OPEN PANEL — Legal Structure

OPEN PANEL — Legal Structure

Foundational + operating legal architecture for OPEN PANEL FOUNDATION (US 501(c)(3) public charity) and its for-profit sister VARIANT (Delaware C-corp). Conforms to CANON.md §2 (the legal & tax thesis). Where this doc and CANON disagree, CANON wins — flag the conflict, don’t silently diverge. Status: DRAFT v0.1 — drafting session 2026-06-13. Jurisdiction assumed United States.

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0. BIG DISCLAIMER — READ FIRST

THIS IS NOT LEGAL OR TAX ADVICE. It is a structural design document written to brief qualified counsel, not to substitute for them. Nothing here may be relied upon to form an entity, file with the IRS or any state, set compensation, or execute an inter-entity transaction. Engage qualified nonprofit/tax-exempt counsel AND a CPA experienced with exempt organizations BEFORE any filing, before adopting any policy verbatim, and before the first dollar moves between the Foundation and Variant. Every IRC section cited below is cited by number so counsel can confirm current text and Treasury Regulations; tax law and its interpretation change, and several judgment calls in this document (especially the §512(b)(13) control analysis and the public-support test) require professional sign-off.

Jurisdiction assumed United States. If the real jurisdiction differs, this entire document must be revisited first (see CANON §10 open decision #1).

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1. The hard constraint — why “revenue sharing for officers” inside a 501(c)(3) is illegal

A 501(c)(3) organization is exempt only so long as no part of its net earnings inures to the benefit of any private shareholder or individual. Two independent doctrines bite:

1.1 Private inurement — IRC §501(c)(3)

The exemption statute itself bars net earnings from flowing to insiders (“private shareholder or individual” — read broadly to mean anyone with a personal/private interest in the org’s activities, i.e. insiders). Inurement is an absolute prohibition: there is no de minimis exception, and even a single substantive violation can, in principle, support revocation of exempt status. “Revenue sharing for officers” — paying officers a cut of the nonprofit’s surplus/royalties/residuals — is the textbook inurement violation. This is non-negotiable (CANON §2 “the hard constraint”).

1.2 Excess-benefit transactions / intermediate sanctions — IRC §4958

Because revocation is a blunt, all-or-nothing remedy the IRS was historically reluctant to use, Congress added intermediate sanctions under §4958. These apply to “applicable tax-exempt organizations” (which includes 501(c)(3) public charities) and impose excise taxes when an excess-benefit transaction occurs — i.e. when an organization provides an economic benefit to a disqualified person that exceeds the value the organization receives in return.

The excise taxes fall on TWO sets of people:

• On the disqualified person who received the excess benefit: an initial tax of 25% of the excess benefit, plus a 200% tax if it is not corrected (repaid with interest) within the taxable period.
• On the organization managers who knowingly approved the transaction: 10% of the excess benefit (capped per transaction), jointly and severally. This is the critical deterrent for our board — approving an improper officer payout personally exposes the approving directors/officers.

§4958 does not replace revocation — for egregious or repeated cases the IRS can apply intermediate sanctions and revoke. Treat them as cumulative, not alternative.

1.3 Disqualified persons (who triggers §4958)

A disqualified person is anyone who, at any time in the 5-year “lookback” period before the transaction, was in a position to exercise substantial influence over the organization’s affairs. This expressly includes:

• voting members of the governing body (directors/trustees);
• officers (the CEO/executive director, CFO/treasurer, and their functional equivalents);
• family members of any of the above; and
• entities (35%-controlled) in which disqualified persons hold >35% of the voting/ beneficial interest — this is how Variant and its insider-owners can be pulled in.

Because the Foundation’s officers will also be involved with Variant, they are disqualified persons, and any Foundation→officer or Foundation→Variant value transfer is presumptively scrutinized. The structure below is engineered around exactly this fact.

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2. How the operator’s intent IS satisfied (without breaking 501(c)(3))

The goal — officers build real wealth, residuals are reinvested — is fully achievable. It just has to be routed correctly. Three mechanisms (CANON §2 “how the operator’s intent is satisfied anyway”):

2.1 Nonprofit officers → REASONABLE COMPENSATION only, via the §4958 safe harbor

Officers of the Foundation receive salary (plus optional bonus tied to mission / non- financial metrics only — readership, titles published, creator-pay fairness — never to profit/royalty/revenue). Reasonableness is protected by establishing the rebuttable presumption of reasonableness under the §4958 regulations. The 3-prong test (all three required, before the comp is paid):

1. Independent body. The compensation arrangement is approved in advance by an authorized body (the board, or a compensation committee) composed entirely of individuals with no conflict of interest with respect to the arrangement (the officer being paid is not in the room and does not vote; no subordinates or family).
2. Comparability data. That body obtained and relied on appropriate comparability data before making its determination — e.g. compensation paid by similarly situated organizations (taxable and tax-exempt) for functionally comparable positions, in comparable locations, drawn from surveys or independent compensation studies.
3. Contemporaneous documentation. The body adequately and contemporaneously documented the basis for its determination (who was present, the data relied on, the terms approved, and the basis) — minutes prepared by the later of the next meeting or 60 days after final action.

Meeting all three shifts the burden to the IRS to prove the comp was unreasonable. It does NOT make any number defensible — the comp must still actually be reasonable; the safe harbor is procedural protection, not a blank check. Counsel/comp consultant must confirm the comparability set.

2.2 Officer wealth-sharing lives in VARIANT (the for-profit)

All genuine upside is built on the for-profit side, where it is entirely legal: equity grants, stock options, profit interests, and performance bonus pools in VARIANT. This is the answer to “revenue sharing for officers”: they share in Variant’s profits as owners of Variant, not in the Foundation’s residuals as insiders of a charity. This is the single most important reason the structure defaults to Option A (§5): a Foundation- owned subsidiary makes giving insiders equity very hard without inurement problems.

2.3 Mandatory reinvestment of residuals — codified as board policy

The Foundation’s net surplus (“residuals”) is not merely allowed to be reinvested — it is required to stay in the charitable mission. We codify a board-adopted Reinvestment Policy: residuals → (a) the free-comics program, (b) fair creator pay, (c) prudent operating reserves. No residual path to insiders exists, by design and by written policy.

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3. Entity formation specifics

3.1 OPEN PANEL FOUNDATION — 501(c)(3) public charity

• State of formation: form a nonprofit nonstock corporation (state TBD with counsel — Delaware nonstock and the operating state are both candidates; many charities incorporate where they operate). Counsel to confirm state.
• Articles of Incorporation must contain the IRS-required language to qualify under §501(c)(3):
  • an exempt purpose clause limiting the org to charitable/educational purposes within §501(c)(3) — here: advancing literacy and the comic art form by creating and distributing comics to the public free of charge, and supporting creators. Must be drafted so activities are not “too broad”;
  • an operational limitation clause (no substantial lobbying; no political campaign intervention — absolute bar); and
  • a dissolution clause dedicating assets, on dissolution, to another 501(c)(3) or to government for a public purpose (required for exemption).
• Bylaws: board structure, officer roles, quorum, committees (incl. compensation and audit), conflict-of-interest procedures, indemnification.
• EIN, then IRS Form 1023 (full form; Form 1023-EZ is almost certainly unavailable/inappropriate given IP ownership, a related for-profit, and expected scale — counsel to confirm). Exemption, once granted, is generally retroactive to formation if 1023 is filed within 27 months.
• Public-charity vs private-foundation status. Default IRS presumption is private foundation unless the org qualifies as a public charity. We target public-charity status (private foundations face the §4940–§4945 excise-tax regime, including §4941 self-dealing rules that are far harsher than §4958 for any Foundation↔insider/Variant dealing). Public-charity routes:
  • §509(a)(1) / §170(b)(1)(A)(vi) — the public-support test: broadly, ≥ 1/3 of total support from public/governmental sources over a 5-year measuring period (a 10%-plus-facts-and-circumstances fallback exists). Donation-funded orgs fit here.
  • §509(a)(2) — supports orgs with significant exempt-function revenue (e.g. program-service income); has its own 1/3 support + <1/3 investment-income tests.
  • Which test fits depends on the revenue mix (donations vs. royalty income vs. program revenue). Royalty income from Variant complicates the support fraction and could, if dominant, threaten public-charity classification → counsel/CPA must model this.
• State charitable registration before soliciting donations (most states require it; multi-state solicitation may require registering in many — the URS is a partial tool).

3.2 VARIANT — for-profit sister

• Form: Delaware C-corporation (default per CANON §1). C-corp is preferred over LLC because it cleanly supports equity for officers/employees (stock, ISOs/NSOs, an option pool), future investors, and standard cap-table mechanics — directly serving the officer-wealth goal (§2.2). (CANON notes LLC as an alternative; C-corp is the default.)
• Cap table: founders’ common stock, an employee option pool, room for outside investment. Variant must be independently owned for Option A to work (§5) — the Foundation does not hold a controlling/large equity stake (see §4.4 control analysis).
• Board: Variant’s own board. Must not be identical to the Foundation board; overlap is limited (§6).
• Standard DE corporate formalities: Certificate of Incorporation, bylaws, stockholders’ agreement, 83(b) elections for founders on restricted stock, etc.

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4. The IP license bridge (Foundation → Variant) and UBIT

This is the spine of the model (CANON §2 “the bridge”). It must be executed with real arm’s-length discipline or it collapses into inurement/UBIT problems.

4.1 Structure of the flow

1. Foundation OWNS the IP — characters, universe, trademarks, the comics created through its charitable program (creator-side rights per CANON §5).
2. Foundation LICENSES commercial-exploitation rights to VARIANT under a written master license: defined field of use (merch, adaptations, collectibles, partnerships), territory, term, royalty rate, audit rights, quality control over the marks.
3. Variant pays royalties UP to the Foundation.
4. Variant sublicenses to manufacturers/studios/partners, keeps the spread, and distributes profit to its owners/officers (where insider upside legally lives).

4.2 UBIT analysis — the §512(b)(2) royalty exclusion

Royalties received by an exempt org are generally excluded from unrelated business taxable income (UBIT) under IRC §512(b)(2). Passive royalty income = “clean money” for the mission. But the exclusion is fragile and can be lost:

• Substantial services destroy the exclusion. If the payment is really compensation for the Foundation performing services (marketing, production, active management of the licensed property) rather than a passive royalty for the use of the IP, the IRS can recharacterize it as UBIT (the “royalty vs. services” line; cf. the mailing-list / affinity-card case law). Mitigation: the license must be a true license for the use of intangible property; keep the Foundation passive; push active exploitation work into Variant. Counsel to paper this carefully.

4.3 §512(b)(13) — controlled-subsidiary attribution (THIS DRIVES OPTION A vs B)

IRC §512(b)(13) is the trap that distinguishes the two structures. Ordinarily royalties are UBIT-free (§512(b)(2)). But when the payer is a controlled entity (generally >50% control — by vote/value for a corporation), §512(b)(13) strips the passive-income exclusion to the extent the payment reduces the controlled entity’s net unrelated income / exceeds arm’s-length terms — i.e. royalties from a >50%-controlled subsidiary can become taxable UBIT to the Foundation. (A limited fair-market/arm’s-length exception under §512(b)(13)(E) has historically existed but its scope/permanence must be confirmed by counsel.)

Consequence:

• If Variant is independently owned (Option A) and the Foundation does not control it (≤50%, ideally far less, and not via attribution through insiders), §512(b)(13) should not apply, and the royalties stay UBIT-free under §512(b)(2). ✅ This is the goal.
• If the Foundation owns/controls Variant (Option B), §512(b)(13) applies, and the royalty stream is at risk of being taxed as UBIT — undercutting the “clean money” premise. Dividends from a controlled sub are not UBIT, but royalties are the better characterization here and they’re exposed under B.

Counsel must confirm: the current >50% control threshold mechanics, the attribution rules (insiders’ Variant ownership could be attributed to the Foundation and inadvertently create “control” even under Option A — this is a real risk to pressure-test), and the status of the §512(b)(13)(E) arm’s-length exception.

4.4 Arm’s-length safeguards (mandatory for both inurement and UBIT)

• Independent valuation of the license / royalty rate by a qualified third party before signing, and periodically thereafter.
• Conflict-of-interest recusal: any director/officer with a Variant interest recuses from the Foundation-side approval; the independent directors approve, document the comparables, and the COI policy procedure is followed (mirrors the §4958 process).
• Written agreement with audit rights, defined royalty terms, and quality-control over the licensed marks (trademark licensors must police quality or risk “naked license”).
• Treat the license approval like a §4958 transaction: it is a transaction with disqualified persons (the insiders behind Variant).

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5. Entity relationship — Option A vs Option B

Dimension	Option A — License model (DEFAULT)	Option B — Wholly-owned taxable subsidiary
Ownership of Variant	Independent (founders/officers, investors)	Foundation owns Variant
Officer equity upside (the core goal)	Strong — insiders own Variant equity directly	Weak — can’t easily give insiders equity in a charity-owned sub without inurement
§512(b)(13) royalty attribution	Avoided if Foundation not >50% in control	Triggered — royalties at risk of UBIT
UBIT on royalties	Excluded under §512(b)(2) (if passive + arm’s-length)	Royalties exposed; dividends up are not UBIT
Inurement risk	Higher discipline required (insiders on both sides)	Lower equity-inurement path, but control rules bite
Arm’s-length burden	High — must be genuinely independent + valued	Lower (intra-group) but UBIT cost higher
Complexity / optics	Two independent orgs; cleaner separation	Simpler ownership; “captive charity” optics risk

Choice: Option A, because the operator’s explicit goal is officer wealth via equity, which Option B structurally frustrates, and because Option A keeps the royalty stream UBIT-free under §512(b)(2) by staying outside §512(b)(13). Option B is retained as the conservative fallback if counsel concludes the arm’s-length/independence discipline of Option A cannot be reliably maintained. (CANON §2 “entity relationship options”.)

The Option A risk to watch: insiders sitting on both sides. If officer ownership of Variant is large enough to be attributed to the Foundation, or if board overlap makes the Foundation a de facto controller, Option A’s §512(b)(13) and inurement protections erode. Governance separation (§6) is what keeps Option A defensible.

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6. Governance separation requirements

• Board independence majority (Foundation). A majority of the Foundation’s board must be independent — no financial interest in Variant, not employed by either entity, no family/business ties that compromise independence. This independent majority is what approves comp (§2.1) and the inter-entity license (§4.4).
• Overlapping-director limit. The two boards must not be identical. Overlap should be a minority of the Foundation board (target: no more than a small minority; counsel to set the exact cap). Any overlapping director recuses from inter-entity votes.
• No insider on both sides of a transaction. The person negotiating for Variant cannot approve for the Foundation. Separation of role on every Foundation↔Variant dealing.
• Independent decision-making infrastructure: standing compensation committee and audit committee, each with an independent majority.

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7. Required policies (board-adopted)

These are referenced in CANON §7 (operating contracts) and must be adopted by the Foundation board (and analogues by Variant where noted):

1. Conflict-of-Interest policy — governs every Foundation↔Variant transaction; recusal + independent approval + documentation. (IRS expects one; Form 990 asks about it.)
2. Compensation policy — codifies the §4958 rebuttable-presumption 3-prong process (§2.1).
3. Whistleblower policy — protected reporting of legal/ethical concerns (990 asks).
4. Document retention & destruction policy — incl. litigation-hold carve-out (990 asks).
5. Gift acceptance policy — what donations the Foundation will/won’t accept, non-cash gifts.
6. Reinvestment policy — residuals → mission, mandatory (§2.3).
7. IP intake & licensing policy — how IP flows arm’s-length to Variant (§4).
8. Investment / reserves policy — prudent management of reserves (UPMIFA-aware).
9. (Variant) Equity / option-grant policy — where insider upside is administered.

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8. Ongoing compliance calendar

Obligation	Cadence	Notes
Form 990 / 990-EZ (Foundation)	Annual, by the 15th day of the 5th month after fiscal year-end (extension via 8868)	Public document; asks about COI/whistleblower/comp process. Form depends on gross receipts/assets. Never miss 3 years → auto-revocation.
Form 990-T (UBIT)	Annual, if gross UBI ≥ $1,000	Files unrelated-business income; pay any UBIT. Triggered if royalty exclusion is lost or other UBI arises.
Schedule R (990)	With the 990	Discloses related entities + transactions — Variant must be disclosed; inter-entity dealings reported.
State charitable-registration renewals	Annual (varies by state)	Renew in every state where soliciting; financial reports attached in some.
State corporate / nonprofit annual report + franchise	Annual (Foundation’s state; DE for Variant)	DE franchise tax + registered agent for Variant.
Variant federal + state income tax (Form 1120)	Annual	Variant is a normal taxable C-corp.
Independent financial audit	Annual (or as state/funder thresholds require)	CANON §7 financial controls; many states require audited financials above a revenue threshold.
License royalty true-up + revaluation	Per agreement (≥ annual)	Re-confirm arm’s-length royalty; independent revaluation periodically (§4.4).
Public-support test monitoring	Continuous; reported on 990 Sch. A	Watch the 1/3 fraction as royalty income grows (§3.1).
Board: comp + COI review	Annual	Re-run §4958 process; collect COI disclosures.

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9. Risk register

#	Risk	Severity	Mitigation
R1	Officer paid above reasonable comp → excess-benefit / inurement	Critical (revocation + §4958 taxes on officer AND approving managers)	§4958 3-prong safe harbor (§2.1); independent comp committee; comparability data; contemporaneous docs
R2	Insider equity in Variant attributed to Foundation → §512(b)(13) control → royalties taxed as UBIT	High	Keep Foundation non-controlling; model attribution with counsel; cap insider Variant stake vis-à-vis Foundation; favor Option A independence
R3	License royalty below FMV (favoring Variant insiders) → inurement/excess benefit	High	Independent valuation; COI recusal; arm’s-length written agreement; periodic revaluation (§4.4)
R4	Foundation renders “substantial services” → royalty recharacterized as UBIT	Medium-High	Keep Foundation passive; push active exploitation into Variant; paper as use-of-IP license (§4.2)
R5	Royalty income dominates support → fails public-support test → private-foundation status	High	CPA models support fraction; diversify donation base; consider §509(a) route with counsel (§3.1)
R6	Boards too overlapping → Foundation a de facto controller → Option A protections erode	High	Independent-majority board; overlap cap; mandatory recusal (§6)
R7	Miss Form 990 three consecutive years	Critical (automatic revocation)	Compliance calendar (§8); calendared filings + extensions
R8	Solicit donations without state charitable registration	Medium	Register before soliciting; track multi-state obligations (§3.1)
R9	Private-foundation self-dealing rules (§4941) apply if PF status lands	High	Secure & maintain public-charity status; if PF, far stricter insider-dealing regime
R10	Trademark “naked license” (no quality control) → marks weakened/lost	Medium	Quality-control + audit clauses in the license (§4.4)
R11	Political-campaign intervention or substantial lobbying	High	Absolute bar in articles + policy; mission is apolitical (§3.1)
R12	COPPA/minors data exposure (comics skew young)	Medium	Data & privacy policy; out of scope here but tracked in CANON §7

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10. Open legal decisions for counsel

1. State of incorporation for the Foundation (operating state vs. Delaware nonstock).
2. Public-charity classification route — §509(a)(1)/§170(b)(1)(A)(vi) vs §509(a)(2) — given the donation/royalty/program revenue mix; model the support fraction.
3. §512(b)(13) attribution analysis — exact insider-ownership ceiling for Variant that keeps the Foundation non-controlling and the royalties UBIT-free; confirm the status of the §512(b)(13)(E) arm’s-length exception.
4. Royalty rate + valuation methodology — who values, how often, what comparables.
5. Board overlap cap — maximum number/percentage of overlapping directors.
6. Form 1023 (full) vs 1023-EZ — confirm full form (assumed required here).
7. Comp comparability set — which surveys/peer orgs define “reasonable” for officers.
8. Multi-state charitable-solicitation footprint — where to register at launch.
9. Trademark ownership/licensing chain — Foundation owns marks, licenses to Variant; confirm registration strategy and quality-control sufficiency.
10. Creator-IP model interaction (CANON §5) — how chosen creator model affects the Foundation’s clean ownership and the UBIT/support analysis.

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End — conform to CANON.md §2. Not legal advice; counsel sign-off required before any filing or transaction.