Going Non-Profit: What You Need to Know

Navigating any open source project’s organizational structure and governance has its challenges. When it came to establishing the AlmaLinux OS Foundation for AlmaLinux—a production-grade enterprise operating system that is binary-compatible with Red Hat Enterprise Linux (RHEL)—we had our ‘north star’ to guide us.

We wanted to be as transparent as possible and put the OS ownership, Intellectual Property, and the project’s direction into the hands of the community.

But what’s good for the open-source goose isn’t necessarily good for the Libre gander, and while the AlmaLinux OS Foundation became a US non-profit 501(c)(6) or ‘c6’ organization in March 2021, there are some important considerations for any open source project on their journey to deciding whether to establish a non-profit organization or not. So, what are the options?

Note: we cover the options in the US as this is was our experience and where AlmaLinux OS Foundation resides.

The 501c options

First, let’s talk taxes. We all pay taxes, and governments need to check that the amounts paid are calculated correctly, requiring us to tell the government about income and capital regularly.

Some organizations - notably those serving the public good directly and saving government spending on those needs - are granted exemption from some taxation.

Becoming exempt involves careful and ongoing scrutiny of the grounds that grant exemption to an organization. The greater the exemption, the greater the scrutiny.

The US tax authority (the Internal Revenue Service, or IRS) classifies tax-exempt organizations in its Internal Revenue Code (IRC) in section 501 subsection c. Within that, there are two special interest groups: Sub-subsection 3 defines rules for organizations qualifying as public charities (‘c3’), and sub-subsection 6 defines rules for trade associations (‘c6’ or as the IRC terms them ‘business leagues’).

Community organizations that qualify as ‘c3’ public charities have a purpose that serves the general public in a way that does not discriminate against any group based on their identity (the things they can’t change about themselves).

In contrast, c6 community organizations that the IRS calls ‘business leagues’ serve a self-selecting group of people who engage in the same kind of interest, preferring those who choose to join the organization over those who don’t, and accepting all who qualify without discrimination.

A critical difference between c3 and c6 organizations is the anticipation that donations to c3 public charities come from the taxed income of individuals, and donors are entitled to reclaim taxes paid on the money they donate. This means that you need to ensure that your funding is predominantly from a diverse general public, and not a sponsor program that’s only appealing to certain corporate entities.

For example, Let’s Encrypt, the open certificate authority, has 501(c)(3) and is able to achieve that as many individuals want to support its goal of creating a more secure web as well as corporate sponsors.

Finally, immediacy may be a factor for your project. You will need to seek a determination that you are qualified for 501(c)(3) status, but that doesn’t stop you from acting like a c3 in advance while you wait for the outcome. In contrast, you can progress towards a c6 determination while getting started immediately.

The B Corp option

Separate from the 501(c) IRC-classified tax-exempt organizations, there is the option to choose to become what is called a B Corp. This is a marketing program administered by a company called B Labs, into which for-profit corporations can enroll to demonstrate their commitment to “building a sustainable and inclusive economy that works for everyone.”

Companies build their bylaws to meet the standard set by B-Labs for public benefit corporations. While it is a positive attribute, it’s important to realize that qualifying as a B Corp is not an indication of non-profit status or public governance and does not offer a binding restriction on future actions.

However, B Corps do aim to create value for society, not just for traditional stakeholders, such as their shareholders, by voluntarily committing to meet specific standards of transparency, accountability, sustainability, and performance.

B Corps are popular as they operate for profit and mission.

Our decision

For AlmaLinux, the foundation needed to operate with a single mission: its community. While corporate social responsibility is a noble aim, the B Corp option wasn’t a good fit as it didn’t comply with AlmaLinux’s ‘north star’ of putting ownership of the OS, the IP, and the project’s direction in the hands of the community.

Since our goal in building the AlmaLinux community would be best classified as a public charity, serving anyone without discrimination and allowing contribution and use openly and equally, we would prefer to become a 501(c)(3).

But we chose the lower target of being a 501(c)(6) non-profit for now, with an expectation that once the AlmaLinux project has established governance and diverse participation, we will eventually transition to a 501(c)(3). But we have worked to design all the organization’s rules as if that’s already true and will continue to do so.

The proper organizational structure for your open source project may be different, but it’s vital for any open source project to be rooted in a commitment to its community whatever route you decide to take.