Why a 501(c)6?

[joshtriplett]

One FAQ I expect to see often: why a 501(c)6 rather than a 501(c)3? This has implications for priorities and constituency, in terms of whose interests the foundation serves. It also affects how people can support the foundation. It'd be helpful to have an answer for that, as well as whether this is an interim/starting structure or a desirable long-term one.

[jyn514]

This has implications for priorities and constituency, in terms of whose interests the foundation serves. It also affects how people can support the foundation.

Can you summarize those differences for non-lawyers?

[jberkus]

I can:

A 501(c)3 is a public interest foundation, one expected to work in the interests of the public, and supported primarily by individual donors. Donations to it are charitable for individuals (depending on situation). Software Conservancy is a 501(c)3, as is the Python Foundation.

A 501(c)6 is a corporate trade association, designed to be supported by, and serve the interests of, its company supporters. Donations are not charitable (but can be tax-deductable for corporations). Linux Foundation and Eclipse foundation are 501(c)6s.

For Rust, the 501(c)6 is tacitly a declaration that they see the foundation primarily serving, and raising money from, the companies that have invested in Rust rather than the individual contributors; likely only companies will be voting members. However, as both LF and Eclipse have shown, the reality is usually quite a bit more complicated than that.

There's also that it's easier/faster to get a 501(c)6 than 501(c)3. There are also more restrictions on how 501(c)3s can spend money, particularly for marketing activities.

[Manishearth]

In order to not confuse people who are reading these threads, please stick to asking questions and follow-ups. We’ll be posting our response to this, feel free to ask any follow up questions you may have after that (in new issues!).

[ashleygwilliams]

I have been late responding to this question because there’s interesting education work to do here and I wanted to be as clear as possible for folks who may not be familiar with the law’s requirements. I may make another attempt at this later but here is what I have so far:

I am not a lawyer but I have spent a lot of time talking to lawyers about this.

Practically speaking, the distinction between 501(c)3 and 501(c)6 matters the most when it comes to US-specific paperwork filed with the IRS. Creating a 501(c)6 is much faster (it doesn’t require nearly as much authorization from the IRS) and it gives us more flexibility. It does mean that donations from US individuals are not necessarily tax deductible, but this only matters to a small audience (US taxpayers who do itemized returns and for whom the donation does not qualify as a business expense). For companies in the US, donations are deductible either way.

The more interesting question is the story around constituencies and priorities.

A 501(c)3, also called a Public Charity, is a group of people with an “exclusively charitable interest”. The definition of this is where a lot of the difficulty with the IRS comes in, as it’s up for interpretation and that interpretation is driven by previous cases and outcomes. You can read more about these here. While it would be completely possible to make the case for a 501(c)3 - making the case, and continuing to make the case would be a lot of effort for what we determined was very little benefit.

A 501(c)6, also called a Trade Association, is an association of people with a common interest. Historically, most open source software foundations have defined that interest as the successful adoption of the technology, often with an implicit assumption that that adoption be by for-profit corporate entities.

In the case of Rust, we are taking a different approach. While the above definition is common, it is by no means legally required by the 501(c)6 designation. What is legally required is that the association's “activities must be devoted to improving business conditions of one or more lines of business”. The public policy idea here is that society benefits from industry practitioners gathering to improve their craft.

The practitioners here are the users and maintainers of Rust, and the craft is using Rust. The interesting part is deciding what “improving business conditions” means. In our case, we are very explicitly defining our common interest as the health, vibrancy, and sustainability of the Rust open source organization as being the most direct way to improve the craft of using Rust. We think we are in a moment where folks are questioning the economic and organizational models around open source and are looking for a change and we’ve had enthusiastic reception from potential sponsors!