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 service marks 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 the 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 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.

18 thoughts on “Creating Nonprofit Chapters and Affiliates

  1. 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

  2. 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!

  3. 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!

  4. 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.

  5. 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)?

  6. 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?

  7. 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?

  8. 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.

Comments are closed.