Anarres 2 cooperative community

May 4, 2019

Legal and Ownership Issues

Filed under: Uncategorized — Ed @ 12:34 pm

I stumbled upon two good articles.

This one is about dealing with legal issues. Here is an excerpt:

Your Community and the Law

Posted on April 30, 2019 by

Seven Things Every Community Should Know

I want communities everywhere to be well aware of legal-financial realities. The founders of my community didn’t know this, and it absolutely came back to bite us! Here’s what I want you to know:

(1) Your forming community will be (or your existing community already is) embedded in and subject to local, state, and federal laws and regulations. Federal tax requirements, federal laws regarding illegal substance use, firearms, and other issues. Federal and state laws regarding the rights and responsibilities of one’s legal entity(s). Annual reporting requirements with the state, and state health department and environmental quality regulations. County subdivision regulations, zoning regulations, building codes, and property tax requirements.

(2) Learn what these laws and regulations in your area are, how they affect your community—and what the legal and financial risks may be to your community and to each member if you don’t comply with them.

(3) Educate your community members about this.

(4) Decide to either comply or not comply with laws and regulations affecting you. Or comply with some but not others.

(5) If your group decides not to comply with some laws, be willing to take the associated legal and financial risks. Tell all potential members about these risks. Full disclosure!

(6) Orient all members, especially new ones, to the legal entity(s) your group uses, and the benefits, responsibilities, and challenges of each.

(7) Especially educate your members about lawsuit and liability issues, so everyone understands the degree of liability protection the community does and does not have.

Good thing for us that most communities do understand the law and make sure their communities are legally sustainable!”

https://www.ic.org/your-community-and-the-law/

It’s probably a good idea to comply with all laws, in my humble opinion!

And this one is about the difference between an LLC and a Corporation:

LLC or Corporation – Which Should I Select for My Business?

Updated October 06, 2018
Excerpt:

“How are Corporations and Limited Liability Companies Alike?

Both corporations and LLCs limit the liability of the owners/shareholders from the debts of the business and against lawsuits against the business. It’s not true that an LLC has less protection against liability.

First Difference – How the Business is Formed

An LLC is formed by one or more business people, as owners. The owners, called “Members,” file Articles of Organization and set out an Operating Agreement. An LLC is a pass-through type of business because the profits and losses are passed on to the Members depending on their share of membership.

A corporation is formed (incorporated) by filing corporate organization documents in the state where the corporation is located, and by designating shareholders, each with a specific number of shares. The corporation also creates a Board of Directors to oversee the corporate business.

Second Difference – Ownership

The main difference between LLC’s and corporations is the ownership of the business. You might say that a corporation is owned by individuals who purchase shares, while the LLC is owned by individuals. LLC owners are called “Members,” while corporate owners are shareholders.

LLC owners have an equity interest in the assets of the business, shown in the business balance sheet as owners equity, while corporate owners have shares of stock.”

https://www.thebalancesmb.com/what-is-the-difference-between-an-llc-and-a-corporation-397526

The author also discusses differences in how profits, losses and taxation are handled, but does not discuss how the business is run.
An LLC can be run by a manager on behalf of the owners (like a corporation) or can be run by the members. “The default rules give each member equal voting and decision-making rights, irrespective of ownership percentage. You can imagine the problems that may arise when there are multiple owners and major decisions to be made under the default rules. This problem may be avoided by allocating rules about voting and decision-making in the Operating Agreement and Articles of Incorporation.” https://gundersondenton.com/business/problems-decision-making-llc/

In a corporation a CEO or board of directors makes day-to-day decisions but they answer to the shareholders, who can change the officers and vote on major issues, with the votes of the shareholders (according to the number of shares held) deciding the outcome. In other words, if Amy has 1,000 shares she gets 1,000 votes, while Ben, who has 750 shares gets 750 votes. “Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship.” https://www.icaew.com/technical/corporate-governance/principles/principles-articles/does-corporate-governance-matter

If you have a small group of people who invest about the same amount of money, an LLC might be better, while a large group with wide variation in the amount invested might prefer the Corporation model. However, I didn’t realize how flexible LLCs are. You can set them up almost anyway you want. All of these articles suggest discussing this decision with an attorney who specializes in setting up these kinds of organizations.
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