/
StartACoopInTexas.page
136 lines (76 loc) · 8.29 KB
/
StartACoopInTexas.page
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
---
title: So you want to start a coop in Texas
...
*Please note: this is purely the opinion and work of [Gatlin Johnson](http://niltag.net). This does not constitute legal counsel or business advice. There is no guarantee express or implied. I do not take responsibility for any damages you incur following this advice.*
**THIS IS A WORK IN PROGRESS.** Email me at <rokenrol@gmail.com> for more information.
# Preamble
So you want to start a coop, huh? Awesome! In a perfect world, you'd just go find some property you want and live in harmony with your friends and family.
Unfortunately, we exist in a rather complex system that can be difficult to navigate, and it is (unsurprisingly) not easy to just live in a house with a bunch of people and share stuff. Real estate law, tenants rights, and the tax code are very convoluted and seem deliberately designed to harm normal people. Regrettably you have to deal with mundane, dry legal crap to succeed. Houses have failed before out of simple ignorance of the law.
The good news is that this only has to be figured out once, and it has! You can construct a legal shield of sorts to avoid running afoul of the law.
Please keep in mind: while we will spend a fair amount of time discussing legal bullshit, the most important things in the entire process are your community and the people who comprise it. Everything else is a necessary evil to protect them from the awful Minotaur at the center of this legal labyrinthe. Just follow my rope.
First, let's make sure we know what we're talking about:
# Definitions
Nonprofit
: A type of corporation in Texas which is not created solely to profit its owners.
Tax exempt
: A federal (not state) term for organizations which do not pay federal taxes.
Cooperative
: A nonprofit organization that is owned and run jointly by its members, who share the profits or benefits.
Equity
: Ownership in any asset after all debts associated with that asset are paid off.
Group equity cooperative
: A cooperative where the members share the equity as a group.
HOLY BORING BATMAN. Let's take this one step at a time.
## Lay explanation
A cooperative is a nonprofit organization which is owned and run by its members. The members pay *dues* to the organization, which the organization uses to provide services for its members. These dues are the organization's income. At the end of the year, any of this income which is not spent is retained by the organization; that's called *equity*. In a *group equity* housing organization, this equity is owned by the organization, not the individual members.
## Why?
1. Liability.
This setup protects the members of the organization from all kinds of hideous liability. For example in Texas, if someone is injured on your property you are liable for damages in court. However if you don't own the property you aren't liable. Instead, the nonprofit is liable.
2. Simplicity.
The members of the organization do not have to worry about anything more complicated than signing a lease. They do not have to invest a lot to buy in and when they leave they simply stop paying their dues.
3. Transparency and community.
A group-equity cooperative is cooperative in the truest sense: the members pool all their resources together and jointly control what is done with this equity. Nobody is paid anything; rather, the members must use this equity to benefit each other (eg, lowering rent, purchasing better food, expanding into new property, etc).
# How to start a tax-exempt non-profit in the state of Texas
This is a fantastic resource from the Secretary of State Website: [Forming a Nonprofit Tax-Exempt Corporation in Texas (PDF)][tx501c3]. It has lots of good information. Please read this.
There are two parts: the state part, and the federal part.
## The state part
First, you file a nonprofit application with the state. This costs $25. You will need to provide a certificate of formation, bylaws, and the initial "directors."
### Bylaws and Certificate of formation
These are just descriptions of how your organization will function *legally* and *financially.* For example, this is a great place to emphasize that you will not be paying salaries to your members or when your fiscal year starts. This is **not** where you describe your hippie communist fantasy. Hippie.
**TODO**: get sample bylaws.
### Board of Directors
You're going to need one. Ideally you could file as a member-directed nonprofit but the IRS will be very skeptical that you'll be able to function properly (see below).
At minimum you must describe a "President," a "Secretary," a "Treasurer," and zero or more "Vice-Presidents." The law also states you can call them whatever you want. The law also allows you to combine the Secretary and the Treasurer.
Many coops have a Chair of the Board, a Secretary, a Treasurer, and then zero or more Directors. Use whatever terminology you want.
**TODO**: describe how most coops do 2 directors from each house, and they elect the various positions among themselves; others just elect 3 - 5 people to be on the board.
### Meetings
At least once a year you must have a general membership meeting. You must also have at least 6 meetings of the board of directors a year. The law does not specify that anything must be accomplished. Take this seriously: there will be legal and financial challenges you face and the board of directors is ultimately responsible for addressing those challenges.
Take minutes!
## The federal part
Once you have formed your Texas Nonprofit, then you file for tax exemption. Ultimately the reason the government allows this is based on the idea that certain kinds of organizations serve the public interest and lessen the burdens of government. In your case, you're providing affordable, equitable housing to people.
Again, please read [the PDF on creating tax-exempt nonprofits in Texas][tx501c3]. It spells out most everything. See [below](#safe-harbor) for nifty information to expedite the process.
### Safe harbor
You can be automatically-approved for tax-exempt status when filing with the IRS if a certain percentage of your members meet certain income requirements. This is called "safe-harbor" and it can fast-track your application. [Here are the safe harbor rules in PDF format](/safe harbor rule.pdf). The relevant portion
> (1) The organization establishes for each project that (a) at least 75 percent of the units are occupied by
residents that qualify as low-income: and (b) either at least 20 percent of the units are occupied by
residents that also meet the very low-income limit for the area or 40 percent of the units are occupied by
residents that also do not exceed 120 percent of the area's very low-income limit. Up to 25 percent of the
units may be provided at market rates to persons who have incomes in excess of the low-income limit.
For now, I'm assuming that my audience is mostly people in their 20s. As obnoxiously and persistently as you can, mention in every part of the tax-exemption application that you qualify for safe harbor. This isn't a letter to a friend, it's a federal form and it will be read by someone who is probably very happy to not have to actually make a decision, because the decision is automatic. Make sure they don't miss that.
### Filing tax returns
Once you are tax-exempt, you will still have to file a tax return. Until you start bringing in over $200,000 a year in income, just know that you'll need to file a 990-EZ form. Any credible tax accountant will be able to take your receipts and fill this out for a few hundred dollars. It's worth it. Also: KEEP TRACK OF YOUR SPENDING. Even if you just use your credit union's online summary for the love of God don't deal in cash.
# Financing a house
## Your case to the bank
### Executive Summary
### Business plan
## Finances
### Debt service coverage ratio
### Vacancy and reserves
### Projections
# The Community
## Food
## Labor
## Meetings
[nasco]: http://nasco.coop "North American Students of Cooperation"
[tx501c3]: http://www.texascbar.org/content/legal_library/pubs/downloads/FormingNonProfitTXREVrev10.pdf "Forming a Nonprofit Tax-Exempt Corporation in Texas"