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2010

What Happened to the Donation Page ... Revisited
Written by Elin Waring   
Wednesday, 16 June 2010 13:00

You probably didn't notice, but recently we have republished the "Support Joomla!" page. We also have a new "Support Joomla!" module for anyone to use. This is exciting because for the past several years we have not been able to ask the Joomla! Community for financial support. What happened?

As I mentioned back in February, at the advice of our attorneys, and with a lot of reflection, the board of Open Source Matters (OSM)  had been exploring the possibility of "correcting" its corporate charter. Those corrections have now been made, and this post will explain what that means. The specific changes could not be discussed previously because they were legal advice, but now we can do so. There are complicated legal and financial reasons for making these changes which I am going to try to explain in this post.   It will be a little heavy going, so before I start let me stress the two main points:

  • OSM will always remain a not for profit organization.
  • This change will allow OSM to ask for money for support of the Joomla! Project.

The Problem

OSM was incorporated in New York State in 2005. New York was chosen because that is where the Software Freedom Law Center has its offices and where our general counsel James Vasile is licensed to practice.

Unlike most U.S. states, New York has several different types of not for profit corporations. This document (pdf) provides a good summary. All of the quotes in this post are from this document unless stated otherwise. OSM was established as a type B non profit which is defined as:

Type B - formed for one or more of the following non-business purposes: charitable, educational, religious, scientific, literary, cultural or for the prevention of cruelty to children or animals.

These organizations are charities and almost always have 501(c)3 status from the Internal Revenue Service.

Having 501(c)3 status actually costs OSM considerably more money--tens of thousands of dollars-- in taxes each year than not having it.

OSM has spent a large amount of money in the past several years for legal and accounting work related to solving this, and this amount was more than paid back with just one year's revised tax return.

Being a Type B not-for-profit but not having 501(c)3 status could, however, potentially lead to confusion, and there were futher complications relating to what a Type B non-profit is allowed to do (according to New York State law) relating to fund raising and the kinds of paper work that it needs to do (such as filing forms related to the 501(c)3 status that OSM does not have).

Having spoken to a number of people involved in the original incorporation I think that it is fair to say there was not a lot of thought given to whether OSM should be a Type B corporation or some other type of not for profit. Type B mainly seemed like the thing to do at the time, and there was not the expectation that OSM would ever have a budget of any size. The main purpose was to provide legal protection to the individuals involved in the project should there ever be a law suit against it. As one person present put it to me "most forks fail," and no one ever anticipated that the project would grow to its current size or popularity.  Perhaps because of this, nothing was done about the tax status of OSM until 2007, although in the meantime income from advertising and other sources including individuals was collected.

In Spring 2007 we began working toward filing the first tax returns for the organization (for the 2006 year) and immediately realized that there were many complications due to this combination of circumstances, and we sought legal and accounting advice. To be blunt, it took a long time for the records to be made usable for the purposes of filing taxes, but they were filed near the end of 2007.  That process highlighted the issues of 501(c)3 status, unrelated business income, and charitable solicitation. Among other things an application for 501(c)3 status was filed at that time. Preparation of the returns for 2007 (filed in 2008)  began almost immediately thereafter and these indicated that the situation was even more problematic than for 2006.

The Solution


In trying to decide how best to address this issue, we learned that New York State has a second type of non profit corporation, type C, defined as:

Type C - formed for any lawful business purpose to achieve a lawful public or quasi-public objective, for example local development corporations under N-PCL § 1411.

You can understand the difference this way:

Type B Corporations are limited to one or more of the following non-business purposes: charitable, educational, scientific, literary, cultural or for the prevention of cruelty to children or animals (N-PCL § 201(b)). Such corporations provide a benefit to the public or some segment of it. Organizations exempt from federal income taxation under Internal Revenue Code (the “Code”) section 501(c)(3) are generally Type B corporations.

Type C Corporations may be organized for a purpose normally carried on by business corporations for profit. However, the purpose of a Type C corporation must be non-pecuniary; that is, it must be formed with an objective other than the making of money. Therefore, it is necessary to set forth, in a separate paragraph from the purposes, the lawful public or quasipublic objective which each business purpose will achieve (N-PCL § 201).


We've had a lot of discussion about the Mission of the Joomla! project and of Open Source Matters. In the end, "our mission is to provide a flexible platform for digital publishing and collaboration. " Which is to say, we are not primarily engaged in charity, education, science, creating literary or artistic works, or preventing cruelty to children or animals. Certainly there are elements of these within our mission. We educate people about Joomla!, and some of our work involves computer science, for example. And code is poetry, so I guess we support creation of artistic works.  On a personal level, I find it very hard to suggest to anyone that giving money to Open Source Matters is similar to giving money to organizations that feed the hungry, help victims of war, protect the environment or even operate museums. 

However, what the Joomla! Project does and OSM does is what Type C corporations do, which is something that many for profits do, but we do it "with an objective other than the making of money" : Produce and support software. That is OSM simply does its work to support making the best software we can and provide the best support we can.

Why change now? This is where the second important factor comes into play. If an organization is not a charity then it can ask for contributions that are not charitable donations. As long as it is made totally clear that they are not charitable donations, the organization will not be subject to charitable solicitation rules and regulations that exist around the world. These were mainly designed to prevent fake charitable organizations from fraudulently seeking money from individuals, and these rules create requirements that are complex and expensive to comply with.

So this change will have the strong benefit of letting us ask for contributions, something that many people have urged us to do. It's great that people want to support the Joomla! Project, and we want to be able to encourage that. Keeping OSM a charity would have meant continuing to work to solve that problem through other, much more expensive, means. For U.S. citizens it is important to note that these changes means that support to OSM is not deductible as a charitable contribution, though a tax professional can assist you in determining how it should be treated.

What are the Exact Changes?

New York State has agreed  to make a specific set of changes. These were written by our lawyers to address our specific issues and New York State and federal laws.  We had consensus that this was the best way to assure the long term financial and legal viability of OSM as an organization.

The changes have two parts.

Part 1: Certificate of Correction

FIRST:   The name of the corporation is   OPEN SOURCE MATTERS, INC.  (the  “ Corporation”).

SECOND: The date the document to be corrected was filed by the Department of State is: September 23 , 2005.

THIRD: The nature of the informality, error or defect to be corrected is: The Certificate of Incorporation incorrectly characterized the Corporation as a Type B Corporation and included terms compatible with a charitable organization.   The Corporation is a Type C Corporation.

FOURTH: The provision in the document, as corrected or eliminated or the proper execution, are as follows:

(1) Paragraph Third is corrected to read in its entirety as follows:

Pursuant to Section 201(b) of the Not-For-Profit Corporation Law, the Corporation shall be a Type C Corporation.

(2) Paragraph Fourth is corrected to add a new subparagraph (e) as follows:

To achieve the lawful public objective of developing, distributing and promoting the use of open source software.


So this literally corrects the paper work to correspond to what we believe is the correct description of OSM as a Type C not for profit.

Part 2: Amendment

The name of the corporation is   OPEN SOURCE MATTERS, INC.  (the “Corporation”).

2.   The  Certificate of  Incorporation was filed  with  the Department of State on   September 28, 2005.   T he corporation was formed under  the Not- f or-Profit Corporation Law of the State of  New York .

3.   The  C orporation is a corporation as defined in Section 102(a)(5) of the Not-for - Profit Corporation Law.  The corporation is a Type  C  corporation  under Section 201 of the Not-for-Profit  Corporation Law .

4.  The Certificate of Incorporation of OPEN SOURCE MATTERS, INC. is hereby amended to effect a change in  certain provisions in the Certificat e  of Incorporation of the  Corporation pursuant to Section 801 of the Not-for-Profit Corporation Law.

a. Paragraphs Sixth, Seventh, Ninth and Twelfth of the Certificate of Incorporation relating to charitable purposes and limitations on charitable activities are hereby deleted and those paragraphs remain blank .

b . Paragraph Tenth of the Certificate of Incorporation relating to the distribution of the Corporation’s assets upon dissolution is hereby amended to read in its entirety as follows:

In the event of dissolution pursuant to a plan adopted by the Directors, after paying or making provisions for the payment of all of the liabilities of the Corporation, all of the remaining assets and property of the Corporation  shall be distributed  to:  (i) one or more organization or organizations organized and operated  for similar purposes ; or (ii)  the United States federal government, the District of Columbia,  any state, territory or possession of the United States,  or to  any political subdivision of any of the foregoing,  b ut only for  similar  quasi-public purposes, subject to an order of a Justice of the  S upreme Court of the State of New York.

5. This Amendment to the Certificate of Incorporation was authorized by a vote of a majority of the entire board of directors. The corporation has no members.

6. The Secretary of State is designated as agent of the Corporation upon whom process against it may be served. The post office address to which the Secretary of State shall forward copies  of process accepted on behalf of the  C orporation is:

Open Source Matters, Inc.
P.O. Box 4668 #88354
New York, New York 10163-4668

So what this does is remove all of the references to being a charity or 501(c)3 organization from the charter text. Since we are not a charity our charter should not require that we act like one. For example, we should be able to do work that supports the Joomla! commercial ecosystem. It also says that if for some reason OSM dissolved all of the assets would be able to go to another Type C corporation (although they could still go to a charity). Of course we all hope that the Joomla! Project lives forever and that OSM always is here to support it. But, as in the case with most legal documents, these paragraphs are written to prepare for the worst case scenario.

The Take Away

So, to summarize, making this change does the following:

  1. Lets OSM ask people to support Joomla! financially.
  2. Lets OSM continue to work on behalf of protecting the Joomla! Project and its assets.
  3. Keeps OSM a not for profit corporation.

And please, consider supporting Joomla! financially as well as by using the Support Joomla! module on your sites. 

By far the most important support that the Joomla! Community provides are time and talents in coding, user support, documentation, and tha many other areas that make up an open source project. Thanks for all you do to make Joomla! possible. We'd also like to thank specifically all of the individuals and firms who have given unsolicited financial support to project over these past challenging 18 months during which we could not solicit support. And we thank our sponsors and partners for their major support.

Questions


We know this is a complicated issue and that people will have many questions and opinions. We want to answer the questions, so we'll be writing a FAQ about what it all means. That means we need to know what the questions are.  So if you have questions please put them into this form and we'll do our best to organize answers. Please understand that because these are legal issues we can't directly share the advice of our attorneys, and there might be other things that we have to answer with approved language from them. It may take a little while to work all that out, but we'll do our best to have it ready as soon as we can. We will leave the form open for one week from today. You'll see a follow up blog here as soon as we can have it done.

 
 
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