange for tax-exempt status, an organization lives with significantly more restrictions on the way it can operate.

III. “501(c)(3)” status

The Internal Revenue Service grants tax-exempt status to several different kinds of organizations. The Section of the Internal Revenue Code that describes the types of exemptions is Section 501. The most important one for our purposes is Section 501(c)(3). This section applies to organizations “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition . . . or for the prevention of cruelty to children or animals . . .”

The Mozilla Foundation is a 501(c)(3) tax-exempt organization dedicated to promoting the Internet as a universal, innovative platform accessible to all.

IV. “Public Charity” status

There are actually two types of 501(c)(3) organizations. One type receives significant contributions from the public — a “public charity” 501(c)(3). The other type is a “private foundation.” These are generally 501(c)(3) organizations where an individual or family contributes most or all of the money and the charity operates from these funds and the income they generate. Private foundations are required to spend a certain percentage of their funds each year, public charities are not. (There are also two types of private foundations, operating and non-operating.) The IRS reviews 501(c)(3) organizations periodically to see if they are public charities or private foundations. The Mozilla Foundation is currently a public charity 501(c)(3) organization.

For Further Detail

Each of these areas can become complex quickly. This is an area where it takes true experts to fully understand. Wikipedia has a nice overview article. The actual documents relating to the Mozilla Foundation can be found at the Mozilla Foundation website.

After living in this world for the last few years I have many thoughts about where this system works well and where it is unwieldy or even counter-productive. I’ll put those in a separate post before too long.

I’m often asked various questions about non-profits. It seems many people have a general idea of what “non-profit” means but very few have a specific, technical understanding. This makes perfect sense. he technical understanding is a legal and accounting mix, and specific to legal jurisdiction as well.

So here’s a brief outline of what “non-profit” means — techncially — to the Mozilla Foundation. It’s pretty dense stuff, and I’ll provide only the most basic summary.

I. “Non-profit” status

The Mozilla Foundation is incorporated as a “non-profit public benefit” corporation under California law. (So yes, even a non-profit “foundation” is a “corporation.” In this sense “corporation” means a form that is recognized as having a legal existence.) Its property is dedicated to charitable purposes. It also means that the Mozilla Foundation is governed by the California Nonprofit Corporation Law, which is different from California’s General Corporations Code. I’ve found that the distinctions between the general Corporations Law and the Nonprofit Corporation Law include structural elements — members instead of shareholders and so on, and a set of distinctions which I think of as designed to ensure that the organization is pursuing a non-profit goal rather than pursuing private gain.

For example, the Articles of Incorporation of the Mozilla Foundation (and other non-profit corporations) provide that:

“This Corporation is a nonprofit public benefit corporation and is not organized for the private gain of any person . . . The specific purpose of the Corporation is to promote the development of, public access to and adoption of the open source Mozilla web browsing and Internet application software.”

II. “Tax-exempt” status

The Mozilla Foundation is also a tax-exempt organization as determined by the U.S. Internal Revenue Service. To be a tax-exempt organization one needs to show that one is incorporated as a non-profit organization (see Section 1 above), and that the purpose of the organization fits within additional specifications. Once this status is granted, a tax-exempt organizations is governed by a body of regulations and policies promulgated by the IRS. These regulations are in addition to any requirements imposed by the Nonprofit Corporation Law. These regulations relate both the purpose of the tax-exempt organization and also require that the organization’s actions be in furtherance of the tax-exempt purpose. They also limit the kinds of activities in which a tax exempt organization can engage, particularly activities that generate revenue. To help me understand this, I think of this as a trading general flexibility of action by the organization in exchange for tax-exempt status.

The Mozilla Foundation’s tax exemption determination letter can be found on the Foundation’s website.

III. “501(c)(3)” status

The Internal Revenue Service grants tax-exempt status to several different kinds of organizations.

More specifically, the Mozilla Foundation is a “501 ( c) (3) corporation.” The “501” here stands for the section number of the U.S. tax code that defines tax-exempt organizations. Section 501(c ) (3) allows tax exempt status for an organization that is ” . . . organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes . . .” You can find the text of Section 503 of the US tax code here: http://www4.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000501—-000-.html

Before I was involved with the Mozilla Foundation, I thought that the definition of a 501(c )(3) corporation covered most of what one needs to know. It turns out that are two quite different kinds of 501(c )(3) corporations. There are “private foundations” and there are “public benefit” charities. Each type is subject to different regulations. Here’s a description of the differences written in generally understandable language.

The Mozilla Foundation is a public benefit charity. In addition, the Mozilla Foundation is a tax-exempt organization as determined by the State of California.

2. Mozilla Foundation and Mozilla Corporation.

It’s hard to find documents in this area that are relatively easily understood. I am including an excerpt from a document at the IRS site that is a useful starting point. It describes how the tax-exempt parent and the taxable subsidiary must act separately, and not as one. The document, known as ectopic86 (written for a training seminar in 1986) says this about the activities of a tax-exempt parent and a taxable entity:

“1. Introduction. Taxable for-profit subsidiaries of organizations exempt under IRC 501(c) are not a new phenomenon. The formation of such organizations, however, has increased markedly in recent years.”

It goes on to state:

“A parent’s exempt status may be jeopardized if the commercial activities of its subsidiary can be considered to be, in fact, activities of the parent . . . . That is, where a corporation is organized with the bona fide intention that it will have some real and substantial business function, its existence may not generally be disregarded for tax purposes. Britt, 431 F.2d at 234. However, where the parent corporation so controls the affairs of the subsidiary that it is merely an instrumentality of the parent, the corporate entity of the subsidiary may be disregarded. (See IRC 482; see also 1 W. Fletcher, Cyclopedia of the Law of Private Corporations Section 43.10 (Perm. Ed. 1983).)

B. Application of Principles Whether the activities of a separately incorporated taxable subsidiary may be attributed to its parent is, therefore, a question of evidence. Basically, once it is established that a taxable subsidiary was formed for a valid business purpose, the activities of such a subsidiary cannot be attributed to its parent unless the facts provide clear and convincing evidence that the subsidiary is in reality an arm, agent, or integral part of the parent. This presents a considerable evidentiary burden that is not easily overcome. Clear and convincing evidence of the subsidiary’s lack of separate existence could be produced, however, in situations where the parent is involved in the day-to-day management of the subsidiary, where the subsidiary’s Board of Directors has no independence of action, or where transactions between the two entities are conducted on a basis that is otherwise than at arm’s length. (Transactions between parent and subsidiary should be scrutinized carefully from another point of view: the possibility of inurement always exists, and a parent-subsidiary relationship cannot function as a shield against the assertion of inurement.)”

You can find the full document the IRS website.