They didn't "turn it into" a for-profit though, they created a separate for-profit arm. This one is unusually successful but that's not an unusual thing for even "regular" charities to do in order to engage in some activities that they wouldn't normally be able to.
Perhaps the regular charity version of this should also be challenged. This case looks somewhat egregious as the for profit arm was able to fire the board of the non-profit parent. Likewise, openAI is selling "PPU" units, it's entirely unclear if anybody knows what these actually are.
It's highly likely in my uneducated opinion that OpenAI will be told to adopt a standard corporate structure in the near term. They will likely have to pay out a number of stakeholders as part of a "make right" setup.
They didn't actually fire the board of the non-profit. They just said they'd all quit in protest because of an action of the board they all felt was egregious. The board could have stayed and been a non-profit that did nothing ever again. They decided it was better to step down.
I believe it was Helen Toner who claimed an OpenAI lawyer said they were at risk of breaching fiduciary duty if the company fell apart because of the ouster.
I don't think that's very likely at all! But I suppose we'll see.
For a good point of comparison, until 2015, when public scrutiny led them to decide to change it, the NFL operated as a nonprofit, with the teams operating as for-profits. Other sports leagues continue to have that structure.
They basically did, though. The nonprofit does nothing except further the interests of the for-profit company, and all employees get shares of of the for-profit company.
It's not unusual for nonprofits to have spinoffs, but it is unusual for the nonprofit to be so consumed by its for-profit spinoffs.
That argument will be tested in court. It certainly looks like things are the other way around as of now.
Most non-profit employees receive their compensation in the form of a salary. If you need to pay "market rate" competing with organizations that offer equity, you pay a bigger salary. When non-profits spin for-profits off (eg research spinoffs), they do it with a pretty strict wall between the non-profit and the for-profit. That is not the case for OpenAI.
And transferred everything they did to that arm. I'm all for tax avoidance, but the rules should apply to everyone equally. Small ma and pa businesses don't have the money to hire armies of lawyers for these legal machinations
I guess "mom-and-pop businesses" are probably not started as charities in the first place in most cases so I don't really get what you are trying to say.
He’s making a (valid) point having to do with tax avoidance.
Want to open a bakery in your small town? Start it as a 501(3)(c) and promise it’s a charitable endeavor for the local community. Then invest your $500k into the bakery maybe even from your local community (it’s a tax deductible donation!) to get the bakery up and running.
Then once it’s turning a profit, ditch the original 501(3)c and replace it with a LLC, S-Corp or C-corp and start paying taxes. (And hope you don’t get sued or audited)
His point is mom and pop bakeries aren’t typically sophisticated enough to pull of schemes like this, even if it would save tens of thousands on taxes.
In general the the 501(3)c isn't replaced by a for-profit corp though. The 501(3)c remains and a new for-profit corp is established under its ownership.
IANAL but I think the tax issue would likely hinge on how well that $500k was isolated from the for-profit side. If the non-profit has no substantial operations and is just a shell for the for-profit, I could see getting in trouble for trying to deduct that as a donation. But if there's an audit trail showing that the money is staying on the non-profit side, it would likely be fine.
Yes if the for-profit was the entire operation, I think you could definitely have issues with the IRS. It would ultimately depend on your ability to convince either the IRS or a judge that there is some purpose to the nonprofit apart from giving investors in the for-profit side tax deductions.
I mean they effectively did. They created a for-profit, moved the bulk of employees there, and when the board attempted to uphold its founding principles they were threatened and forced to resign.
What's next? Can the OpenAI nonprofit shell divest itself of the for-profit OpenAI and spend the remainder of its cash on "awareness" or other nonsense?
