Creating Nonprofit Chapters and Affiliates

Nonprofit Chapters and AffiliatesSuccessful nonprofits often look to grow by creating nonprofit chapters and affiliates in other geographic areas, including other countries. Nonprofit organizations that are organized geographically into chapters that share a name, trademarks and mission are frequently referred to as “federated organizations.”

These entities take an amazing variety of legal forms with some being tightly controlled and hierarchical and others being more loosely affiliated and autonomous. Historically, many federated organizations have grown on an ad hoc basis with little thought to how the chapters are linked or what their legal relationship to the founding organization will be. Often, the founding organization finds itself in the position of policing valuable trademarks and servicemarks to uphold the organization’s reputation and goodwill, essential commodities for any organization that is funded by donations from the public.

Over the years, a number of well known organizations that quickly spawned numerous chapters have been forced to impose order on their chapters and affiliates long after their creation. Ideally, to avoid these struggles, nonprofits considering spinning off chapters or affiliates should give careful thought to how they will structure their federated organization before creating their first chapter or affiliate.

There are three affiliate models used to create nonprofit chapters that are most commonly encountered among federated nonprofit organizations as well as one emerging model. They include the following models:

  • a single corporation operating in multiple jurisdictions;
  • separate subsidiary corporations in multiple jurisdictions;
  • separate subsidiary limited liability companies in multiple jurisdictions; and
  • separate independent corporations in multiple jurisdictions that operate pursuant to affiliation agreements.

Single Corporation. The primary advantage of forming nonprofit chapters using the single corporation model is that the founding organization or “parent” retains maximum control over its activities. However, the parent’s Board will bear any liability for its out of state activities. Thus, a successful claim against any one state’s program will expose all of the parent’s assets and the out of state programs to liability. This exposure to liability is what motivates most growing nonprofits to consider alternative structures that offer greater protection for the organization’s assets.

Separate Subsidiary Corporations. Another alternative is to create nonprofit chapters as separate subsidiary corporations in each state where the parent operates an out of state program. The parent can retain ultimate control over the out of state programs by retaining the right to appoint the board of directors or by acting as the sole voting member of a membership corporation. This structure permits the subsidiaries some protection from the potential liabilities associated with the other subsidiaries. The downside is that each corporation must be respected as a separate entity. This includes separate board meetings, separate minutes, separate bank accounts, separate books and records, filing annual reports, filing a separate Form 990, and separately qualifying for tax-exempt status.

Separate Independent Corporations. The third approach is to create nonprofit chapters as truly separate corporations in each state where the parent operates. Each corporation, or nonprofit chapter, would have a separate, locally elected board of directors that would be legally responsible for the activities of the corporation that it governs. The parent’s authority over the out-of-state corporations would be as set forth in a Charter and License agreement between each chapter and the parent. Such an agreement would, among other things, outline the terms governing the chapters’ use of the parent’s name and logo, define the geographic scope of each chapter’s activities, etc. The greatest advantage of this approach is that it shifts maximum responsibility (and the corresponding liability) for local operations to the local chapters.

Another twist on this approach that increases the Foundation’s influence over the nonprofit chapters is to apply for a group exemption and to list each Chapter as a subordinate under the Foundation’s group exemption. The benefit of this model is that it permits the chapters to gain tax-exempt status without going through the expensive and often time consuming application process; however, to qualify as a subordinate under the parent’s group tax exemption, the Chapters have to submit to some degree of control and supervision by the parent. Under the group exemption model, the chapters would be able to file their own Form 990s relieving the parent of responsibility for tax reporting and compliance on behalf of each Chapter. However, the parent would be taking on the role of certifying to the IRS that each subordinate qualifies for exemption and monitoring their compliance.

Separate Subsidiary Limited Liability Corporations. An emerging nonprofit chapter model is to form subsidiaries as limited liability companies with the parent organization as the sole member. As single member LLCs, the subsidiaries are treated as separate entities under state law for purposes of asset protection, but are disregarded by the IRS for tax purposes. Thus, each LLC is treated by the IRS as a program or division of the sole member, obviating the need for each LLC to apply for tax-exempt status. LLCs are also very flexible, permitting parent organizations to carefully tailor the degree of autonomy their chapters will have.

There is no ideal model. Each structure should be be suited to the needs of the organization which will be different depending on its activities, risk tolerance, desire for control, etc. Regardless of which organizational structure a nonprofit organization chooses, a thoughtful growth plan will help to ensure the long-term success of the organization and avoid struggles among the chapters and the parent for years to come.

Ellis Carter is a nonprofit lawyer with Caritas Law Group, PC. To contact Ellis, call 602-456-0071 or email us at info@caritaslawgroup.com.

21 Responses to Creating Nonprofit Chapters and Affiliates

  1. I am investigating forming an affiliate corporation to an existing nonprofit organization that I am apart of but I am finding very little advice on setting up the “Charter and License agreement”. Are there any additional resources which might be able to help me out?

  2. My friend has a Weimaraner(dog) rescue in New Mexico and trying to expand to Arizona and California as the need is widespread to save these dogs from the shelters throughout the states. She simply wants to be able to legally obtain (pull) dogs from shelters in these states then find homes for them. Don’t know if she necessarily needs to open chapters of her rescue in those other states?? Do you think she also need liability insurance other than the policy she holds in New mexico? They told her she needs a separate policy for each state. Thanks for any input you can provide.

  3. The Pipestone County Historical Society, the main non-profit corporation under 501c3 is working on creating a chapter in another town in the county. your explanation on separate affiliated corp. sounds like the correct one for us. just a question. I would assume the chapter will form a MN non-profit corp. Since they will be under our tax exempt status, do they use our tax id number in filing? I assume that their incorporation papers will have a reference to being a chapter of us. Nothing on the internet that I have found yet on this.

  4. Hello. Our original non-profit would like the ability for other states to form their own chapters/subsidiaries, but it is critical that the Parent retains control over these subsidiaries. Therefore, from you *VERY HELPFUL* article, it appears that the “separate subsidiary corporations in multiple jurisdictions” option is the way to go. If we pursue this option, and I understood correctly, we would need to file a group exemption for all the subsidiaries. Would the parent and all subsidiaries reside under the same Tax ID or would they all be different in order to limit the liability? If they have to have different Tax IDs, then would we have to create a 501(c)(3) for each subsidiary? I guess I am a little lost on how a subsidiary is created and recognized by the government under the “separate subsidiary corporations in multiple jurisdictions” option. Any response would be greatly appreciated! Thank you so much!!!

  5. We have a group exemption with the IRS. We have a subordinate and are looking to grow in the future. We use the Separate Affiliated Corporations model above.

    What suggestions do you have that an organization should do to improve communication, startup, and operation of subordinates from the beginning. Can you tell me what legal or business documents a parent organization should have “parent to subordinate”…Affiliate agreement, Operations manual, Training manual…what else? Do you suggest a parent have a license agreement for using name / logo/…with subordinates. Should we have a Manuel with instructions on incorporating, setting up the organization (board, accounting, insurance requirement, 990 filing…)

    Any suggestions or places to find information is appreciated.

  6. What is the definition of a Chapter? Would area support groups (located throughout the U.S.) led by local facilitators, but funding by the primary nonprofit be considered chapters?

  7. We are looking at expanding our organization to have offices in other areas of the country. We thought about “franchising” but not certain if this is legal for a nonprofit to do. If we follow the business model in this article, could we charge a fee, such as in franchising to expand? Thanks for your help.

  8. Hello, I belong to a non-profit Historical group and is researching the possibility of converting several long established chapter into Separate Affiliated corps. After reading your document above, we in practice already follow the Separate Affiliated model for our chapters minus them being separate corps, So the questions I have are who would handle membership and insurance, would the new Affiliated Chapters collect memberships and pass a percentage on to the Parent Company? Also insurance would that be the Chapter’s cost or something the Parent Company would handle? Or would that depending on what level on support that is agreed upon between the Chapter and Parent offer… like if Parent continue to include us on the insurance then the Chapter would give them half to two-thirds of the membership fees to them, but if the chapter has to get their own insurance then the Parent get maybe $5 to $10 of the membership fee and chapter keep the rest?

  9. There isn’t a set definition. In my experience the parent defines what it considers to be a “chapter”. Some groups do call unincorporated groups associated with the organization “chapters”.

  10. I have a 501c women’s ministry and would like to run a seperate youth ministry under our 501 umbrella. Can I do that ? If so is it best for the new org. To be set up as its own corp in AZ?

  11. We are a 501c3 conducting Christian retreats each month to help with anything people would typically go to counseling for. We want to establish other chapters in other states. We want consistency in the retreats and we want a contractual agreement that would recognize us as the overall leaders and will also need a percentage or some sort of financial compensation from their revenues.
    I am unclear on whether our liability insurance would have to cover them and also wonder about what part of the administrative burden we would carry and they would carry.

  12. Your article is great and really helps me with my project at hand. Thank you for taking the time to reach out.

    I am looking into opening a Separate Affiliated Corp of an existing non-profit. I want to clarify, if I acquire assets and liabilities during the time we are affiliated, are they separate and solely owned by me if they are acquired using my tax ID?

  13. We are a 501c3 organization that helps educate and create awareness for Charities by presenting a yearly Benefit Concert. If we are going to do this event in a different state under our organization, would I need to create a charter?

  14. You may need to register to do business in the state depending on your level of activity there. Also, you should check to see whether you need to register as a paid fundraiser or solicitor in the state in question.

  15. If a Chapter in a Separate Affiliated Corporation wants to become its own 501(c)(3), would it have to apply to the IRS for such a status?

    And once it gets the status, would the new organization (a 39 prefix) be a separate organization from its previous Chapter/Affiliate Status (80 prefix)?

  16. I am a board member of APSE, a national non-profit organization, and the former board president. We currently have chapters in 35 states. APSE is a single corporation (501c3). However, each chapter has its own separate EIN, and files a 990 EZ (the postcard) as they each have their own bank accounts. We were told by a lawyer that the national organization is vulnerable from a liability standpoint in terms of the current structure and we would be better off having each chapter become its own 501c3. However, all of our chapters are staffed by volunteers, and to be frank, many are fledgling and not always attentive to administrative matters. Personally, I would prefer not to go this route if we can avoid it. (There is the additional concern about having “control” over the chapters if they are separate corporations, but we feel that can be addressed in the chapter agreement.) Any thoughts or guidance would be appreciated.

  17. Hello,

    My name is Rosa Moniz one of International Specialist organization at DeVry University, we are looking for organization partnership who works with student chapter around nationwide/worldwide, I would like to know if you have a student chapter also what are the requirements for my school club to be a part of claritylawyer Organization!

  18. I am the founder/director of a non-profit in Florida. There is interest from contacts of mine in other states to have our programs there. Looking at the group exemption, it appears the filing fee is $3,000 which we aren’t willing to put into it at this time. Is there another way around that, or is that the only way to accomplish having out of state chapters? A second question- my contacts are part of a very large national non-profit…if a group exemption is an absolute must, can they operate one of our chapters under their current non-profit? Thank you!

  19. I am a board member of an ethnically-based cultural organization registered as a 501 (c) 7. We are establishing chapters in different states. My questions are:
    1) Can we set up the chapters as SMLLCs?
    2) What are the benefits of setting up the chapters as single member LLCs
    2) Do the chapters need to register in their respective states and what forms are required to fill out for SMLLCs?
    Thanks very much,
    M. Gashi