Your angle or yuor devil: choosing between LLC and nonprofit

Ms Boba's Quarterly Extravaganza #2 part 2

Published on January 24, 2024

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Table of Contents

OwO What’s this?

This is a commented version of the second edition of my $upporters newsletter/town hall/“quarterly extravaganza” (or, better said, of one of its sections). It was originally published in January 2024, and it’s now public. If you want new editions of this Town Hall straight into your inbox as soon as they’re available, you can support me on Patreon or on this same website!

Warning: Missing Feature! You cannot enlarge images on this blog yet (alas). Do make generous use of “open image in new tab” on browsers, “pan to zoom” on mobile, or ignore the small text and focus on the–literal!–big picture.

Since the dawn of the BobaVerse project, I had one question in the back of my mind: in the long term, should these projects be under a nonprofit or a more typical business structure?

For a long while, this question stayed unanswered. Then, after FujoGuide’s very succesful Kickstarter campaign showed us we were “in for the long run”, it became time to finally answer it.

The challenges were many: for one, I had never worked with lawyers before (not even in my home country); then, as the lawyers themselves said, “the legal system is 20 years behind the type of project you’re trying to build”; last, (in case you’re not aware) lawyers are really expensive.

However, with grit, determination, and lots and lots of reading, we eventually made a choice.

Here’s what we learned.

Right side:

Thing that Got Done since Last Quarterly Extravaganza #2:
We (mostly)
figured out
legal stuff 

Left side:

The matrix "I know kung fu" meme, but it reads: i know how to work with lawyers (mostly)

flavor text:
look, I never had to work with lawyers before

now I know more about US business law than my poor European immigrant brain ever wanted to know 

(that is, 0)

Bottom: screenshot of 2 toots reading "lawyer: you're very knowledgeable about these laws / me, as my soul leaves my body: thank you" and "every moment I spent reading about law is one less moment spent reading about my blorbos".
(these are the sacrifices I do for The Cause™)

Nonprofits vs LLCs

The first step in this journey was to look at the path chosen by other fandom-adjacent entities. As people might know, Archive of Our Own (the largest fanfic archive, popularly known as AO3) is headed by The Organization for Transformative Works, a nonprofit organization dedicated to the preservation of fanworks. Conversely, Dreamwidth (a social network for fandom born on the wings of Strikethrough) went with an LLC, thus choosing the for profit route.

Being unable to copy our foreparent’s homework (an unwise choice regardless), the next task became clear: we collected information on the difference between nonprofit organizations and LLCs to help us determine which one would better fit our needs.

A presentation slide comparing nonprofit organizations with limited liability companies. Full text follows:

It’s time to solve a long standing Question™, a.k.a.: “I can be your angle or yuor devil” (but until now, i’ve been your sole proprietor)

On one side:
Nonprofit Organization (fandom example: The OTW)
Has no owner
Cannot distribute profits (e.g. royalties from sales)
Is governed by a board
People can deduct donations from their taxes
It’s a lot of work

On the other side:
Limited Liability Company (fandom example: Dreamwidth)
Can have one or more owners
Can do whatever with their profits
Is governed according to its operating agreement (an incredibly flexible document that describes the financial and functional governance of the LLC)
People cannot deduct donations from their taxes (but they can still donate!)
It’s also lot of work, but significantly less than a nonprofit

At the bottom:
(If I get anything wrong in these slides please do let me know)
(I am still learning)
(so much learning)

On the other side of this work, the difference feels straightforward. However, getting a clear picture of the legal intricacies felt way more overwhelming when learning about it all. This is just an abridged version of them!

Fun fact: we were sure we’d make the opposite choice until the almost-very-last minute. One day, you’ll hear all about what we’d do if we had the resources to choose both (maybe one day we will).

Choosing a Winner

As the slide below says in big, bold letters, we chose to incorporate* as an LLC (and, once we grow enough, possibly switch to a benefits corporation1). This was not an easy choice, and we went back and forth–and agonized over it–for quite a while. Eventually, however, a few considerations tipped the scales:

  1. While our projects have a “charitable intent” that would allow us to qualify for 501c3 status (a.k.a. become a nonprofit), we decided that the procedures required would place a too heavy weight on our already-stretched shoulders.
  2. As we spearhead many ambitious projects with very little budget, we wanted to be able to reward those who took a bet on us with their time and work, should our efforts eventually pay off.
  3. Last–without mincing wordsthe online (and fandom) discourse around and view of nonprofits made us uncomfortable: while it’s true that nonprofits have a charitable intent, they still have a balance sheet to balance, and produce work that deserves to be paid for. This seemed too easy to forget.

Another slide, talking about why LLC was chosen. Full text follows:

And our winner is… LLC! (or a fancy alternative like a benefits corporation)

In a top corner:
(also let it be known I did not give up on the idea of setting up a nonprofit too)
(but not right now)
(right now we gotta fight to get a stable business going)

Listed under the “winner is LLC” heading:
Not enough resources, people, and/or time to go the nonprofit way
Too-strict requirements over profit-sharing make it hard to creatively supplement the little upfront cash we have
And, tbh, a nonprofit would set the wrong expectations

Under that last bullet point:
I do “vibe” with the ideas behind nonprofits, but it’s too easy for people to think “nonprofit” = “works for free” (which isn’t true, btw)
The goal is a company that builds things that are good for the world AND gets paid for them (and it’s already hard to convince people they should pay for software when you’re not “a charity")
Eventually a balance sheet needs balancing, and if people don’t buy what you make, then you don’t have resources to make it (this is true for both legal structures, but a nonprofit makes outsiders more likely to forget this)

On the side: a photo of a “Limited Liability Companies for Dummies” book and a “Nonprofit Kit for Dummies” book
Text underneath: Thanks to whoever rec’d the “for dummies” books in the FFA thread, I need you to know you literally saved my life
I didn’t consider them at all, cause I’m not a dummy
(...except on this I kinda am)
jokes aside they’re genuinely good and informative books

* As of January 2024, we’re not yet officially a company. We’re working on it, and you’ll hear more as the year progresses!

The ethical concerns

Given that our projects have a clear “anti-corporate bent”, becoming a for profit corporation came with concerns. As we researched more, however, we found that LLCs are an incredibly-flexible legal structure that gives us ample power to add ethical guardrails. Indeed, by adding to their Operating Agreements (the governing document of an LLCs), the members of an LLC can ensure the company is run (and remains run!) in a way that’s consistent with their values.

The scope of available options for a custom operating agreement (and, most importantly, their consequences) is a deep rabbit hole we haven’t fully dived into yet. Among the possibilities we learned about is putting a legal upper limit on the amount of returns that can be offered to investors (thus discouraging or outright forbidding Venture Capital investments); ban the company from being sold to corporate entities; or become a cooperative managed by its members, or even a custom type of management structure that better meets the needs and wishes of our collaborators.

Another slide, talking about the misconception that LLCs are The Bad Corporations and what they actually are. Full text follows.

Aren’t LLCs = The Bad Corporations (trademark symbol)?

LLCs are mostly about creating a legal entity to protect the assets of the person(s) who owns the company (LLCs can be co-ops, workers-owned, etc…)

On the side: for example: if an LLC gets sued, only the company money is at risk (rather than e.g. my house)
(not that I have one)
(hashtag millennial)

Back to bullet points:
As an incredibly flexible legal structure, LLCs can set up guardrails to make sure that they can’t e.g. unilaterally be sold to another corporation (which is a significant source of our modern problems)
Similarly, there can be restrictions in place on e.g. what the business is allowed to offer to investors

On the side:
so you could make it legally impossible to e.g. accept VC funding, even in the future (for example by capping maximum returns)

Last bullet point:
Also, new legal structures like benefit corporations can have explicit goals of doing good for the world alongside protecting shareholders

Underneath this last bullet point:
TBH what I found here is that people choose to structure their LLCs to enable unethical behavior, rather than “ethical LLCs” being impossible
On one hand, “unsurprising”, on the other hand pls understand I knew nothing about US business law a few months ago

Concluding note:
All this is regulated by the LLC’s “operating agreement” (we’ll start with a standard one while we study the various options) (the trials and tribulations of too much flexibility tbh)

In a bottom corner:
big thanks to the “Sustainable Economies Law Center” for their excellent material and free help (link: go donate) (literally couldn’t have done it without them, lawyer costs are pwning our funds lmao)

Until we have more resources in place and a better understanding of our future, we’re going to keep things simple: at first, our LLC will be what’s called a “single-member LLC”, owned by yours truly (me). As our work continues and enjoys more and more stability (and more funds for lawyers), we’ll be looking into how we can better distribute both success and responsibilites, as well as how to formalize and incorporate our ethical principles.

In the meantime, if you know a lawyer who loves infodumping about corporate (or other) law (especially on Discord), please send them my way. Our legal journey has just started, and it’s only going to get more complex from here on out.

While I condensed it in just 3 slides, this research has taken a lot of time, effort, and money. Lawyers are a significant expense. We really, truly wouldn’t have been able to get here without the pro-bono help of the amazing “Sustainable Economies Law Center”, whose lawyers provided incredible advice and fielded many disparate questions. You can donate to them here.

For-profit motives and social networks: BobaBoard’s destiny

If you asked me about the corporate structure of BobaBoard in the past, you’ve undoubtely heard my rant on the incompatibility of for-profit motives, and sustainable, community-driven social networks. While this might make the choice of going with an LLC appear puzzling, I want to assure you: my opinion on the topic has not changed.

While we’ll move many of the projects in the BobaFujoVerse under the new legal entity, BobaBoard will stay behind as an independent project. We’re currently looking into fiscal hosting as a lightweight option to grant it nonprofit status, without adding an unsustainable administrative burden. Once again, you’ll hear more as the year progresses.

Next Up: More Extravaganzas

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  1. A benefits corporation is a new type of legal structure that sits in-between nonprofits and other corporate structures like LLCs. A benefits corporation must include a social benefits cause in its mission statement, and must consider the social impact of its business choices, rather than just the economic impact for its shareholders. While complications with taxes and processes make it an unwise choice to start with, we’ll continue evaluating the possibility with time.