It’s been discussed before, but given some of the comments I got about my post discussing MailCo’s legal structure, I feel I need to try again and explain the whole for-profit/non-profit structure, and why it’s not only the logical thing to do but also a brilliant organizational hack.

First, the usual caveat — I’m very much not a lawyer, and I may get some of the details below wrong. I think I have the fundamentals right, though.

A constant: Mozilla assets belong, either directly or indirectly, to the Mozilla Foundation, which is a “California not-for-profit corporation dedicated to the public benefit”.

One of the significant consequences of this is that the full power of the US Internal Revenue Service (the friendly folks who took down Capone, remember?) is available to make sure that the public benefits from the Mozilla Foundation’s activities. This is a fundamental bit of legal architecture which has a real impact on the trust that can build between Mozilla and its users, developers, partners, and the public at large. People generally trust the IRS to make sure that, in exchange for being tax exempt, non-profits are monitored so that no swindling of the public can occur.

The downside is that the IRS ends up defining the rules of operation of such an organization, and those rules are so focused on funds transfers (in and out) that many non-profits end up being effectively glorified (and occasionally glorious) financial houses, raising funds and disbursing funds. Which is great in some fields, but doesn’t tend to produce great software, or allow for the kinds of relationships with companies which are needed to change an industry.

On the other end of the spectrum you have “Corporations”, which are taxable entities, and in exchange have more freedom and autonomy from these IRS regulations, as their social purpose is not direct public benefit but private benefit (from which, at least theoretically, the public should benefit in aggregate).

As any manager or executive is well aware, if a company has shareholders, the courts have, since 1916 (we’ll get back to that date), ruled that companies must act in the best interest of their shareholders, and they’ve defined that interest as fiduciary interest — meaning, how much money the shareholders can make.

While this standard corporate structure has led to awesome world changing businesses that employ hundreds of millions of people and have generated wealth for many, it’s also true that the need to look out for shareholders first and foremost sometimes leads companies to do things that hurt the general public. The sad thing is that company directors and managers legally don’t have a choice — they are bound by law to look out for the interests of the shareholders, beyond all other interests. I’m grossly oversimplifying, and there are lots of great debates to have on this topic, but the main point is valid.

(I do recommend both the movie version and the book version of “The Corporation” to people who are interested in that topic. As an example, starting on page 35 of the hardcover edition, you’ll find the story of the fight between Henry Ford and the Dodge brothers which led to the landmark 1916 ruling mentioned above).

So it would seem that corporations are legally bound to be “amoral”, while non-profits, while “moral”, are stuck in a mess of paperwork. If you want to work in a software shop that wants to make the world a better place, that would be a depressing conclusion.

We now get to the the organizational scheme that Mozilla picked and why it’s such a wonderful hack. By making a wholly owned subsidiary of the foundation (which means making a corporation with a single shareholder), it’s possible for the corporation to do what’s in the best interest of the shareholder, using whatever metric the shareholder wants to specify. And given that the shareholder’s interest must be the public interest, it means that while the corporation is taxable, there are safeguards in place to ensure that it stays aligned with the mission of the foundation. The only “downside” is that the subsidiary must pay taxes. Personally, I’m a big believer in taxes as a key mechanism for the improvement of humanity, so that doesn’t seem like a significant bug.

As an aside: Mozilla isn’t the only organization to use this setup — it’s just the only one I know in the software field, and probably the first to have such a big impact on an industry of “hard core” for-profits.

For the conspiracy theorists out there, I realize it’s a bit disappointing. There cannot be an IPO or acquisition. No one can buy or sell stock in any of these organizations.

Which leads to the next question I wanted to clarify, viz. how can MailCo make enough money to become more self-sufficient? Tune in tomorrow for the answer, or a least a hand-waving version of an answer.