Recently, Jim told us that other hackerspaces he is a member of have strict rules about private businesses utilizing the space. This led us to ask for guidance from a pro-bono lawyer who is an expert in 501c3. The current response from the lawyer seems to indicate that having private businesses use Hive13 resources for production could put our 501c3 status in jeopardy. That there are many degrees of ‘production’ and we are trying to get clarification on where to draw the line.There is a spectrum of options available to us from the most restrictive (no use of Hive13 resources for private businesses) to the radical (setting up a for-profit Hive13 subsidiary corporation with a parallel membership track)
Below are the actual notes that we received from the lawyer about this. Dave Velzy has been the main point of contact with them, so if you have further questions, or would like to pass along some questions to the lawyer, please get in contact with him.
This message has been posted both here on the mailing list and to the #leadership_discussion channel on slack.
Notes from a conversation with Rachael Chamberlain, Attorney at Law Frost Brown Todd LLC, Erin Starkey, Staff Attorney Pro Bon Partnership of Ohio and Dave Velzy Sad Bee Inc, Board Member. 2021/10/15.
Purpose of the conversation: Advise Hive13 on best practices for avoiding private benefit arising from members’ activities in a makerspace.
Bottom Line Up Front:
Throughout the history of Hive13 a significant number of members have independently used the tools in Hive13 to make products for personal sale.
That is PRIVATE BENEFIT.
Why did Hive13 ask for advice about making items for profit? One of our members is also a member of a Greenville SC Woodworkers Guild which forbids any for profit activity in their shop. For profit activities are restricted by their SC state charter.
Our leadership team’s discussion of this rule led us to explore the Hive13 501c3 charter and how to maintain the corporation’s nonprofit status. We wanted to understand the nuances of what is allowed and what is not allowed.
It is within the scope of a 501c3 to support innovation and or development
It is not permitted for a 501c3 to become the defacto production facility for a for profit business.
That is private benefit.
Hive13 could establish a limit on member activities for profit.
Example: Members may make no more than 5 to 10 for profit.
Or we could have an outright prohibition on for profit work as the Greenville Woodworkers Guild does.
As a one-off occurrence there is a small likelihood of conflict with IRS. As Hive13 grows and we have more members and Sad Bee Inc. reports more revenue we should be concerned.
Replicating items for profit as in making Many and or for Big Profit is concerning.
It is Not OK to be anyone’s for profit Production line.
- Make less than 10 of something for profit policy. This is probably OK. (below the radar)
- Form an agreement with UC as a step up path from the UC Accelerator – This would probably be an ongoing UC educational partnership program which would fit with the Hive13 educational charter.
- Form Our own Incubator program.
- Create another sister 501c3 to bless incubator ahead of time and qualify
- Create a for profit subsidiary that belongs to Sad Bee Inc.
– Outline of a Nonprofit Incubator Program –
A Nonprofit Incubator Program could fit into the Hive13 charitable program, offering low cost rent, shared services, co-working space and mentoring.
The Objective would be to support growing a business – With 3 general limits to business development:
- Area serving economically depressed area. (See Note 1)
- Targeting demographic individuals for participation minorities, women, elderly, disadvantaged OR
- Target businesses that wouldn’t be there without help.
In incubator programs they look at how they program operates: How long does the group participate in the program? Really in the startup phase? Making a $100K business no, $10K Maybe OK.
How does Hive13 protect ourselves – Good Application, asks for info on the business. Business plan, Income so far, Equipment needs, What and how much, Periodic reports to leadership; revenue. Say we have a $50K revenue cap.
Extension of UC program. Relationship management through UC.
Options to consider –
- Incubator Idea, but separate and with IRS approval. Create a sister organization, as as subsidiary, submit a separate 1023 with the specifics of the incubator and ask IRS for explicit approval.
- Look at individuals who are doing the work, as a class of individuals who do not meet the incubator qualifiers – Run the activity through a for profit subsidiary,
This would protect Hive13,
Create a 100% owned for profit corporation, leases for space and access. Individuals using the space. Then they go into the for profit membership. Pay taxes at the for profit level, funnel profits out to Hive13. File income taxes for corporation, treasurer record keeping, Outsource bookkeeping,
In the past, use of Hive13 shops to make items for profit has been known and accepted with caveats:
- Don’t monopolize the machines or workspace. This isn’t your space, it’s all of our space.
- Don’t count on tools working all the time. If you need to use a broken machine, then you fix it.
While many members have made products to sell, most of these have been on a small scale.
Examples of for profit problem areas:
One member with a cosplay costume and artifact business successfully lobbied for the group purchase of a vacuum forming machine. That member was eventually voted out due to misbehavior. The machine has been underutilized. (Lesson – Question proposed expenditures by members with ulterior motives.)
Making a Livelyhood a for profit business or full time = Hard No
One member with a sign making business simultaneously used both CNC and Laser cutter, which are automatic equipment that non-the-less require constant supervision. One night the Laser cutter caught fire and was heavily damaged. (Lesson – Members cannot be allowed to prioritize time saving and profit making over the safety to members and the equipment.)
Making a Livelyhood a for profit business or full time = Hard No
One member with a contract to make fancy mailbox posts got busy and left work in process material stacked in the shop. This required some rather heated discussions about the need to clear the space.
In a purely ficx up the neighborhood, beneficial sense – de minimus.
If for making money? Not OK
One member offered to donate the material to build a paint large spray paint booth. The quid pro quo was a need to monopolize the booth at various times. The offer was declined.
Quid Pro Quo – Wanting to reserve space & Time = Hard No
Jenga Blocks – Grew up to be a separate business.
This could be a prime example of a small business incubator – Different membership class for purposefully Growing a Business – Limits on activity – Limit eligibility – Limits on Time and Dollars. 1 to 2 year limit on business growth. Limit on gross revenue.
SadBee Inc. at 2701 Spring Grove Ave, is located in the economically disadvantaged area of Camp Washington, and adjacent to Fairmount, English Woods Millvale South Cumminsville. These areas are categorized as SES1 http://www.socialareasofcincinnati.org/report/Chapter2.html