A true fish story…… Several years ago I was retained by a few lake associations to cure what was “fishy” at their lakes. Have you ever heard of invasive species? An invasive species is a species that is introduced into a new environment, becomes overpopulated, and harms the ecosystem. Examples found in the news lately are Burmese Pythons in the Florida Everglades, Asian Jumping Carp heading to the Great Lakes, and Zebra Mussels in the Midwest, including Nebraska.
My case in particular pertained to the scourge of White Perch, a silvery-white, quickly multiplying fish. In the late 1960s, the Nebraska Fish and Game Department purchased White Perch to stock lakes in western Nebraska. Apparently, the lakes in the Sandhills have a high level of alkaline, and the department believed that the White Perch would enhance fishing there. Despite good intentions, human intervention in nature can have negative and even catastrophic results. I do not recall if the fish ever made it to western Nebraska, but what I do know is that the fish are now plentiful in eastern Nebraska and killing off natural fish in lakes and rivers. White perch breed faster than rabbits, and they grow faster than the native fish. They also feed on the native fish population. Soon all that is left in the lake are white perch that are no bigger than three inches long. The fish then start to cannibalize each other. The end result is that a lake is no longer suitable for fishing.
How did the White Perch get into Eastern Nebraska’s lakes and rivers? Personnel at Game and Parks went to stock a few lakes in Lincoln and Omaha with bass, a highly desirable fish. Apparently, “baby” bass and “baby” white perch look the same. Game and Parks mistakenly stocked the lakes with white perch fry (babies) and not bass. Once the fish are in a lake, they can migrate to other lakes through various methods, such as flooding and birds. Another way the fish migrate is through “bucket biologists” who take fish caught in one lake to stock in another lake, thinking it is a good thing to do. Once the fish get into the river systems, it is practically impossible to rid the ecosystem of the invasive fish. And that is where Nebraska is now. My clients’ lake association hired me because their lake and fishing environment was being destroyed by this invasive species. My solution for my clients was not running off to court and spending thousands of dollars like most attorneys would do. I decided to take the issue to Game and Parks and their bosses, the Nebraska State Legislature. Not only did I save the clients’ time and money, but we also obtained an excellent result.
Game and Parks agreed to pay for the lake kill, the restocking of the lakes with desirable fish, and several years of monitoring for white perch. A lake kill is achieved when a professional uses a toxin that indigenous people in Brazil use in the Amazon Rainforest to catch fish.The toxin removes the oxygen from the water. Monitoring is achieved through the use of electric shocks that render the fish motionless, causing them to float on the surface and allowing a statistical count before the electrical stun wears off and the fish swim away. The monitoring is essential to keep the number of white perch down before they overtake the lake once again.
Expensive litigation is not always the answer. Creative solutions can work out best for all the parties involved. In my fish case, my clients got along just swimmingly without litigation.
The Trial of the Chicago 7, Photo Credit MovieStillsDB
Netflix’s 2020 release, The Trial of the Chicago 7 (written and directed by Aaron Sorkin), attempts to make a straightforward story out of a complicated trial, in which eight defendants are accused of conspiracy to provoke the riots at the 1968 Democratic Convention in Chicago. In some ways, Sorkin had incredible success, while in other ways, the compromises he made may have been too hasty.
The overall structure of Sorkin's screenplay for The Trial of the Chicago 7 was incredibly effective. In the brilliantly edited opening montage, he introduces us to the characters and the upcoming protest with the fun touch of Sorkin dialogue (a la The West Wing or The Social Network). The editing, both visually and sonically, heightens the audience’s excitement for the convention. Then, all of a sudden, we are thrust forward in time—the montage is over, and we are left stagnant and enclosed in the US Attorney’s office, watching President Johnson’s photo being taken off the wall with an almost comical lack of ceremony. Sorkin reveals the events of the convention slowly throughout the trial. During opening arguments, we only know that there were riots, not how they started and why they occurred. This structure excellently maintains the film’s forward momentum. The audience isn’t in suspense only for the outcome of the trial—we’re told from the beginning that it is rigged. We also want to know what happened in Chicago that weekend.
My only qualm with the storytelling methods Sorkin uses is that the stakes seem to drop at the end during the freeze frame when the title cards tell us that the case was overturned on appeal. In trying to create the triumphant final scene (which I admit was emotionally affecting), the film may have lost some of the weight that comes with sentencing and the appeal process. It almost seemed too easy.
While the film’s ensemble is full of great performances and ripe for character study, I was especially interested in Joseph Gordon Levitt’s character, prosecutor Richard Schultz. He’s not a total lunatic, like the judge, or a bigot, like his fellow prosecutor and boss. His decency, however, makes him even more odious. In the final scene, the sentencing, his character stands up out of “respect for the fallen” as defendant Tom Hayden, played by Eddie Redmayne, reads the names of Americans killed in Vietnam. This gesture is too little, too late. Furthermore, it is so frustrating to watch Schultz in the scene with his daughters. How can this seemingly kind father actively fight to put men in jail when he knows they do not deserve it? Schultz shows Sorkin’s ability to write complicated, real characters. People can make decisions at their jobs that harm other people, and they can still be kind parents and friends. These things are not mutually exclusive.
Joseph Gordon Levitt as prosecutor Richard Schultz, Photo Credit MovieStillsDB
There is, however, something contradictory with this character that makes me question what the film itself is trying to say. Richard Schultz is the antithesis to the film’s argument articulated by Hoffman in his testimony, that our country has “good institutions with evil people.” Schultz shows that there are bad institutions populated by “good” (or at least tolerable) people. Even if he is kind, he is still arguing that these men should go to federal prison for a long time. Why? Because he is a part of a system that allows such things.
I also was a bit put off that Sorkin makes it seem like Schultz immediately objected to defendant Bobby Seale (Co-Founder of the Black Panther Party, played by Yahya Abdul-Mateen II) being bound and gagged when in reality we know that Seale was bound in the courtroom for days, not just a few minutes. At the same time, it is possible that Schultz’s intentions were selfish. As defense attorney Kunstler argues, Schultz stands up for Seale because the judge’s actions will make Seale more sympathetic to the jury, and Schultz doesn’t want the jury to feel sympathy for the defendants.
Another discordant point is the portrayal of Ramsey Clark. Michael Keaton’s performance is exceptional, and his dialogue was exciting to watch. I was just unsure of why there wasn’t any commentary on the fact that Clark was a part of the Democratic establishment that the defendants were protesting against in the first place. I think Sorkin missed an opportunity to explore those nuances.
Eddie Redmayne as defendant Tom Hayden, Photo Credit MovieStillsDB
That being said, I was authentically moved by the film, with Sorkin’s superb combination of humor and optimism with grave issues of institutions and power. After Fred Hampton’s assassination, we return to the courtroom with his seat empty. Yahya Abdul-Mateen II brings Bobby Seale’s grief to life in a performance that is heart-wrenching and incredibly real for those who have felt that type of blinding anguish from someone lost. The fact that Seale uses the full physical power of his voice at this moment makes his silencing by the judge and the marshals even more harrowing. Furthermore, Sacha Baron Cohen’s performance as Abbie Hoffman, in combination with the way Sorkin wrote the character, really worked for me. He masterfully transitions from comedy to sincerity within and between scenes. His moments of earnest emotion were deeply affecting, perhaps because they were brought out through this shell of humor. Lastly, Sorkin handled the conflict between Abbie Hoffman and Tom Hayden with great skill. With minimal exposition, the audience understands where each is coming from with their revolutionary ideology. Like all of my favorite interpersonal conflicts in film, both sides are right. I almost wish Sorkin had spent more time examining this fundamental ideological divide in the activist left. I was most interested when I wasn’t sure which side I should be on, and I was most hopeful when I saw the characters’ connection through that difference. It gives me hope for the concurrence of cultural revolution with incremental electoral change.
Overall, The Trial of the Chicago 7 succeeds in telling its story in a way that is engaging, intelligent, and poignant. In reality, Sorkin couldn’t address all the nuances in the story. There is value, however, in examining each contradiction, each question that arises as we reflect on films about our history with justice.
By Marisa Bianco
The Trial of the Chicago 7
Director: Aaron Sorkin
Year: 2020
Streaming on Netflix
The term used for an owner of an LLC is "member" and an LLC can have a single member or many members. The difference between the two is fairly obvious, but can be worth addressing. Generally a single member LLC will be managed by that single member, though it is entirely possible that the single member could chose to have a manager run the LLC instead. The single owner LLC generally operates much like a sole proprietorship with the owner exerting full control over the business.
The multi member LLC, on the other hand, has a bit more variety. Multi member LLCs will generally operate either more like a partnership or more like a corporation. The members of the LLC may choose to operate the business directly, making the LLC similar in structure to a partnership, or may choose to instead have a manager run the LLC which will give the LLC a structure similar to that of a corporation with the members of the LLC acting as the stockholders.
The LLC has two basic forms that it can take, member managed and manager managed. These two forms are designed to emulate the partnership and the corporation respectively. In the member managed LLC the members act similarly to a partnership. The members of the LLC run the business themselves according to the rules laid out in the operating agreement. On the other hand, the manager run LLC is run more like a corporation. The members of the LLC choose a manager who is responsible for the actual running of the business while the various members of the LLC act more like shareholders in a corporation.
The default for an LLC is member-managed. In order to create a manager-managed LLC the Operating Agreement must explicitly state that the LLC will be manager-managed. Neb. Rev. Stat. §21-136(a). The two forms act largely the same with a few exceptions. In a member-managed LLC the default rules allow the members equal rights to conduct business with the majority prevailing in matters of the ordinary course of business and matters beyond that requiring unanimity. §21-136(b). Manager-managed LLCs operate in a similar manner with managers making the business decisions instead of members. There are some powers reserved for members in a manager-managed LLC, though, and these include the ability to dispose of all or most of the LLCs property, approve of mergers, conversions, and domestications, undertake matters outside of the ordinary course of business and to amend the operating agreement. §21-136.
The difference between a domestic LLC and a foreign LLC is simply where the LLC was created. The domestic LLC is created in Nebraska while the foreign LLC is created in another state. There is little difference between how these are treated under Nebraska law and a foreign LLC can file for a certificate of authority with the secretary of state that will eliminate any difference. This is often a good idea because until a certificate of authority for the foreign LLC is on file, that LLC cannot bring an action in Nebraska and it is possible for the Attorney General to seek to enjoin that LLC from operating within Nebraska. §21-162 – 21-163.
An LLC that is providing professional services governed by a regulating body will have a number of additional requirements which must be met. §§21-185 – 21-191. Most importantly, an LLC which provides a professional services must provide the Secretary of State with a certificate of registration from the regulatory body which provides the name and address of all members, managers, professional employees, and agents who must be licensed and assures that any these people are authorized to provide such services. §21-185(2). A professional LLC also can only provide that one type of service and any services that are ancillary to that primary service. §21-190.
When forming a limited liability company, the two most important documents are the Certificate of Organization, the term used in Nebraska for what is typically called the Articles of Organization, and the Operating Agreement. Only the Certificate of Organization is actually required in order to create an LLC; however, it is foolhardy to create an LLC without an Operating Agreement because much of the structure of an LLC can be changed to fit with how the members would like to run their business in that document. What cannot be changed in the Operating Agreement under §21-110 are:
(1) the LLC's capacity to sue and to be sued; (2) the applicability of Nebraska law; (3) the power of the court under §21-120; (4) eliminating the duties of loyalty and/or care; (5) eliminating the contractual obligations of good faith and fair dealing; (6) unreasonably limiting the duties and rights of members and managers to information; (7) limiting the power of the courts to dissociate the LLC in the case of illegal activities; (8) vary the requirements of winding up the LLC in case of dissolution; (9) unreasonably restrict the right of a member to maintain an action against the LLC or against other members; (10) restrict the right to approve a merger, conversion, or domestication of a member that will have personal liability with respect to a surviving, converted, or domestic organization; and (11) restrict the rights of a person other than a member or manager.
In order to file a Certificate of Organization it must be signed by at least one organizer and contain the name of the LLC and the street and mailing addresses of the designated office and agent for service of process. §21-118 – 21-119. The final requirement for creating the LLC is that notice must be published in a legal newspaper of general circulation for three consecutive weeks that states the same information that is required to be in the Certificate of Organization. §21-193.
If something in the filings is incorrect or changes over time then it is possible to amend both the Operating Agreement and the Certificate of Organization. There is no need to create another filing with the Secretary of State in order to amend the Operating Agreement because that document deals with how the inner workings of the LLC are to be done. If the Certificate of Organization is being changed, though, then this must be filed with the Secretary of State. If members of a member-managed LLC or managers of a manager-managed LLC are aware of inaccurate or outdated information in the Certificate of Organization then there may be required amendments. Even if not required, though, it is generally a good idea to amend a Certificate of Organization that is not correct because it is possible that if a third party suffers a loss due to inaccurate information in the document then it is possible that the members or managers could be held liable for that loss. §21-123. When amending the Certificate of Organization the filing must contain the name of the company, the date that the Certificate of Organization was filed, the changes that are being made and any former names. Also of note is that the introductory paragraph must contain the company's present name and the date of the filing of the company’s initial Certificate of Organization.
After the creation of the LLC there is also a requirement for a biennial report. This means that every two years, on odd-numbered years, the LLC is required to file a report with the Secretary of State which includes the name of the LLC as well as the street and mailing addresses of the designated offices, any PO Boxes, the agent for service of process and the principal office. §21-125.
To create a C corporation the party must file a document called the Articles of Incorporation. While the specific requirements of these can vary between states, in Nebraska the most important requirements of the Articles of Incorporation are the following: (1) the corporation’s name; (2) the number of shares that the corporation may issue as well as the classes and par values of those shares; (3) the address of the registered office and of the registered agent; and (4) the name and address of each incorporator. Neb. Rev. Stat. § 21-2018. Once the Articles are filed there must be a board of directors for the corporation. They can be chosen in the Articles of Incorporation or elected afterwards. All other positions flow from the board of directors. Officers are chosen by the board to perform the day to day running of the corporation, and from there employees are hired. Ultimate ownership of the corporation lies with the various shareholders, who have an indirect claim on the capital of the business.
The disparate structure of the C corporation also leads to the control of the corporation being broken up and divided among the various groups. The shareholders have some statutorily defined rights that give them control over the board of directors. The shareholders have the power to elect who is on the board of directors. Neb. Rev. Stat. § 21-2080(4). The board of directors is ultimately responsible for the decisions of the corporation; however, generally the board is not involved with the daily operations. The officers of the corporation whom the board chooses handle daily operations.
While all of these different groups exert control over the corporation in one form or another, generally none of these parties are personally liable for the obligations of the corporation. The corporation's status as its own legal person means that the shareholders' liability is limited to the amount of their investment and that the board members, officers and employees of the corporation are also, generally, not personally liable.
The profits that a corporation makes are taxed to the corporation as a result of its status as an individual. Whatever profits the corporation makes may be distributed to shareholders as the board of directors determines. If the board does choose to distribute profits to the shareholders then the shareholders will also have to pay income taxes on the distributions received in spite of the fact that the corporation has been taxed once before on the profits earned.
The S corporation is very similar to the C corporation, but has a few key differences that arise due to its creation as an entity designed to offer some limited liability to corporations. The laws governing S corporations are not a matter of any state law, but are a creation of the IRS. The IRS will allow a corporation to make the election to be an S corporation if the corporation meets the following requirements: (1) the corporation has no more than 100 shareholders; (2) shareholders must be U.S. citizens or residents and generally must be actual persons (3) the corporation cannot have issued more than one class of stock. 26 U.S.C.A. § 1361.
The S corporation shares the same rules from structure, control and most other issues with the C corporation because the S corporation is really just a C corporation which has filed a special tax election. The big difference between the two forms comes, not surprisingly, in how the corporation is treated for tax purposes. The S corporation is treated like a partnership for tax purposes. This means that the S corporation is given pass-through taxation and that there is no problem with double taxation because the profits flow right through to the shareholders.
The S corporation seems to address the tax-shield conundrum on its own, so why is there a need for the LLC? This is because, while the S corporation can be useful in some situations, the S corporation is far more rigid than the LLC and can be notoriously difficult to use. The purpose of the S corporation was to give the small business the ability to limit its liability while not forcing it into the double taxation that a normal corporation faces. The problem, however, is that the rules surrounding the S corporation can be prohibitively complex. The S corporation must make a tax election with the IRS; however, the formalities to do this can be very complex and require considerable legal help. The high transaction costs are needed, though, because if the formalities are not properly followed then the IRS can require all back taxes to be repaid.
A partnership is simply an agreement between at least two individuals to carry on a business for profit as co-owners. This business entity does not actually require any formalization; however, it is often helpful to file a partnership agreement in order to lay out the structure of the partnership. The Nebraska Uniform Partnership Act of 1998 governs Nebraska's law of partnerships. This act follows the Uniform Partnership Act of 1997, also known as the Revised Uniform Partnership Act, quite closely.
The control of the partnership is shared equally between all partners in the business unless there has been an agreement otherwise. The partners all share in both the profits and losses of the business equally unless there has been an agreement otherwise. Neb. Rev. Stat. § 67-421.
The major advantage to a partnership is the fact that the partnership is given the advantage of flow-through taxation. This means that the profits and losses incurred by the corporation are attributed to the partners in their individual capacity and not attributed to the partnership.
The limited partnership, like the general partnership, is an agreement between at least two individuals to carry on a business for profit as co-owners. Where the limited partnership differs, is that in a limited partnership, the partners are not equal in all respects. A limited partnership must have at least one general partner and one limited partner. This form of partnership is also different from a general partnership in that it is generally created by statute.
What does it mean to be a limited partner? One key difference between a limited partner and a general partner is that the limited partner may not participate in controlling the partnership. Neb. Rev. Stat. § 67-251. The operation of the partnership is left in the hands of the general partner or partners while the limited partner or partners are excluded. If a limited partner does, in fact, operate the partnership then he or she becomes a general partner.
The reason one would choose to be a limited partner is because, while one does give up control over the partnership, the limited partner is not liable for the obligations of the partnership. The limited partner is only liable to the extent of his or her investment in the partnership. This provides the limited partner with a barrier against personal liability while still allowing the limited partner to enjoy the benefits of flow through taxation.
The limited partner is able to gain protection from liability while still sharing in profits as other partners do by giving up control. This is both the advantage and the disadvantage of the limited partnership.
Finally, we have the sole proprietorship. This is the most basic form that a business organization can take and, in reality, it is not really a distinct entity at all. The sole proprietorship is owned by an individual and is legally indistinct from that individual. There are no formalizations required of a sole proprietorship. If a business is not one of the other entities listed above or one of their variants, then it will default to this form.
There is no legal separation between the business owner and the business itself. This means that the owner of such a business is fully liable for the obligations incurred on behalf of the business and the business could also be pursued for any liabilities incurred by the owner as an individual. The owner of a sole proprietorship has total control over the business, collects all of the profits and is allowed the benefit of flow through taxation (after all there is no distinct business entity by operation of law here).
This is the most basic form that a business can take, but it is also the most dangerous. The owner of a sole proprietorship opens himself or herself up to unlimited liability arising from the business. This means that a single lawsuit against the business could not only sink the business but carry dire consequences to the owner, and vice versa. If a lawsuit were brought against the owner for, say, an auto accident, then the assets of the business could be levied upon.
So when is it best to use an LLC as opposed to the other forms of business entities available? The answer to this question depends heavily on the specific circumstances presented; however, by reviewing what we have covered we can come up with some general conclusions.
The LLC provides the benefits of both flow-through taxation and a liability shield, both of which are highly desirable. This makes the LLC a good choice for the sole owner of a business. If the owner of such a business takes no steps then he opens himself up to the perils that are innate to the sole proprietorship. A member managed LLC with a single member is a better alternative.
The LLC also is useful for small businesses that have multiple owners. The partnership is an option for small businesses, but with it comes the issue of personal liability for the obligations of the business. The limited partnership does address this, but then the new issue arises of controlling the business one is invested in. The LLC can provide the answer to this conundrum by allowing the various owners of the business the ability to run it while also being protected from the liabilities that may be incurred. Another possibility for the small business would be the S Corporation. As stated above, the S Corporation and its tax consequences can be quite complex and go beyond the scope of this article. The LLC is generally a simpler entity to create and can be simpler to administer largely due to the lack of IRS involvement and oversight, meaning that this can be a better choice. Where the S Corporation may outstrip the LLC is when dealing with a business which will be changing owners more often, since stockholders are generally more easily interchanged than members, or when the business owns a great deal of capital assets.
Generally, then, the LLC is a good choice for the single owner business, the family business or nearly any small business that is seeking to have a stable group of owners who want to both own and run their business (though not in the case of a manager-managed LLC) and who want to maintain the benefits of flow through taxation without taking the heavy risk of personal liability that traditionally accompany it.
Unlike most of the common business entities that exist today, the LLC has a fairly brief history in the United States. Entities such as partnerships, sole proprietorships and corporations have existed since the founding of the country. The LLC, however, has only existed in a recognizable form for roughly thirty-five years. What, then, led to the creation of this new entity? The single most important reason for the creation of the LLC was what has come to be known as "the tax-shield conundrum."
This was a problem created from two interests that traditionally have been in competition with one another. On the one side is the tax issue. More often than not, it is best for a business to be treated as a partnership for tax purposes. This is because the IRS allows the profits from the business, then, to be taxed to the owner or owners of the business. Incorporation is often less desirable from a tax viewpoint because the corporation is treated as an artificial individual. This means that the corporation will be taxed itself for any profits made and then stockholders will also be taxed on any dividends paid to them. The desire to avoid this double taxation provides one half of "the tax-shield conundrum"; the other is the desire to be shielded from liability.
While both partnerships and sole proprietorships provide important tax benefits, they also carry what can be a serious down side. In each case, the owner or owners of the business are personally liable for the obligations of the business. This can include everything from debts incurred in starting the business, to payroll, to lawsuits, and beyond. Corporations, however, do not share this trait of personal liability for the owners. A corporation is legally deemed to be an entity unto itself and as such, any liability incurred by the corporation will not generally pass on to the owners. This desire to be shielded from personal liability is what creates the second half of "the tax-shield conundrum."
There was a great desire in the business community, especially the small business community, to have a business entity that could address both of these needs simultaneously.
The Kintner Regulations were the IRS' method for determining what a business entity should be taxed as, partnership or corporation. These regulations determined the taxation of a business entity by looking to a set of four factors. These factors were: (i) limited liability; (ii) continuity of life; (iii) free transferability of ownership; and (iv) centralized management. The IRS compared these four factors to the features of any given business in order to determine tax liability. The IRS held that in order to be considered a corporation, the entity in question must meet at least three of the four factors. By making limited liability simply one of a number of possible features of a corporate entity, the IRS had given states a tool to answer the tax-shield conundrum. With this system in place it was only a matter of time until one of the states exploited this weakness.
It was finally in 1977 that Wyoming took the first step to create the modern LLC. The Wyoming legislature became the first to take advantage of the weakness that was hiding within the Kintner Regulations and passed The Wyoming LLC Act. This act created a new form of business entity that had the liability shield innate to a corporation while maintaining the management, continuity and transferability of the partnership. The Wyoming legislature gambled that an entity that failed three of the four factors in the Kintner Regulations would be passed over by the IRS. Wyoming would not get its answer for ten years.
Apart from the likes of Florida, which copied Wyoming's LLC statute in 1982, most states held off from created an LLC statute of their own until the IRS decided to finally weigh in. It wasn’t until 1987, ten years after Wyoming’s statute, that the IRS finally made a decision on how this new entity would be treated. In Revenue Procedure 88-76 the IRS finally classified this new entity as a partnership for tax purposes. With the IRS now having given its blessing, legislatures across the nation were quick to enact laws of their own which would create LLCs.
Given the basis of these early LLCs as a reaction to the IRS' regulations, it should come as little surprise that there are great differences between those early LLCs and their modern incarnation. While there was much diversity in the specifics of the various LLC legislation, there were similarities due to their birth as a reaction to an arcane set of IRS regulations. These new LLCs tended to have more in common with partnerships than more modern LLCs do. Early on LLCs tended to be only member managed, have dissolution upon the dissociation of a member and strict limits on the transferability of membership. All of these traits were due to the nature of the early LLC as a reaction to avoiding the hammer that the Kintner Regulations could bring down. Over time LLCs saw an increase in diversity as it became clear that the IRS would not strictly enforce the Kintner Regulations on these new entities.
This came to a head in 1997, when the IRS officially did away with the Kintner Regulations in favor of a "check-the-box" tax classification. Under this new classification a business that was organized under a corporate or joint stock statute would be taxed as a corporation while all else would be taxed as a partnership unless stated otherwise. This, in large part, was the final piece of the puzzle. By finally unchaining the LLC from the archaic Kintner Regulations, the IRS allowed the LLC to move far further from its roots in partnership law, bringing it to the partnership-corporate hybrid that we see today.
The process of creating a tax-exempt organization is generally viewed as a difficult process and while the individual steps can be daunting and time consuming, the differences between beginning a corporation and beginning a tax-exempt corporation are largely similar. This article will discuss the chief differences that should be noted when starting a tax-exempt corporation as well as briefly address liability issues with unincorporated organizations and LLCs. The focus of this article is on Nebraska and corporations being formed under its laws, however, because tax-exemption is largely a creature of federal law much of the article is applicable to corporations formed in other states as well so long as care is given to address differences in state corporate law.
It is not uncommon for an unincorporated organization to exist. The general perception of an unincorporated organization is that there is very little or nothing placed in writing. This is not necessarily true, though. Often times an unincorporated organization will take the form of a partnership which is governed heavily by statute and mutually agreed upon contract. The use of contractual relationships between members of an unincorporated organization is fairly common and often is effective at regulating the internal operation of an organization. Unfortunately such arrangements are oftentimes not of use when seeking to avoid personal liability arising from the actions of the unincorporated organization.
The two most common ways of avoiding personal liability arising from an organization are to create either a corporation or a limited liability corporation (LLC) for your business organization. Both of these forms can offer owners and operators the advantage of limited liability however in the tax-exempt arena the two differ from one another greatly. The use of LLCs as a tax-exempt business will be discussed later in the article, however, the LLC is less common in this area than the corporation. The most common form of tax-exemption for corporations can be found in §501(c) of the Tax Code. 26 U.S.C. §501(c). This section of the Code details the requirements for a corporation to be considered tax-exempt by the federal government. There are numerous forms that are available, some of the more commonly seen are: civic leagues/organizations under §501(c)(4); labor/agricultural/horticultural organizations under §501(c)(5); and fraternal benefit organizations under §501(c)(8). Id. The most important of these, and by far the most commonly used, is §501(c)(3). This section of the code allows a corporation to be tax exempt for the broadest number of purposes. These purposes will be laid out in full later in the article but a few of the most important purposes are: charitable; educational; scientific; and fostering amateur sports. 26 U.S.C. §501(c)(3). This article will focus on the basic requirements of §501(c)(3) that are different from how other corporations are created.
The articles of incorporation is the key document to creating a corporation of any kind. This document lays out much of the basic information about a company such as corporate name, address of the corporation, names and addresses of the people incorporating, and other important information. The articles of incorporation is the document that is filed with the Secretary of State as part of forming the corporation. In general the articles of incorporation for a tax-exempt corporation (S corp) are the same as those filed for a normal corporation (C corp). This follows from the idea that the S corp is, at its core, a corporation which has agreed to a few extra restrictions in order to meet an IRS standard. After seeking an Employer ID Number (EIN) from the IRS, one will have to draft the articles of incorporation. While the similarities between the two forms are greater than the differences, it is critical to have an understanding of what the differences are in order to properly file your corporation with the IRS as being tax-exempt.
One important difference arises in defining what the governing body of the corporation will consist of. In general the governance of an S corp is very similar to that of a C corp with a group of members, or shareholders, electing a board of directors to oversee the operation of the company and then the board of directors electing various officers to oversee the day-to-day running of the company. An important difference, though, is that Nebraska does not require a nonprofit corporation to have any members at all. Neb. Rev. Stat. §21-1940. Whether or not the corporation will have members must be stated within the articles of incorporation. Neb. Rev. Stat. §21-1921(a)(5). Whether there are members or not does not change the fact that the corporation must still have a board of directors. Neb. Rev. Stat. §21-1968. If the corporation does not have members then the corporate organizers will elect a board of directors of the corporation after creation of the company.
A second important difference comes in the requirement of a purpose clause. A C corp may contain a clause in its articles of incorporation that describes the purpose of the corporation. Neb. Rev. Stat. §21-220(5)(b)(2)(i). A nonprofit corporation, though, must state in its articles of incorporation that it is one of three types of corporation: (1) a public benefit corporation; (2) a mutual benefit corporation; or (3) a religious corporation. Neb. Rev. Stat. §21-1921(a)(2). Of these three, the most common to file will be the first, a public benefit corporation. This is because in order to gain tax-exempt status under §501(c)(3) of the Tax Code the corporation must be a for the public benefit. A religious corporation may also be able to attain tax-exempt status under §501(c)(3), though this is a less common filing than the category of public benefit corporation. The second of the three, a mutual benefit corporation, because this form of corporation will still have to file taxes because it is run for the mutual benefit of a specified group of people rather than proving benefits to the public. This also demonstrates that it is possible to be a nonprofit corporation but still be a taxable corporation. The terms have significant overlap but are not quite the same as one another.
The third major difference is the requirement for a dissolution clause. A nonprofit corporation must include in its articles of incorporation a provision to distribute and an all remaining assets once creditors have been paid. Neb. Rev. Stat. §21-1921(a)(6). This need not be an elaborate provision, all that is required by state law is that the provisions put forth here are not inconsistent with the law regarding distribution of assets upon dissolution. What can complicate this, however are additional requirements laid out by the IRS in addition to state requirements. So far the required additions to the articles of incorporation have all been additions required by state law. There are also provisions that must be added in order to be incompliance with the Tax Code.
The requirements laid out by the State of Nebraska for the required purpose clause in the articles of incorporation is quite straightforward, it is important to go a bit further in order to comply with IRS requirements, though. In order to qualify under 501(c)(3) the articles of incorporation must state that the purpose of the corporation are limited to one or more of the following: (1) charitable; (2) religious; (3) educational; (4) scientific; (5) literary; (6) testing for public safety; (7) fostering national or international amateur sports competition; and (8) preventing cruelty to children or animals. 26 U.S.C. §501(c)(3). The breadth of this list demonstrates why most S corps gain their status through §501(c)(3). On top of that list, though, the term “charitable” is also quite broad and encompasses the generally accepted legal definition of giving relief to the poor as well as other purposes such as the advancement of religion, the advancement of education or science, and the erection or maintaining of public buildings and works. The IRS also requires a statement in the articles that the assets of the corporation will be dedicated to whatever the exempt purpose is. This includes what will happen to the assets of the corporation upon dissolution.
These, then, are the basic additional requirements that must be included in the articles of incorporation for a corporation in Nebraska that is seeking to be considered tax-exempt under §501(c)(3): (1) state whether or not the corporation will have members; (2) identify the corporation as either a public benefit corporation or as a religious corporation; (3) state that the purpose of the corporation is limited to the exempt purposes laid out above; and (4) state that the assets of the corporation will be used exclusively for an exempt purpose and that upon dissolution the assets will be disposed of for the exempt purpose in a manner which is not inconsistent with the law.
When forming a corporation the bylaws are generally not filed along with the articles of incorporation, however they are also a crucial aspect to creating a corporation. The bylaws of a corporation are essentially the rules by which the corporation agrees to govern itself and are set at the outset. Bylaws are very mutable and can be adjusted in any number of ways to best fit the needs of the corporation. That being said, though, in order to form a nonprofit corporation in Nebraska it is necessary to create bylaws for the corporation. Neb. Rev. Stat. §21-1925. Furthermore, there are certain requirements for bylaws in order for them to comply with the statutory requirements placed upon nonprofit organizations.
One of the most critical areas which bylaws address is defining the number, powers, duties, and other aspects of the role that directors and officers play. There are limitations that must be allowed for in defining a nonprofit corporation’s board of directors that are very important to observe. First, in Nebraska all directors must be an individual. Neb. Rev. Stat. §21-1969. This means that all of the directors must be human beings. You cannot have a corporation, LLC, or any other business entity as a director for a nonprofit corporation. Also, the board of your nonprofit corporation must consist of at least three directors. Neb. Rev. Stat. §21-1970. Finally, the terms for any director cannot exceed five years and, unless the bylaws say differently, will be set at one year. Neb. Rev. Stat §21-1972. Of note when setting terms for directors is that it is common practice when determining the terms and elections of the board to stagger the election of board members. The staggering of board members is not a requirement but it is often a good idea to include in order to ensure continuity of the board. There are not only requirements for the board of directors, though, but also a requirement that must be met for officers of the corporation. The choice of what officers a corporation will have or not have is largely a matter left to the discretion of the board of directors, there are some officers that are required in order to be a nonprofit corporation, though. Neb. Rev. Stat. §21-1990. These required officers are: (1) a president; (2) a secretary; and (3) a treasurer. Id. Each of these officers must exist, however it is possible for all of these officers to be the same person.
There are also requirements placed on the meetings that need to be noted when creating the bylaws for a nonprofit corporation in Nebraska. Bylaws are capable of governing the procedure for calling and conducting meetings and are generally left to the discretion of the corporation to establish proper procedure. There are, however, a few requirements that must be met in this regard. First, it is necessary to establish that notice of meetings for members, if the corporation has members, is done in a fair and reasonable manner. Neb. Rev. Stat. §21-1955. This is not difficult to accomplish, and in general simply requires that the corporation give notification of the place, date and time of all meetings no more than sixty days before the meeting and include a description of what the meeting is about. Id. There are additional restrictions that must be observed when conducting meetings and voting in meetings; however, those need not be placed in the bylaws of the corporation.
Finally, it is important to be aware of some limitations on how the bylaws of a nonprofit corporation handle the liability of directors for their actions. In general directors and officers are indemnified for the actions taken in their role as a corporate agent. If seeking to change this through the use of bylaws, though, it is important to note that statue does have certain requirements that must be met. These rules establish minimum requirements for liability of directors and officers that cannot be avoided by the use of bylaws and are found in §21-1986, §21-1987, and §21-1989. These can be summarized as requiring directors and officers to follow the Business Judgment Rule, prohibit certain self-dealing transactions, and impose liability for unlawful distributions respectively.
Ultimately, then, it is important to place the following in a nonprofit corporation’s bylaws: (1) state that all directors must be individuals; (2) state the number of directors on your board and ensure that it is at least three; (3) be sure to at least create the offices of president, secretary, and treasurer; and (4) state the requirements placed on meetings of members that will ensure fair notification of place, date and time of meetings no more than sixty days before the meeting and that notification must include a description of what will be discussed.
A mission statement can be an important document for a nonprofit organization to create. This is a short statement which looks to establish what the nonprofit organization is seeking to do and is often times used in promotional materials for the corporation. These documents can be critical when looking to attract funding and should be carefully considered. The idea behind creating a mission statement for a nonprofit organization is to create a concise overview of what the purpose of the organization is. This should be limited to no more than a few sentences and should cover your organization’s name, goals, who is to be served, how they are to be served, where you will serve, and how your organization is distinct from others. It can be a daunting task to fit so much information into such a short statement, however, it is made easier by being direct. An example of such a statement might be something like, “Healthy Eating Inc. is a group of dedicated individuals who are constantly striving to improve the diets of those living in the Omaha area. Healthy Eating Inc. works closely with other charitable organizations to bring healthy alternative to the underprivileged in our city by connecting those in need with local farmers who can provide healthy and inexpensive food.”
LLCs are currently the most popular form of business organization in general, however, for tax exempt and nonprofit purposes they can still be problematic. The issue arises largely from the fact that an LLC can act as a corporation or as a partnership. This ambiguity has led to the IRS treating LLCs warily when evaluating whether or not they should be allowed to seek tax-exemption when formed as a nonprofit. It is possible for LLCs to be a nonprofit and this can offer both protection from liability and, like other nonprofit organizations, can often be exempted from certain state taxes such as property taxes. The biggest issue with forming an LLC as a nonprofit is that it is very difficult to create an LLC that is capable of meeting the IRS’ requirements to be tax exempt under §501(c)(3). If you are seeking only to create a nonprofit organization then an LLC may be a good choice for the simplicity that it can offer; if, however, you would like to seek tax exemption under §501(c)(3) as well then it is not the best organizational form to use. When, then, can an LLC meet the requirements and be allowed to be tax-exempt under §501(c)(3)? It can occur, but generally such an LLC will have less in common with a nonprofit organization and more in common with a subsidiary or a holding company. This is because the IRS has created a set of twelve factors that must be met in order for an LLC to be considered tax-exempt under §501(c)(3). See I.R.S., U.S. Dep’t of the Treasury, Limited Liability Company reference Guide Sheet (2011), available at http://www.irs.gov/pub/irs-tege/llc_guide_sheet.pdf.
The twelve factors all deal with the organizing documents of the LLC. The term “organizing documents” is used rather than articles of incorporation or operating agreement because of the variance that exists between the LLC laws of different states. For example, in Nebraska an operating agreement is not technically required and as such all of the twelve statements would need to be included in the articles of organization for the LLC. The twelve factors all require that something that must be included in the organizing documents in some way. First, the documents must include a specific statement which will limit the LLC’s activities to one or more exempt purposes. The exempt purposes for this are the same as were discussed earlier as the exempt purposes which a tax-exempt corporation must follow. Second, the documents must state that the LLC is operated exclusively to further a charitable purpose. Third, the documents must require that the LLC’s members are all 501(c)(3)s, government units, or wholly owned instrumentalities of a state. This requirement and the next two are the requirements that make a qualifying LLC more like a holding company or a subsidiary than a true nonprofit organization itself. The only entities that can ever be members of such an LLC are other tax-exempt organizations rather than individuals. Fourth, the documents must prohibit any transfer of any interest in the LLC to a transferee which would be prohibited from initial membership. Fifth, the documents must state that the LLC, any non-membership interests in the LLC, or any assets of the LLC can only be availed by, or transferred to, a non-member who would be prohibited from initial membership for a fair market value. Sixth, the documents must guarantee that, upon dissolution, the LLC and all the assets devoted to the LLC’s charitable purposes will continue to be so devoted. Seventh, the documents must require that any amendments to the articles of organization or the operating agreement are consistent with the language of §501(c)(3). Eighth, the organizational language must prohibit the LLC from merging with, or converting into, a for-profit entity. Ninth, the documents must require that no assets may be distributed to a member which ceases to be an S corp or a governmental unit. Tenth, There must be an acceptable contingency plan in place in the event that one or multiple member cease to be an S corp of governmental unit. This is fairly simple to accomplish because it would only require something along the lines of a forced sale to a still viable entity within a reasonable time such a 90 days. Eleventh, the documents must state that the LLC’s exempt members will expeditiously and vigorously enforce all of their rights in the LLC and will pursue all legal and equitable remedies to protect their interest in the LLC. Finally, the LLC must represent that all of its organizing document provisions are consistent with state LLC laws and are enforceable in both law and equity. That long list demonstrates why there are very few LLCs which seek, or are allowed, to be a tax-exempt entity under §501(c)(3). This leaves the LLC largely out of the discussion when trying to create a corporate form that will allow for tax-exemption.
Finally, of note is a currently small trend toward a new type of entity known as a Low-profit Limited Liability Company, or L3C. This type of organization is only currently available in a handful of states such as: Illinois; Louisiana; Maine; Michigan; North Carolina; Utah; Vermont; and Wyoming. The idea behind the L3C is to create an entity which is essentially the same as a nonprofit LLC but which can also allow for any profits which are earned to be distributed amongst the members rather than put back into the organization. States which allow this type of organization allow such distributions back to members while still granted protections and exemptions like those of a nonprofit LLC. It is critical when making an L3C to state that the mission of the organization is primarily charitable, and to name what the mission is. One of the major benefits associated with this form is the possibility of finding funding more easily due to the possibility of distributions. Currently there are very few places where such a form is used at all, and when comparing it to the twelve part test for tax-exemption of an LLC it is clear that there is no chance of the IRS allowing an L3C to be a 501(c)(3) organization in the near future. It is, however, an interesting form of nonprofit corporation which warrants keeping an eye on.