Can anybody explain how this actually works? What happens to all of the non-profit's assets? They can't just give it away for investors to own.
The non-profit could maybe sell its assets to investors, but then what would it do with the money?
I'm sure OpenAI has an explanation, but I really want to hear more details. In the most simple analysis of "non-profit becomes for-profit", there's really no way to square it other than non-profit assets (generated through donations) just being handed to somebody for private ownership.
If the assets were sold to the for profit at a fair price I could see this being legal (even if it shouldn't be). At least in that case the value generated by the non-profit tax free would stay locked up in non-profit land.
The biggest problem with this is that there's basically no chance that the sale price of the non-profit assets is going to be $150 billion, which means that whatever the gap is between the valuation of the assets and the valuation of the company is pure profit derived from the gutting of the non-profit.
If this is allowed, every startup founded from now on should rationally do the same thing. No taxes while growing, then convert to for profit right before you exit.
It’s pretty great if you can manage to have the parent be 501(c)(3). Have all the early investors “donate” 90% of their investment to the 501(c)(3) and invest 10% in the for-profit subsidiary the old-fashioned way. They get a tax deduction, and the parent owns 90% of the subsidiary. Later on, if the business is successful, the parent cashes out at the lowest possible valuation they can pull off with a mostly straight face, and all the investors in the subsidiary end up owning their shares, pro rata, with no dilution from the parent. The parent keeps a bit of cash (and can use it for some other purpose).
Of course the investors do end up owning their shares at a lower basis than they would otherwise, and they end up a bit diluted compared to a straightforward investment, but the investors seem likely to more than make up for this by donating appreciated securities to the 501(c)(3) and by deferring or even completely avoiding the capital gains tax on their for-profit shares.
Obviously everyone needs to consult their lawyer about the probability of civil and/or criminal penalties.
I haven't seen any details, but isn't this a pretty straightforward way of doing it? The non-profit has had majority ownership of the for-profit subsidiary since 2019. The already-for-profit subsidiary has owned all the ChatGPT IP, all the recent models, all the employee relationships, etc etc.
The cleanest way for this to work is the for-profit to just sell more shares at the $150B valuation, diluting the non-profit entity below majority ownership. The for-profit board, which the non-profit could still probably have multiple seats on, would control the real asset, the non-profit would still exist and hold many tens of billions of value. It could further sell its shares in the non-profit and use the proceeds in a way consistent with its mission.
They wouldn't even have to sell that much - I am pretty sure the mega-fundrasing rounds from Microsoft etc brought the non-profit's ownership to just north of 50% anyway.
I don't see how this wouldn't be above board, it's how I assumed it was going to work. It would indeed mean that the entity that controls ChatGPT would now be answerable to shareholders, a majority of which would be profit seeking and a minority of which would be the non-profit with its mission, but non-profits are allowed to invest in for-profits and then sell those shares; all the calls for prosecutions etc seems just like an internet pitchfork mob to me.
The non-profit would have to approve the scheme, and a rational non-profit would not, because it gives up any ability the non-profit has to fulfill its charter.
Exactly, the question is this move in the non profits best interests? It's definitely in the best interest of the people running the non profit but I think many of the early donors wouldn't feel like this was what they were signing up for
I think the problem is early employees and investors were convinced to invest their time and money into a non profit. They were told that one of the reasons they should donate/work there as opposed to Google was because they were a non profit focused on doing good. Now when it seems like that non profit is successful that all is being thrown out the window in service of a structure that will result in more profit for the people running the non profit
Corporate tax is always only paid on profit and is usually a minor part of the tax draw for the government from corporations of all sizes.
The vast majority of taxes paid in developed nations are employee taxes and whatever national+local sales taxes and health/pension equivalent taxes are (indirectly) levied (usually 60-80% of national income). Asset taxes are a bit different.
It's true even in the bootstrapped company case:
If you earn say $100k and keep $50k after all the employee indirect/direct taxes. Now imagine you spend $40k of that $50k in savings, setting up a business. You spend $30k on another employee, paying $15k of employer and employee taxes, and spend the other $10k on a company to do marketing (who will spend $5k of that on employees and pay $2.5k of tax), and you earn less than $40k in income, by the end of year 1 you have:
1) A loss-making startup which nonetheless is further along then nothing
2) Out of $100k of your original value, $67.5k has already reached the government within 12 months
3) Your time doing the tech side was not compensated but could not (for obvious anti-fraud reasons) be counted as a loss and as you have noted, you don't pay tax when you make a loss, and you don't get any kind of negative rebate (except certain sales tax regimes or schemes).
If you are in the US, the above is currently much worse due to the insane way R&D Software spend needs to be spread immediately as a tax burden.
So it's really not fair to say a new startup isn't paying taxes. They almost always are. There are very few companies or startups that pay less than 50% of their income to staff, and almost all of those are the unicorns or exceptional monopoly/class leaders. Startups, and founders tend to disproportionately give more of their income and are essentially to that extent re-taxed.
Even though you saved the money in order to start a startup, and paid your due employee taxes, you then have to pay employee taxes to use it, etc.
Is this a US thing? In the UK employee tax is the employee’s to pay, not the company. Even if the company technically transfers it directly to the tax agency it’s not really their money.
EDIT: I guess we do have employer tax as national insurance contributions too, always forget about that since I’ve always paid myself under that threshold
I'm not sure if you mean whether the UK has the same low corporation vs high income/pension/NI contributions income? If so, yes.
The UK does have employers NI contributions but that's not what I mean. The point is, if you spent a year to earn a gross £100k, and as you earn it, pay £50k of total tax, and with the remaining £40k/£50k you spend it on an employee at your company in salary and pay then £20k of tax, the government has that year earned £70k from that £100k passing through.
You can argue that really "£140k" has passed through, but it's not the case, because you created a new job that wouldn't otherwise have existed had you instead saved that £40k for a house. Either way HMRC gets £70k this year rather than £50k.
The wider point I was making is that all companies, even for-profit, pay tax to do just about anything, and companies with much lower sales than costs aren't just paying nothing. They generally have higher costs because they are paying people, and paying their taxes every month. The tax per employee is completely uncorrelated with the financial profit or thereof by the business, so it's a (sensible) misconception that companies that don't make profit like startups don't contribute to the economy. They do, by paying employment taxes.
I'm really making the point that you have to account for employee taxes (both employer and employee as you mention) for your costs as a business. That means, even though you already paid those yourself when you carried out the work to gain savings to invest in your business (to spend on an employee), you have to pay again when paying your employee.
I.e. Self-funded or businesses launched from previous accrued personal income where you invest your own time as well result in a bad tax situation;
whereas an employee earning £100k might pay £50k tax total and save £50k for a house (no VAT),
The alternate of investing that £50k in your business by paying someone £40k means you have to pay that employees PAYE, their Employer and Employee NI. So the government gets to re-tax most of that money when you use it to hire someone to build a new business with you, in a way they don't if you use it to buy a house, in terms of practical impact. When you pay yourself as an entrepreneur depends, there's dividends+PAYE in the UK (which requires yes you pay for both your employer and employee tax for yourself) or capital gains(ignoring tax schemes), either way, you do get taxed at some point to bring cash out.
The government in other words massively benefits from unprofitable for-profit companies so long as they hire some people, especially if the companies are self-funded. But even if it is investment, it's better to have that money spent on salaries now in new companies than sitting as stock in larger companies that keep cash reserves or use schemes to avoid tax. They get much more tax from people starting even unprofitable new businesses, than from employees who simply save money.
It's one of the reasons that since the introduction of income taxes (more or less WW1 in most countries!), you need money to get money in way that you fundamentally did not in the same way back when you could earn $50 from someone and directly use that same $50 to pay someone for the same skills without any loss of value.
> So the government gets to re-tax most of that money when you use it to hire someone to build a new business with you.
You should consider it also from the point of view of the employee. The government taxes your employee to offer him services, it does not care who hires him (you, that saved the money).
Yes, it is true that you need lots of money to HIRE someone, but you can try to do a startup with a couple people that live from their savings for a while (so, not paying themselves a salary, but having shares) which avoids the tax situation as first.
I think we are quite bad to assess how was life around 1900 in terms of infrastructure (in any country) - so yes, probably people paid less taxes but lived in much worse overall conditions.
True, you can try and do a startup without hiring anyone, but how many companies with no paid employees succeed or bring in a net profit? You can do that until you need to hire someone, then you still hit the end of the road.
Forget who the government is supposed to be taxing for what supposed purpose. The decision about asset and income law working differently (liabilities counting for one and all sources being able to intermingle over the financial year, financially speaking, for assets - with income always being payable within a month) is why these taxes work differently in practice then just one being for income, and one for personal asset (accrual). We could instead "tax an employee to offer his services" with a tax which allowed them to discount the liability of savings spent in businesses from their due tax from other sources, or we could charge higher capital gains than personal taxes.
If you earned the original income from renting out properties or capital gains however and then invested it, you can write it off as a loss for your overall individual capital gains, pay $0 for all your rental/share increase in value, and only pay for the startups employee, with no tax on your original income as a result that tax year.
If you have asset wealth, you don't get taxed twice like this as you can write it off. If you have income based savings wealth, you always get taxed and can't count it against investments you make.
1900 is obviously different but income taxes help people with assets retain them for the reasons mentioned above. If Assets were taxed at a higher rate and you could not personally include liabilities in your capital gains (as with income), then it would be the opposite scenario.
We say capital gains tax is all about wealth, but it's not: The US has no wealth tax. The capital gains tax is just lower tax on unearned income and the ability to intermingle that income. It's all income at the end of the day - just one, income from work, the government taxes heavily, the other, the government taxes less heavily, but most people never significantly earn that income.
This is one reason why some companies have located engineers in Canada under subsidiaries. Canada not only allows you to deduct R&D costs as an expense, but there is an extremely generous R&D tax credit that yields a negative tax rate on engineers. For Canadian controlled private companies, this represents as much as a 60% refundable tax credit on R&D salaries. For foreign-owned companies, the benefit is smaller but still significant.
The Trump tax policy was a bizarre move for a country that relies so heavily on homegrown innovation. But then again, so was the entire Trump presidency.
Wait, you saying in Canada a R&D software company can essentially sell a dollar (of SDE produced goods) for a dollar and get a tax refund from the government?
If the R&D is going toward intellectual property that is owned by the company, yes. And it doesn’t matter if the company is foreign or locally owned. The program is designed to foster companies hiring engineers and scientists to work in Canada to increase the brain trust within the country.
It pushed almost all SWE jobs to be classified as R&D jobs, which changed how taxes are calculated on companies.
They have an example at [0], but I'll copy it here. For a $1mm income, $1mm cost of SW dev, with $0 profit previously you paid $0 in tax (your income was offset by your R&D costs). Now it would be about $200k in taxes for 5 years, as you can't claim all of the $1mm that year anymore.
There's tons of taxes on hiring employees that you have to pay even if you're losing money. Payroll taxes, mandatory insurance taxes, unemployment taxes, probably more I just don't remember off the top of my head.
In an effort to lower the deficit effects of the Trump tax cuts (i.e. increase revenue so they could cut further in other areas), they reclassified software developers salary so that their salaries have to be amortized over multiple years, instead of just a business expense in that year. This is usually done for assets as those things have an intrinsic value that could be sold.
In this case, business have to pay taxes on "profit" that they don't have as it immediately went to salaries. There were a lot of small business that were hit extremely hard.
Sure. But there are a lot of other tax advantages. For example, at least where I am, non profits don't pay sales tax on purchases, and don't have to pay into unemployment funds. I'm sure there is more, but I'm not super familiar with this world.
Corporations don't generally pay sales tax either, if the bean counters can justify the purchase as COGS. There are plenty of accountants who can play fast and loose with what constitutes COGS.
> Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and sales force costs.
Cash flow. Profit get's taxed at x%, cash flow that was offset with losses/expenses gets taxed at y% < x. Company that does $100Mil of business and makes no money is very different than company that does $10k of business and makes no money.
That's fine, and in exchange we get significantly more tax revenue and close a gaping tax avoidance loophole. If taxing profit was a good proxy for business activity companies would use it when making their pricing tiers. But they don't. They use revenue and headcount because profit can
and is gamed. I can't deduct my expenses on my own taxes and the world didn't end.
It’s an interesting point but your argument fails in that you get a standard deduction that probabilistically exceeds the expenses related to your job.
Perhaps it would need to be something like x%revenue above $10M, y%revenue above 1B beginning after three years of operation.
True, non-profits don't pay taxes on any revenue regardless of expense.
How do you know they had no profit with all of the deals with major companies and having one of the most popular software services in existence? Non-profits can earn profit, they just don't have to pay taxes on those profits and they can't distribute those profits to stakeholders -- it goes back to the business.
They are also a private company, and do not have to report revenue, expenses, or profits.
So yeah, I stand by what I said -- it sounds like fraud. And it deserves an audit.
To be fair, this is a year and a half out of date (finances ending Dec 2022). The first chatGPT had only just come out at that point. 2023 fiscal report is due by Nov 15, and we won't know until next Nov about 2024. So yeah, an audit is in order, to bring the records up to date before the switch, if nothing else.
You actually don't even need to sell them. Just sign an exclusive, non-revocable license agreement.
Practically the same as selling, but technically not. Non-profit still gets to live up to it's original mission, on paper, but doesn't really do anything internally.
> there's basically no chance that the sale price of the non-profit assets is going to be $150 billion
The non-profit’s asset is the value of OpenAI minus the value of its profit-participation units, i.e. the value of the option above the profit cap. Thus, it must be less than the value of OpenAI. The non-profit owns an option, not OpenAI.
I've actually worked through a similar situation for a prior startup. We were initially funded by a large, hospital system (non-profit) who wanted to foster innovation and a startup mentality. After getting started, it became clear that it was effectively impossible for us to operate like a startup under a non-profit. Namely, traditional funding routes were neigh impossible and the hospital didn't want direct ownership.
It's been many years, but the plan was essentially this:
* The original, non-profit would still exist
* A new, for-profit venture would be created, with the hospital having a board seat and 5% ownership. Can't remember the exact reason behind 5%. I think it was a threshold for certain things becoming a liability for the hospital as they'd be considered "active" owners above 5%. I think this was a healthcare specific issue and unlikely to affect non-profits in other fields.
* The for-profit venture would seek, traditional VC funding. Though, the target investors were primarily in the healthcare space.
* As part of funding, the non-profit would grant exclusive, irrevocable rights of it's IP to that for-profit venture.
* Everyone working for the "startup" would need to sign a new employment contract with the for-profit.
* Viola! You've converted a non-profit into a for-profit business.
I'm fuzzy on a lot of details, but that was the high level architecture of the setup. It's one of those things where the lawyers earn a BOAT LOAD of money to make sure every technicality is accounted for, but everything is just a technicality. The practical outcome is you've converted a non-profit to a for-profit business.
Obviously, this can't happen without the non-profit's approval. From the outside, it seems that Sam has been working internally to align leadership and the board with this outcome.
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What will be interesting is how the employees are treated. These types of maneuvers are often an opportunity for companies to drop employees, renegotiate more favorable terms, and reset vesting schedules.
> * As part of funding, the non-profit would grant exclusive, irrevocable rights of it's IP to that for-profit venture.
This is the part that should land people literally in jail. A non-profit should not be able to donate its assets to a for-profit, and if it's the same people running both companies, those people must be sent to prison for tax evasion. There is no other way to preserve the integrity of the "non-profit" status with this giant loophole.
After the non-profit sells its assets, it would either donate the proceeds in a way that would be aligned with the original mission, or continue to exist as a bag of cash, basically.
It seems incredibly convenient that a non-profit's leaders can say "I want equity in a for-profit company, so we will sell our assets to investors (who will hire me) and pass off the proceeds to some other non-profit org run by some other schmuck. This is in the public interest."
Every answer moving forward now will contain embedded ads for Sephora, or something completely unrelated to your prompt...
That money will go into the pockets of a small group of people that claim they own shares in the company... Then the company will pull more people in who invest in it, and they'll all get profits based on continually rising monthly membership fees, for an app that stole content from social media posts and historical documents others have written without issuing credit nor compensating them.
Maybe it’s a hint that the tax rate for small and medium companies should be reduced (or other non tax laws modified based on company size), to copy the advantages of this nonprofit to profit conversion, while taxes for large companies should be increased. It would maybe help make competition more fair and make survival easier for startups.
This is actually a good idea. I say we go even further and stop wasting so much money cleaning up after companies - get rid of the entire legal entity known as a corporation and let investors shoulder the full liability that comes with their ownership stake.
History has shown that limited liability is a massive advantage for our economy in encouraging both domestic and foreign investment. Seems unlikely we would put ourselves at a global disadvantage by doing this.
History has also shown that limited liability ends up costing me an awful lot of tax money to cover for some twat getting paid out (at a lower tax rate) with no consequences for their actions. Adding liability would certainly lower my taxes, and have a fantastic chilling effect on the type of trash that harm innocent bystanders with their reckless disregard for consequences in the name of chasing a dollar.
My expertise is in NFP hospitals. Generally, when they convert for for-profit part of that deal is the creation of a foundation funded with assets that are ostensibly to advance the original not for profit mission.
The nonprofit gives all its ownership rights to the for-profit in return for equity. The nonprofit is free to hold the equity and maintain control or sell the equity and use the proceeds for actual charitable purposes.
As long as the money doesn't go into someone's pocket, it's all good (except that Sam Altman is also getting equity but I assume they found a way to justify that.)
OpenAI will eventually be forced to convert from a public charity to a private foundation and will be forced to give away a certain percentage of their assets every year so this solves that problem also.
The significant asset isn't equity, it's control. 51% is much more valuable than 49% when the owned organization is supposedly working towards technology that will completely change how the world works.
The non-profit could maybe sell its assets to investors, but then what would it do with the money?
I'm sure OpenAI has an explanation, but I really want to hear more details. In the most simple analysis of "non-profit becomes for-profit", there's really no way to square it other than non-profit assets (generated through donations) just being handed to somebody for private ownership.