What’s a corporation?
Most basically, a corporation is a legal entity licensed by the state that allows a group of people to do things and pay taxes in a different way than they would as individuals, without being individually liable for the actions and debts of the group effort. For-profit corporations are required to pay taxes, while nonprofit corporations are eligible to be tax-exempt—DSA, as a membership organization working to improve society, is concerned with the latter.
There are 29 different types of nonprofit organization licensed by the U.S. Government, all of which are listed in section 501(c) of the Internal Revenue Code. To name some fun ones, there are 501(c)21s (Black Lung Benefit Trusts), 501(c)13s (Cemetery Companies), 501(c)7s (Social and Recreational Clubs), and 501(c)5s (Labor Unions).
The most common type of 501(c) is a 501(c)3, which encompasses charities, schools, animal welfare organizations, and the like—on top of not paying taxes themselves, contributions to these organizations are tax-deductible. But 501(c)3s aren’t allowed to participate in political campaign activities, and are only allowed to lobby a little bit.
Is DSA a corporation?
DSA as a national organization is a 501(c)4—a “social welfare organization”—which allows for unlimited amounts of lobbying activity and substantial amounts of political campaign activity while still letting the organization pay no income taxes. It’s technically incorporated in New York.
Like many 501(c)4s, DSA also has an affiliated 501(c)3 called the DSA Fund, but the DSA Fund is restricted to educational and charitable activities, and legally can’t be directly controlled by DSA membership and their elected leadership.
What is the legal status of DSA-LA right now?
Under the law, DSA-LA is just the LA branch office of the national DSA organization. Our chapter bank account was opened in 2011 using the EIN (employer identification number) of the national DSA 501(c)4.
As far as the DSA-LA Steering Committee understands it, since we aren’t “engaging in any transaction for the purpose of financial or pecuniary gain or profit” in California and don’t hit any of the thresholds mentioned in that section of the tax code, it seems like the laws requiring us to pay corporate taxes in-state (or registering as a “foreign corporation” and applying for tax-exempt status) may not apply to our current formation—and past leaders of the chapter have been told as much by national legal staff. Since we don’t solicit donations for charitable causes (like a 501(c)3 would), we don’t need to register as an official charity and apply for tax-exempt status.
For tax purposes, DSA national registers the size of our treasury in their federal tax-exempt tax return, and we in LA can call it a day.
What does “incorporation” mean?
Incorporating would mean becoming an independent 501(c)4 nonprofit corporation in California.
This would require us to designate a Board of Directors—most likely the Steering Committee as elected per the bylaws—and choose one member or an agency to be a “registered agent” (basically the entity that gets the corporation’s official mail). Then we would include that information in an incorporation document, which would legally control the operation of the organization, pay a fee to file it with the state, and formally re-adopt our bylaws as the bylaws of this new corporation. We would then apply for tax-exempt status, and apply for a new Employer Identification Number (EIN), allowing us to open a bank account under the name of this new corporation.
This corporation would be exempt from local income tax, but would not automatically be exempt from federal income tax—DSA national is in the process of applying for a “group exemption” with the IRS, by which they can list the names of affiliated state 501c4s and gain federal tax exemption as a group. This is likely to happen.
Why is DSA National encouraging chapters to incorporate?
Right now, incorporation is a major topic of discussion in DSA. National has dedicated time and resources to developing Incorporation Kits for local chapters, and set up calls to discuss the process for becoming an independent legal entity. For many of the newer chapters across the country, which were not allowed to use the national 501(c)4’s EIN to open bank accounts, incorporation is a necessary step to becoming a functioning chapter—it’s difficult to build local power if you have to keep your money in a shoebox.
But the handful of local chapters of DSA that were allowed to open bank accounts using the national 501(c)4’s EIN, like DSA-LA and NYC-DSA, are legally considered regional offices of the national organization. That means that, should any of these chapters run afoul of the law or get sued for anything, the national organization is the legal entity that would ultimately be accountable for paying any fines or defending itself against a suit.
Given the sprawling and (ideally) ever-expanding nature of DSA, this prospect understandably gives the national organization a certain amount of agita—rather than being legally liable for the actions of these local chapters, the national organization would prefer that the local chapters separately incorporate.
What are the advantages of incorporation for DSA-LA?
If DSA-LA were to incorporate as a 501(c)4 independent of the national organization, some bureaucratic processes would become simpler. Our requirements for reporting our spending on political activity (i.e. campaign finance law compliance) would be slightly relaxed, as the reporting guidelines for in-state entities are simpler than those for out-of-state entities, and requirements for co-reporting with other unincorporated chapters in California would be clearer (though not necessarily substantially different).
A separately incorporated DSA-LA would also be able to open bank accounts using its own EIN, rather than the national DSA’s EIN (as is the case now). That would prevent the national DSA from being able to siphon funds from or shut down DSA-LA’s local bank account without our consent. In a worst-case scenario, the NPC would still retain the power to dissolve our chapter by a majority vote, per the DSA Constitution, but the California 501(c)4 would continue to exist as a legal entity until the local officers chose to dissolve it.
According to the DSA Fund—DSA national’s affiliated 501(c)3—a separately incorporated version of DSA-LA would be allowed to enter into a cost-sharing agreement with the DSA Fund, in which donations to the fund could be disbursed to DSA-LA in the form of a grant. Pending approval and oversight by the board of the DSA Fund, this would allow some organizations that will only work with 501(c)3s, like the food providers that Food for Solidarity (a proposed project developed by the DSA-LA Immigration Justice and Mutual Aid Committees) hopes to work with, to give donations to the DSA Fund, which could then be granted to DSA-LA to distribute.
But the full details of this proposed relationship are unclear. The fact that DSA-LA is currently fully part of the national DSA 501(c)4, and the DSA Fund currently has a similar arrangement with the national DSA 501(c)4, raises the question of whether it’s strictly legally necessary for us to be separately incorporated for them to work with us in this capacity, or whether they would simply prefer us to be separately incorporated.
If the latter is the case, and separate incorporation is legally unnecessary for those kinds of (c)3-(c)4 partnerships, then there may be a way for projects like Food for Solidarity to partner with local 501(c)3s, rather than the DSA Fund, and carry out their work regardless of the incorporation status of the chapter.
What are the disadvantages of incorporation for DSA-LA?
Incorporating separately would shift the administrative burden of tax and legal compliance from the national organization, which has paid staff and receives all of our mandatory national dues, to the local organization, which is all-volunteer, and is funded only by non-mandatory local donations. The national organization has a little more than a million dollars in its treasury—DSA-LA receives no portion of member dues paid to National and relies only on voluntary donations made to the local chapter.
More importantly, incorporating separately would shift the legal liability for our actions from the national organization to the local organization. This sounds admirable in principle, but in practice it effectively hangs us out to dry.
Given the often confrontational nature of our political activity, it is not difficult to imagine that at one point we might grow powerful enough that our enemies will choose to try and destroy us by bankrupting us through a politically motivated lawsuit—a common tactic throughout the long and storied history of attacks on the organized left in America. While we could feasibly be sued for property damage incurred during a direct action or running afoul of campaign finance law, the most likely case is a defamation suit in response to a DSA-LA campaign. Regardless of our legal rights and chances of winning the suit, even mounting an initial defense against a defamation claim can run into the tens of thousands of dollars, a sum that would either entirely deplete or exceed our local funds should we incorporate separately from the national organization and be left to defend ourselves.
These risks could be mitigated if DSA national were willing to establish some sort of agreement of legal protection for its local chapters, such as establishing a legal fund or agreeing to use its resources to defend its chapters regardless of their incorporation status, but as of yet, nothing along these lines has been guaranteed to the chapters that have already chosen to incorporate separately.
Recommendation from the Steering Committee:
At the moment, barring any new information about our tax liability as a California branch of the national DSA 501(c)4, and in the absence of any written agreements with national ensuring either legal protection or funding for legal protection for separately incorporated chapters, it is the Steering Committee’s position that we have little to gain from incorporating as a separate California 501(c)4, and much to lose.
Many other chapters which started during or after the 2016 boom were not allowed to use national’s EIN to open bank accounts, and therefore had to incorporate in order to function as a large organization. By chance, we find ourselves in a better position than those chapters, and should work with other chapters in the same position (like DSA NYC and DSA Philadelphia, to name a few) to negotiate with national to ensure that a legal fund, agreement of legal defense, or similar provisions are put in place before we consider taking the leap into separate incorporation—and in the process, ensure that the same protections are in place for our comrades in other chapters that have chosen to incorporate separately.
A Note on Drafting This Statement
This DSA-LA Steering Committee position on incorporation was informed by conversations with members involved in research on incorporation from chapters across the country, independent legal research, and dialogue with attorneys from the DSA Legal Working Group. That said, this statement is for informational purposes only, and is not intended to convey or constitute legal advice. The law is very complicated, and as we continue to research and speak with members, national leadership, and independent experts on this issue, our understanding of the topic might shift substantially—this is simply an attempt to summarize our current understanding of the question of incorporation as it stands in order to keep our membership well informed about this issue that could impact all of our work together.