As I think I've made clear, this article is not of my own composition. It was taken from
Communities Directory: a Guide to Intentional Communities and Cooperative Living, third edition, March 2004. Written permission was given by the publisher, the
Fellowship for Intentional Community (http://fic.ic.org/) to reproduce it here.
As I'm sure you'll agree, there wasn't any way to meaningfully re-word it, and I don't possess the legal knowledge to usefully expand upon it. I did, however, think it would be a useful reference for us resident communards.
Legal Structures for Intentional Communities in the United States
by Dave Henson
with Albert Bates, Allen Butcher, and Diana Leafe Christian
Many of us involved in
intentional communities have an aversion to legal procedures, government regulations, and taxes. It is often the ugly side of the American fetish for
private property, lawsuits and the corporate form tha inspires us to create
grassroots democracy and trust-based intentional communities in the first place. However, forming an intentional community where the members seek to collectively own
land and
buildings, and possibly run a business together, requires that at least some of those involved become fluent in the relevant aspects of property, tax laws, and regulations.
Residents of the United States have inherited a relatively recent tradition of placing the highest value - and legal rights - on private property. The vast majority of cultures around the world for the past many millenia have organized the relationship between themselves and the land they inhabit as community property, or with a sense of stewardship rather than any sense of private property ownership. As we know, the private property model has led to a rule of law that protects private "rights" to exploit nature for private benefit. Growth is valued above the sustainable management of the "common wealth" of the natural world. Intentional communities are a return to a more traditional - and more ecologically sustainable - model of social organization. Because we are going against the grain, we will run into all sorts of legal barriers. Persevere! We are reclaiming the traditions of our ancestors, and modelling solutions for our children.
What follows are summaries of the options a group of individuals have for holding land and/or conducting business. While we will primarily be looking at legal forms for owning land, in many cases that same legal form can be used for operating businesses. At times in this article, we will be discussing simultaneously the land owning and business opportunities of a particular legal form.
Options for Community Legal Structures
There are many legal forms that allow an individual or group of individuals to own real property (land and buildings). Before we examine each organizational form, let;'s look at some of the more important questions a community should consider while comparing each legal form:
- Does the form fit the values of our community?
- What are the group and individual tax consequences?
- What are the group and individual liability consquences?
- How would the form influence a lender in deciding whether or not to refinance a mortgage or give a loan?
- Does the form set requirements or restrictions for how the organization must divide the organization's profits or losses among the individual members, partners, or shareholders?
- Do the individual members, partners, or shareholders have to pay taxes on the organization's profits (as well as receiving tax benefits from losses)? Does the organizational form itself have to pay the taxes, and benefit from losses? Or do both have to pay taxes?
- Does the form allow the group to assign its own criteria for management and economic decision-making authority (e.g., only active members get to vote), or does it mandate specific rules for decision-making within a group?
- How easy is the form to set up, and to manage over time? How vulnerable is it to changes in the law, to the Internal Revenue Service (IRS), or to other governmental scrutiny? How much are annual filing fees?
- Does the form limit the group's political activity (as does the 501(c)3 tax-exempt status)? Is that important to your group?
- How easy is it to make changes in the controlling documents of the organizationsal form, or to manage people's joining with or departing from the community?
For the purposes of this article, I have divided the various methods of holding real property into three basic categories:
- "Sole Proprietorship" (ownership by an individual),
- "Co-ownership" (ownership by a group of individuals),
- "Corporate ownership" (ownership by an artificial legal entity).
In addition, essentially there is a fourth category, "Mixed Ownership", which is where you create a mix of two or more legal forms.
II. Co-ownership
This covers a variety of ways a group of people can legally organize to buy and own land and buildings, and to legally conduct for-profit economic activities. Many of these organizational forms differ significantly from state to state, so it is important that you do your own research in addition to the general descriptions to read in this or other books.
1. Joint tenancy
Joint tenancy is the joint ownership of a single property by two or more people, where all of the joint tenants have an equal interest and rights in the property.
Joint tenancy can be created several ways: (a) when someone wills or deeds property to more than one person; (b) when more than one person takes title to a property (as when a married couple buys property in California, the deed usually names them as joint tenants); or (c) when joint tenants transfer property to themselves and others (as a way to add more people to your joint tenancy community). All joint tenants have equal rights to use of the joint property, and all share equally in liabilities and profits. This most often includes sharing all necessary maintenance costs, taxes, and work responsibilities. However, a tenant is solely responsible for the costs of improvements made without the consent of other tenants.
An advantage of this form is the right of “survivor-ship”, which means that a joint tenant cannot will his/her interest in the property, but rather upon that joint tenant’s death, the title is automatically passed to the surviving joint tenants. The surviving joint tenants take the estate free from all creditor’s claims or debts against the deceased tenant.
The disadvantages of this are significant for most communities, including that a joint tenant may sell of give his/her interest to another person without the approval of the other tenants. Such action causes a severance of the joint tenancy, and the arrangement reverts to Tenancy in Common (see below). Also, if one tenant goes into debt, the creditor seeking collection could force the sale of the property to access the cash value of the debtor tenant’s share in the property.
2. Tenancy in Common
Tenancy in common is when two or more people have undivided interest in a property. If not otherwise specified, the presumption is that all of the tenants in common share interests in the property equally. The tenants may, however, distribute interest in the ownership of the property at whatever fractions they wish. Taxes and maintenance expenses, profits and the value of improvements on the property must be distributed in the same proportion as the fractional distribution of their shares of ownership.
A tenant in common may sell, mortgage or give his/her interest in the property as he/she wishes, and the new owner becomes a tenant in common with the other co-tenants. Unlike with joint tenancy, there is no right of survivorship – the property interest of a deceased tenant in common would pass to his/her heirs.
There are not many advantages to use this form for most communities. This is a lowest common denominator legal form, meaning that in lieu of the group creating a more sophisticated and intentional legal form or written agreement, people holding property together are considered tenants in common. The same basic disadvantages for joint tenancy hold, with the addition that any one tenant in common can force a sale of the property to recover the value of his/her interest in the property.
3. Partnership
A partenership is an association of two or more people who carry on a for-profit business. It is the most common way several people can form a small business together. In the simplest form of partnership, each partner makes equal contributions, shares equally profits and losses, and has equal share to rights, responsibilities, and liabilities. If that partnership owns property together, a "tenancy in partnership" exists.
To make the legal side of interstate business easier to negotiate, the Uniform Partnership Act has been adopted in 43 states. It defines a partnership as a for-profit business association where two or more persons are co-owners. The controlling document for a partnership is the "partnership agreement", which at a bare minimum needs to state the names and addresses of the partners, the name of the partnership, and and be signed by all the partners. It needs to be filed with the county clerk.
Unless otherwise stated in the partnership agreement, every partner can act on behalf of the partnership - including signing contracts, and borrowing money - and have that act be binding on the partnership as a whole. This has the potential to be a big problem in that one community member could suffer a lapse of group process and borrow money in the name of the partnership, or buy a boat with the community partnership's checkbook (with the money the community was saving to overhaul the septic system). All the partners are jointly and severally liable, meaning that the whole partnership and each individual partner are responsible for the full value of the contracts signed by any one partner. This is typically avoided by putting specific language in the partnership agreement that says something like "purchases over $100 made on behalf of the partnership must require consensus by the partners at a regular partnership meeting", or "no individual partner can borrow money on behalf of the partnership".
A "general partnership" is when each partner has all rights of ownership, and each is liable for all the debts and liabilities of the partnership. A "limited partnership" allows for multiple partners to invest but only be liable for partnership debts and liabilities up to the amount of their share in the partnership. Limited partners have reduced decision-making authority and other rights regarding the partnership. In a limited partnership, at least one partner must be a general partner, and that person or persons are jointly and severally liable for all the partnership debts and liabilities.
There are some advantages to this form. In a partnership, a partner cannot sell or otherwise assign his/her rights in a partnership property to another. Similarly, a creditor, anting to collect a personal debt that an individual partner owes, cannot force a sale or lien on the partnership's property. If a partner dies, his/her rights in the partnership return to the partnership, but the heirs of the deceased partner are entitled to the value of that partner's interest in the partnership. Also, for a community, the partnership form offers maximum decision-making control of the organization - the partners can put into their agreement any decision-making or profit-sharing structure they choose, and, if desired, they can change it over time with minimum legal hassles.
The other major advantage of a partnership is that it has "pass-through tax status", meaning that, while the partners are taxed on the profits of the partnership, the partnership itself is not taxed. Similarly, the tax advantages of losses to the partnership are distributed directly to the partners.
However, as noted above, all general partners have unlimited liability, although a strong partnership agreement can help remedy this problem. There is also the disadvantage of the fact that it is cumbersome to add new partners or to have a partner leave. In both cases, the partnership agreement needs to be re-signed by the remaining partners, and filed again with the county clerk. Dissolving a partnership can also be difficult, again depending on the clarity of the partnership agreement. And, a partnership cannot hold accumulated aernings in the partnership, but must pass on the profits and losses each year to the partners.
III. Corporate Ownership
There are several corporate forms that should be considered by a group of individuals who want to hold real property together and/or conduct for-profit or nonprofit business as a community.
1. Corporation
A corporation is a legal entity consisting of one or more shareholders, but having existenceseperate from shareholders. Over the course of American history, the corporation has been ruled by courts to have the legal status of a "natural person", meaning that it has many of the constitutionally protected rights of of we flesh-and-blood people, including free speech, rights to standing in federal courts, rights to due process, and extensive private property rights. In the eyes of many, this has led to corporations wielding too much power, to the detriment of the very foundation of our democratic society, and there is a growing anticorporation grassroots movement. That said, let's get back to the business of creating alternatives to corporate control and of the world: building intentional communities!
The basic corporate form is not the best legal form for a community. Compared to a Limited Liability Company (LLC) or a partnership, the disadvantages outweigh the advantages.
A corporation is a common way to raise capital. It is familiar to investors, and legal precedance has been established for every possible sticky situation. Ownership is transferred easily, and the corporation lives forever: it continues until terminated, surviving the deats and departures of shareholders. The main advantage is limited liability. A corporation can often also accumulate earnings over the years and and distribute them when the tax advantages are best for shareholders.
However, profits are taxed twice - once as corporate taxes, then again as shareholder personal income. There is somewhat stringent government oversight, and there are many legal requirements (keeping records, holding meetings, keeping minutes, and filing reports). Incorporation costs, legal fees, and annual registration fees should be considered too.
2. Chapter S Corporation
This form is essentialy like a corportion, but with the tax advantages of a partnership or an LLC. In fact, tax filing is based on partnership return. The tax implications of an S corporation are the most complex of any of the similar legal forms - one should consult a tax attorney or an accountant about the specifics. I'm not aware of any reason to form an S corporation over an LLC.
An S corporation eliminates the double taxing of the corporation. It keeps the limited liability advantages of the corporation. It allows pass-through of losses to offset income from other sources and is a common way to raise capital. Ownership is transferred easily. Like a regular corporation, this entity continues until terminated, out-living its shareholders of any one time.
However, all profits must be distributed and taxed annually. You can't have over 35 stockholders. And, there are lots of rules - more than a regular corporation. Plus, there are specific limits on who can join as a shareholder.
3. Limited Liability Company (LLC)
All 50 states have enacted LLC laws since 1988. There is a move in congress to make a uniform LLC law so states can have common LLC rules. For many communitites who are holding real property and conducting any kind of for-profit business, this is likely the best legal form to use.
The initial filing fees and annual taxes vary from state to state. An LLC is controlled by an "operating agreement", and the participants are called "members". The LLC is similar to an S corporation, with its limited liability and pass-through taxation status, but the LLC has substantially fewer restrictions than an S corporation.
An LLC is treated as a partnership for tax purposes instead of as a corporation, if it lacks the majority of the following corporate characteristics: (1) limited Liability, (2) continuity of life, (3) centralized management, and (4) free transfer of ownership. The LLC law in most states makes it pretty easy to comply with these restrictions.
Like a partnership or an S corporation, the LLC avoids the double taxation of a corporation. Unlike an S corporation, there is no limit on the number of shareholders. Unlike a partnership, LLC members are not liable for LLC debts. Unlike a corporation, there is no statutory necessity to keep minutes, hold meetings, or make resolutions. The operating agreement can allocate different decision-making rights to different kinds of members (for example, the community could decide than LLc investors are are limited to voting only on the expenditures which exceed a certain dollar amount, keeping day-to-day decision making in the resident group. Admitting new members is easy, and any type of legal entity can join an LLC, including a person (US citizenship is not required), a partnership, a corporation, another LLC, and trusts. However, an LLC cannot accumulate earnings like a partnership can. It must distribute them the year the earnings are made. Also, annual fees are typically greater than for a corporation.
4. Nonprofit Corporation
Nonprofits are primarily organized to serve some public benefit, and not to provide individual profit. Hence, a nonprofit may obtain IRS and state approval for special tax exemption. Most intentional communities have elected to organize as nonprofit corporations and to apply for tax-exempt status.
As with for-profit corporations, a nonprofit corporation is created by registering with the state - filing a list of corporate officers and articles of incorporation. After receiving state approval, the organization may apply for a federal tax exemption with the IRS.
For those seeking to form tax-exempt corporations, there are many IRS tax exemptions to choose from: cooperative of mutual benefit corporations; 501(c)7 social and recreational clubs; 501(c)3 educational, charitable or religious corporations; 501(c)2 title holding corporations; 501(d) religious and apostolic corporations; private land trusts; homeowners associations and condominium associations; and housing cooperatives. It is best to decide which category of tax exemption you are seeking before filing articles of incorporation, because the articles may have to conform to certain language that the IRS expects before it will grant a particular exemption. A short section on each of these nine categories follows.
a. Cooperative or Mutual Benefit Corporations
"Co-ops" are foten used by consumer cooperatives (such as food-buying co-ops or credit unions), worker cooperatives, or producer cooperatives and are another legal option for communities with good state laws governing cooperative corporations. Co-ops are usually organized as nonprofit corporations; however, some states offer a special "cooperative corporation" category that is neither nonprofit or for-profit.
In either case, to qualify as a co-op, the articles of incorporation must usually provide for open membership, democratic control (one member, one vote), no political campaigning or endorsing, and no profit motive - that is, a limited return on any invested capital. A co-op also provides limited liability to its members. In some states, members get nontransferable membership shares (instead of shares of stock) with an exemption from federal and state securities regulations. Any members who also serve as employees get tax-deductible fringe benefits.
b. 501(c)7 - "Social and Recreation Clubs"
Nonprofit mutual benefit corporations can use the IRS tax exemption 501(c)7, which was created for private recereational or other nonprofit organizations, where none of the net earnings goes to any member. This exemption can be used by a community with land which cannot legally be subdivided, yet whose members are required to put money into the community in order to live there, and who wish to recoup their equity if they leave. Members of a community organized this way "buy" a membership in a mutual benefit corporation. They can later sell their membership (possibly at a profit) to an incoming member.
The advantages are that, if organized properly, the community would not be subject to state and local subdivision requirements - because members wouldn't own specific plots of land or specific houses. Rather, in a strictly legal sense, they would simply have use rights to any plots or dwellings (although the members internal arrangements could specify which plots or dwellings each would have preferred rights to use). In addition, members could pay for their memberships with a down payment and installments rather than in one lump sum. They could be afforded some liability for the actions of the mutual benefit corporation. They would also have the right to choose who joined the community, which would be an advantage over other land-owning legal entities such as planned unit developments (PUD's) or other subdivisions, wherein the landowners would be subject to federal antidiscrimination regulations if they attempted to choose who bought into the community.
The disadvantages are that 501(c)7 nonprofits can be quite complicated to set up and may require a securities lawyer, as they are regulated by the Securities and Exchange Commission. As such, a 501(c)7 cannot advertise publicly for new members, who are legally "investors". Rather, existng members or staff may only approach people they knoew personally to join them. A 501(c)7 may have no more than 35 investor/members. No donations to such a community are tax-deductible. There are no dividends or depreiation tax write-offs; members are taxed on anyb profit if and when they sell.
c. 501(c)3 - Educatinal, Charitable, or Religious Corporations
Nonprofit 501(c)3 corporations must provide educational services to the public, offer charitable services to an indefinite class of people (rather than to specific individuals), combat negative social conditions, or provide a religious service to its members and/or the public. (The IRS interprets "religious" very liberally; this can include self-described spiritual beliefs or practices.) 501(c)3 nonprofitsmay receive tax-deductible donations from corporations of individuals, and grants from government agencies or private foundations. They are eligible for lower bulk mailing rates, some government loans and benefits, and exemption from most forms of property tax. Religious orders that qualify under 501(c)3 may also be exempt from Social Security, unemployment, and witholding taxes in some cases.
In order to qualify for recognition as a 501(c)3, an intentional community must meet two IRS tests. It must be organized, as well as operated, exclusively for one of more of the above tax-exempt purposes. To determine the organizational test, the IRS reviews the nonprofit's articles of incorporation and bylaws. To determine its operational test, the IRS conducts an audit of the nonprofit's activities in its first years of operation. Many communities have difficulty passing the operational test because of the requirements that no part of the net earnings may benefit any individual (except as compensation for labor or as a bona fide benecifiary of the charitable purpose). If the primary activity of the organization is to operate businesses for the mutual benefit of the members, it fails this operational test.
Even if the community passes the operational test by virtue of other, more charitable public benefits - running an educational center, providing an ambulance service, or making toys for handicapped children, for instance - it can still be taxed on the profits it makes apart from its strictly charitable activities.
This catch, called unrelated business taxable income, has been a source of disaster and dissolution for some nonprofits because of the associated back taxes and penalties, which can assume massive proportions in just a few years of unreported earnings. Unrelated business taxes prevent tax-exempt nonprofits from unfairly competing with taxable entities, such as for-profit corporations. The IRS determines a a nonprofit's unrelated business trade income in two ways: the destination of the income and the source. If a community uses profits from bake sales to build a community fire station (presumably a one-time project related to the community's purpose), the IRS may consider the income "related" and not tax it. If, however, the bake sales expand the general operations of the community, or pay the electric bill, the IRS may consider that "unrelated" income, and tax it.
A 501(c)3 nonprofit may not receive more than 20 percent of the corporate income from passive sources, such as rents or investments. If they are educational in purpose, they may not discriminate on the basis of race and must state that in their organizing documents. 501(c)3 are not allowed to participate in politics - they can't back a political campaign, attempt to influence legislation (other than on issues related to the 501(c)3 category), or publish political "propaganda". If they disband, they may not distribute any residual assets to their members; after payment of debts, all remaining assets must pass intact to a tax-exempt beneficiary - such as another 501(c)3.
d. 501(c)2 - Title-Holding Corporations
This legal structure is a useful option for owning, controlling, and managing a nonprofit group's property. The 501(c)2 os designed to collect income from property - whether it is a land trust, a retail business, or a passive investment such as space rental. All income is turned over to a nonprofit tax-exempt parent corporation, which is usually a 501(c)3. The tax-exempt parent must exercise some control over the 501(c)2 holding company, such as owning a majority of its voting stock or appointing its directors. The two corporations file a consolidated tax return. Unlike a 501(c)3, a 501(c)2 may not actively engage in "doing business", except for certain excluded categories such as renting real estate or negotiating investments ... and a 501(c)2 can receive more than 20 percent of the corporate income from rentals or investments.
Many nonprofit communities, epsecially community land trusts (see below), find that having both 501(c)3's and 501(c)2's provides a needed structure to both run businesses and manage land and housing. The 501(c)2 limits the community's exposure to conflicts with the IRS over questions of income and possible personal "inurement", or illegal benefits.
e. 501(d) - Religious and Apostolic Associations
If a nonprofit community has a spiritual focus and a common treasury, it may apply for this tax-exempt status. (Again, the IRS interprets "religious" and "apostolic" very liberally; this can include self-desribed spiritual beliefs or practices, or secular beliefs that are strongly, "religiously" held.)
In any case, the 501(d) is like a partnership or chapter S corporation, in that any net profits after expenses are divided among all members pro rata, to be reported on the member's individual tax forms. Unlink the 501(c)3, the 501(d) corporation cannot confer tax deductions for donations.
501(d) nonprofits make no distinction between related and unrelated income. All income from any source is related. However, if a substantial percentage of community income is in wages or salaries from "outside" work, the 501(d) classification may be denied. A 501(d) can engage in any kind of business it chooses, passive or active, religious or secular. The profits are taxed like those of a pertnership or an S corporation. But, a 501(d) doesn't have the restrictions of a partnership (it doesn't have to reform itself with each change of members), and it isn't limited to 35 shareholders like the S corporation.
501(d) corporations have no restrictions on their political activity - they can lobby, support candidates, and publish political "propaganda". They may or may not elect to have a formal vow of poverty. Upon dissolution, the assets of the 501(d) nonprofit may be divided among the members as far as federal law is concerned. However, state law generally requires that any assets remaining after payment of liabilities should be given to another nonprofit corporation.
The substantial advantages of the 501(d) may be outweighed in communities that would prefer to hold property privately.
f. Private Land Trusts
A private land trust is a legal mechanism that protects a piece of land from various kinds of undesirable future uses, like being sold for speculative gain; or to preserve land for various specific purposes - public use as a wilderness area, as rural farmland, or for low-cost housing. A land trust can be set up by an intentional community that has a specific purpose for the land, or simply to preserve it for future generations.
There are three parties to a land trust: the donor(s), who gives the land to the trust for a specific purpose or mission; the board of trustees, who administer the land and protect its mission; and the beneficiaries, who use or otherwise benfit from the land. People or institutions on the board of trustees are selected for their alignment with the goals and mission of the trust and their pledge of support. The trustees represent three seperate interest groups: the beneficiaries, the people in the wider community, and the land itself. The beneficiaries can be people who visit a wilderness preserve or park, the farmers who farm the land, the owners or residents in low-cost housing on the property, or the members of an intentional community who live and work on the land. The donor, trustees, and beneficiaries can be the same people ina rpivate land trust.
g. Community Land Trusts (CLT's)
A CLT is designed to establish a stronger and broader board of trustees than a private land trust. This is accomplished by creating a board with a majority of trustees that are not land users. Usually only one-third of the trustees can live on the land or benefit directly from it, while two-thirds must live elsewhere and receive no direct benefit from the land. This ensures that any donors or land-resident beneficiaries who are also trustees cannot change their minds about the purpose or mission of the trust, use the land for some other purpose, or sell it. The two-thirds of the board of trustees from the wider community serve to guarantee the mission of the trust since they are theoretically more objective, and will not be tempted by personal monetary gain.
Private land trusts can be revocable by the original donors; community land trusts are usually not revocable.
Private land trusts and community land trusts are set up as nonprofit corporations, sometimes with a 501(c)3 tax-exempt status. The trust holds actual title to the land, and grants the land residents long-term, renewable leases at reasonable fees.
The original owners of the land and assets cannot get their money out of a community land trust once they have made the donation. Also, once the land is placed in a CLT it can be difficult to use the land as collateral for loans.
A CLT is an option for those who wish to ensure that the original purpose for their land and activities continues unchanged into future generations, and are not altered by subsequent requirements for quick cash, loss of commitment, or personality conflicts among the land residents.
h. Homeowners Associations, Condominium Associations
Some communities may choose to organize as a "planned community" - a real estate term, in which members individually own their own plots of ground and dwellings, and are each members of a nonprofit corporation - a "homeowners association". The association, rather than the individual members, own any community buildings and all the common areas, including land other than the individual plots.
Or a community may organize as a "condominium", where the members each individually own the air space within their dwellings, and - as members of a nonprofit corporation, or "condominium association" - they own an undivided interest in the common elements of the property. The common property includes the structural components of the individual dwellings (roof, walls, floors, foundation), as well as the common areas and the community buildings.
Planned communities and condominiums aren't legal structures; they are simply methods of purchasing land. In a planned community, the homeowners association owns everything but the individual units, and it must maange and maintain everything. In a condominium, the condominium association owns nothing, but must manage and maintain everything. Both kinds of associations are often organized as nonprofits, under the Internal Revenue Code (IRC), Section 528.
Under Section 528, such an association is exempt from taxation in acquiring, contructing, managing, and maintaining any property used for mutual benefit. Such tax-exempt "association property" may even include property owned privately by members, such as a greenhouse, meeting house, or retreat. But to qualify, the private property must affect the overall appearance of the community, the owner must agree to maintain it to community standards, and it must be used only by association members and not rented out.
The association must also receive at least 60 percent of of it's gross income from membership dues, fees, or assessments. Also, at least 90 percent of its expenses must be for construction, management, maintenance and care of association proerty.
i. Housing Cooperatives
This is a very specific kind of cooperative corporation, also called a mutual benefit corporation. Housing cooperative nonprofits vary slightly from state to state. In general, however, memebers own shares in the housing cooperative, which gives them the right to live in a particular dwelling. Although nonprofits don't usually allow shares of stock or stockholders, a housing cooperative does. The number of shares the members buy is based on the current market value of the dwelling in which they intend to live.
The members don't own their individual houses or apartments; the housing cooperative does. The membrs have simply bought the shares, which gives them the right to occupy the dwelling of their choice. They pay a monthly fee - a prorated share of the housing cooperative's mortgage payment and property taxes, combined with general maintenance costs and repairs. The monthly fee is based on the number of shares each of the members holds, which is equivalent to the dollar value given to the member's individual dwelling.
Personal Versus Community Property
So far we've reviewed ways for a community to hold title to real property. There still remains the questions of personal property. Some communities require that, as part of joining the community, some or all of the individual's personal property be transferred to the organization, whether it be a partnership, LLC, corporation, or other form. This might include money or bank accounts, cars, and any other private personal property. Some communities require a "vow of poverty", and the giving up of personal property to the organization. Others have certain personal property contribution requirements listed in their partnership agreement, bylaws, or operating agreement. Such agreements can also govern what personal property a departing member or partner may take with them from the organization.
Most typically, the community holds title to the land, and individual community members retain ownership of their personal property. As for buildings, there are two typical ways many communities work this out.
One way is that a community will hold title to all the homes and shared buildings as community property through its partnership or LLC, for example. The homes and other buildings are then used by community members for as long as they are members of the community, probably for some monthly payment to that partnership or LLC. When someone leaves, there is no need to sell the individual home. This eliminates the problem of having a departing member decide who will take their place in the community, and largely does away with housing cost speculation on the houses in the community. There is most often, however, a need to reconsile that departing member's financial, material, and/or sweat equity in that home. Some communitites don't place a vlaue on this at all - when you leave, you leave without equity. Others put simple or complex formulas into their written agreements so that when a person leaves (and it should be expected that it may not always be on the best of terms), there is no question of how to figure what monetary compensation that departing member receives. It is absolutely critical to address this question in your agreements before someone leaves. Otherwise, the irreconsilable differences may force you all into court, to nobody's benefit.
The other way that communities manage the question of who holds title to the buildings, is to have each individual or family own their own home, the improvements on that home, and sometimes the land under and just around the home. The community owns the overall property around which the homes are situated, and manages all the common lands and common buildings. Often county zoning regulations will not allow for this level of subdivision of ownership, but if it is legal, it lets individuals and families have maximum control over their own homes.
The problem here is when someone wants to leave the community, they have to sell their house. Who decides on the value of the home? This begs the question of who decides whether a community member can build onto their home, thus raising the price of their home if they eventually leave. Does the community set style guidelines? Who decides whether or not to accept a particular willing buyer? These are very difficult questions that need to be addressed in your written agreements.
Resources and Research
As your community meets to craft your legal and organizational structures, focus your discussions on making decisions! It is common to have a two-hour discussion on these topics where real progress and agreements are made, but leave the room without writing the exact decision down. It is impossible to structure the legal organization of your community in one or two meetings, so save the last 15 minutes of each meeting to get down in that special binder exactly what was agreed upon, what the nature of the questions are on the issues where no decision was reached, what was left to discuss, and what the next steps you all will take to continue to move the process along.
My best advice os for you to form a committee of a few people in your community to take on a research project. After doing some work, have the committee present the best options for community legal structures to the whole community for extensive discussion. This may be one area where your community needs to pay for some legal advice - but do it after your committee has become literate about the questions and options. Ask around for an attorney with experience in tax and real estate law. You want someone who will really understand the "alternative" nature of your endeavor. A certified public accountant (CPA) can often be very helpful on the tax questions. Remember, an attorney or CPA works for you - their advice on organizational questions is only as good as the community's clarity about what your economic and organizational goals are.
Try the legal clinic at a law school near you. They often offer legal advice inexpensively or for free, and may be able to hook you up with a law student looking for a research project.
The Web is an excellent place to get free legal advice. In doing research for this article, I found many sites with very clear and lengthly legal notes on about the options discussed here, such as Rob Sandelin's resource site, at www.infoteam.com/nonprofit/nica/resource.html. Search for "Limited Liability Company", "Partnership", etc., and you will find more than you can read!
Nolo Press, in Berkeley, California, puts out some great self-help legal books, including step-by-step books on how to set up a corporation, partnership, LLC, or nonprofit. Some come with the papers you need to file on computer disk. Nolo Press, 950 Parker St, Berkeley CA 94710, USA. Tel: 510-549-1976, www.nolo.com.
The Institute for Community Economics (ICE) puts out the Community Land Trust Handbook and other resources on land trusts. ICE, 57 School St, Springfield MA 01105, USA. Tel: 413-746-8660.