Ownership units (decision-making power) for an accelerated LLC operating agreement

In order to exempt contributors who want to do and direct large contracting work, such as myself, @Dame, or others, from workers compensation insurance for Detroit Arcology, this would be a reason to accelerate filing an LLC operating agreement, and for a new LLC specifically for 3731. More details here:

This would be a reason to accelerate filing a separate LLC for 3731 with a simple division of ownership of 10% to each member who wishes to do work and risk their personal safety for Detroit Arcology, with a majority (greater than 50%) ownership going to Detroit Arcology LLC, which will still have ownership units with to-be-discussed combination of

The proposal will be that proceeds of the sale of the house, which will be for no more than $90,000, will be distributed according to these fixed percentages when the house is sold not later than 20 Nov 2022 to a buyer who meets the following criteria:

  • The buyer will live in the home as a primary residence
  • The buyer agrees to join this forum and use it for all required legal and public communication with Detroit Arcology and government organizations
  • The buyer agrees to receive a stake in Detroit Arcology and learn how to cast legally binding votes
  • The buyer has qualified for an affordable mortgage (1.4% interest or less over 15 years) from NACA, USNAP-BAC, or United Housing Coalition.

Proposed LLC Ownership for Detroit Arcology and 3731 Northwestern St

This chart shows the proposed percentage ownership of 3731 Northwestern St as a separate LLC, with a fixed 10% ownership stake to contributors who have done and wish to do contracting work on the house before it is sold, with 5% of each stake that is eligible to be distributed as a dividend and a taxable event, and 5% stake held in trust by Detroit Arcology LLC for a period of 25 years, to be used to pay for any of the following (The Homeowners Warranty).

Detroit Arcology Homeowners Warranty

A core value of Detroit Arcology is building for the long-term, using high-quality materials that approach the lifetime of the contractor who installed it. To align values with those of homebuyers, the larger Community Trust, and the wider city of Detroit, contributors who are contractors (perform work for the house, or subcontract out this work to others) are required to warrant this work by paying for any future negative impacts from it out of their 5% stake in the house, up to 25 years after the house is sold, as determined by plurality vote of the wider Detroit Arcology LLC contributor base. These negative impacts include but are not limited to any defects in workmanship leading to permanent damage or personal injury in the house, legal fees arising from disputes, or other liability of that contributor that negatively impacts the long-term value of the home and living experience of the homebuyer (aka The Detroit Arcology Homeowners Warranty). This stake accrues at between 10%-20% per year, according to trade volume of liquidity pairs on decentralized exchanges, in which it will be invested as an enforced savings policy for the contributors and managed by Detroit Arcology LLC. At the end of 25 years, if no claim has been made against this stake, it is released to the contributor who may sell it as a taxable event.

Finder

The contributor who finds the property, secures approval from the Detroit Arcology LLC to form a new house LLC, draws up the legal documents for approval acts as trustee of Detroit Arcology LLC funds to purchase the house and transfer the title to the new house LLC, and warrants the house against future unexpected liens and title claims (by doing a title search and obtaining a title commitment from a title insurance company) will receive a 10% stake in the new house LLC. In the case of 3731 Northwestern, the finder is @cryptogoth. There is no additional stake for wishing to be a contractor on the house and being exempt from workers compensation insurance. The finder’s stake is subject to the same restriction as above: 5% is liquid on sale of the house, and 5% is held for 25 years as a warranty against legal defects: the afore-mentioned liens, title claims, and disputes on ownership that would prevent the house title from being transferred according to votes of Detroit Arcology LLC. If a finder is also a contractor, that contributor is liable for both contractor / workman defects in physical house work as well as legal defects of informational house work.

This chart is only for illustration and is open for discussion and change before signing a final 3731 LLC agreement. The remaining percentage (80% in this case) is owned by the original Detroit Arcology LLC, whose ownership stakes are described next.

Detroit Arcology LLC (The Community Trust)

The ownership percentages of Detroit Arcology LLC, the original LLC, is still to-be-determined with some static percentages to community partners, advisors, neighbors, and home buyers; and dynamic percentages determined by SourceCred grain and hours contributed. These percentages are not part of the 3731 LLC operating agreement.

As part of a separate proposal, the Detroit Arcology LLC trust will have an operating agreement with these main tenets:

  • There are Individual Contributors, people who do work for the Trust such as
    • construction or contracting work
    • clerical or organization work
    • creative work
    • any other kind of hourly work that is tracked
  • Individual Contributors may be paid an hourly or per-project wage, as agreed by all contributors, in addition to earning a dynamic stake.
  • Individual Contributors may sell their stake, transfer it to another party, etc. without approval of other contributors, unless such amount is greater than 5% of the overall stake.
  • There are Advisory Contributors, made up of three groups:
    • Faith-based, Non-profit, Governmental, Civic Advisors with a mandate to increase safe, dignified, affordable housing
    • Neighbors of Trust property, within 500 feet of any community trust parcel
    • Community Partners, other civic and activist groups in Detroit working towards more equitable opportunity
  • Homebuyer Contributors buy the properties on Trust land, agreeing to resale restrictions and paying a long-term ground lease.
  • The plurality holder and founder stake will never be eligible for selling and can only be distributed to other contributors, by approval of all contributors, to further the goals of Detroit Arcology. This is currently held by cryptogoth but may change in the future as more contributors earn work hours or SourceCred grain.
  • At any time, Detroit Arcology contributors can vote to burn or transfer away the stake of any contributor who has acted in bad faith, caused financial damage to the Trust, or acted contrary to the mission of Detroit Arcology as described in bylaws.
  • Advisory Contributors may never be paid any kind of salary or contribution from Detroit Arcology LLC.
  • These Advisory Contributor groups will be granted a fixed 25% stake as a group, or 2.5% for each contributor, which stake cannot ever be sold, and can only be transferred by a plurality vote of all contributors.
  • The operating agreement when it is active can take the following legal actions
    • approve selling a house such as 3731 LLC by directing its managers to draw up a legal sale contract
    • release any contributor’s stake in a house LLC after 25 years without incident
    • issue Ethereum governance tokens as a result of SourceCred grain or hours contributed
    • pay back investment loans with guaranteed rate of return
  • The operating agreement will not activate until each kind of Advisory Group has at least 10 members each, meaning
    • 10 Faith-based, Non-Profit, Governmental, Civic Advisors
    • 10 neighbors of trust property
    • 10 community partners, other civic and activist groups
  • For each additional advisory group member beyond the 10, their additional 2.5% stake will automatically come from the plurality holder and founder with the most stake.

Please Send Feedback as Usual

I’ll present an example LLC operating agreement with this proposal at tomorrow’s meeting, and also welcome discussion of it in replies to this thread, or if you prefer, DMs (direct messages) on this forum.

I largely agree with most of these points however there are somethings that should be discussed further. I believe that the parent company by laws or operating agreement should be established first. That will set the tone for everything else. I also believe that LLCs that would own the homes should be wholly owned by the parent company to avoid complicating the tax process because many individuals would already have a stake in the parent company & having the house llc as a single member llc would mean the profits pass directly to the parent company, then they can be distributed properly.

Thanks for sharing these perspectives @Dame I’m open to different options and also welcome responses from others here too.

Here’s my reasoning:
Having a single owner is simpler, I agree. However if there is only one owner, and that parent LLC is ready now, I would just transfer the house title to that parent LLC.

For future houses, we may buy the house and transfer ownership to the parent cooperative right away when we close at the title company.

The giving of a fixed 10 percent of a specific house LLC to certain individual owners is to exempt them from workers compensation insurance. This is an exemption under Michigan state law, and would let owners do work on the house like roofing, which I would like to do for 3731 or future houses, and I believe you do too.

There are probably many ways to accomplish our goals, including using a cooperative corporation like @adrian mentioned yesterday. More discussion is welcome.

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Great point on the worker’s compensation law. If we contract the work out to another business, that business would bear the responsibility and liability correct ? Hypothetically The house LLC can hire my llc to do the job, then my llc will hire anyone who wishes to work as a sub. The sub will be responsible for there own workers comp.

I also really like @adrian’s idea of a collective corporation as the parent company. Here are some ideas I wrote down to brainstorm. NOTE: As a co-op, I believe the appropriate term is Member but the term Members and shareholders are interchangeable. Also its says financial contribution to become a member, however to keep up with the theme of working for shares and also comply with IRS standards, the hours worked can be converted to funds which then can be converted to stock shares instead of just work hours being converted to shares.

@adrian ‘s suggestion to be a cooperative corporation is an interesting one we should explore for sure, and one that we can ask the Detroit Justice Center for advice. What are the advantages and disadvantages of being a cooperative versus being a multi-member LLC with democratic governance in our operating agreement?

@Dame do you think it makes sense for the 3731 Company to be a cooperative as well, or just the parent company?

Do all members have to be listed in the LLC / cooperative operating agreement, or can we refer to an online ledger, with or without connecting identities with a real persons name, address, phone number, etc. I would prefer the latter, but I’m also okay with us filing a snapshot every year or every quarter updating the paper agreement with the online ledger.

Thanks for the notes in that screenshot. We definitely need to take on loans to fund rehab work, and are taking on unofficial loans right now from me and @adrian , paying for the closing costs of the house, various materials, and subcontractors.

When we sell the 3731 house, the proceeds in dollars get divided up to those members with fixed percentages who co-invest dollars with a capital contribution. This is taxed as personal income for those members. These are tracked in the budget spreadsheet.

I use the term “member” or “contributor” to emphasize that the important quality we are recognizing is someone putting in work hours, which anyone in the neighborhood can do, to be part of Detroit Arcology.

As you said, there are tax implications from the IRS allowing people to sell their governance shares (which also determines their decision-making / voting power) as a substitute for earning a salary. They have to keep track of the cost basis (the dollar value of their governance shares when granted) to subtract from the cost when they sell to dollars. This is an experimental feature we can implement with decentralized exchanges like Uniswap, but it will take time and is part of the parent company agreement, not 3731, in the plan I presented.

I can also see shares only being tradeable once a year in a batch auction where they all get the same price. This is how Gemini settles trades, would make cost basis easier, and would let Detroit Arcology issue statements to help members file capital gains taxes every year.

Shares inflate over time, so there is no guarantee that share values will increase or decrease over time.