We have written about how to form chapters and affiliates, but sometimes nonprofits ultimately decide they have created too many affiliates, or that their affiliates aren’t working smoothly for one reason or another, or they are just collapsing under the weight of too much bureaucracy. When that happens, the focus shifts to chapter consolidation, otherwise known as a chapter roll-up.
Reasons for Nonprofit Chapter Consolidation
There are many reasons that nonprofits choose to consolidate their chapters. Enthusiasm at the chapter level can wax and wane over time. A chapter that started out with strong leadership may lose that leadership over time and fall into disarray. Too many chapters can result in competition for scarce resources among chapters. It can also result in too much investment in administrative work for a relatively small payoff in impact. Whatever the cause, the process to wind-down chapters will vary depending on the chapter structure, differences in state law, structural differences, and the political climate within the organization.
For chapters that are structured as corporations without voting members, there are two possible approaches to consolidate chapters – dissolve and transfer assets to the surviving entities or merge smaller chapters to create larger chapters. The legal steps to typically involve:
- Directors must vote to merge or dissolve the corporation. The vote should approve articles of merger or dissolution, a plan of merger or dissolution, and authorize a specific individual to sign all of the documentation required to implement the plan
- File the articles of merger or dissolution with the state and publish if necessary
- If the corporation is dissolving, many states require the dissolving corporation to send a notice to any known creditors and publish a notice to unknown creditors and settle any creditor claims
- Some states also require the corporation to obtain a tax clearance showing that all tax obligations with the state have been satisfied
- Once all the requirements have been met, the state will typically issue a Certificate of Dissolution.
If the chapter has voting members, the Directors must vote to recommend the merger or dissolution to the membership. Then, a member meeting must be properly noticed, taking into consideration any requirements in the bylaws and in state law. A quorum of the members can then meet to approve the merger or dissolution. This can be a sticking point for groups whose members have become inactive over time.
Another important element of chapter consolidation is having a solid communication plan. A number of large federated charities have run into major problems, up to and including lawsuits, when they tried to consolidate their chapters. Well-known examples include the American Red Cross, the Girl Scouts, and Easter Seals. The best approach is to prepare the directors of consolidated entities and their members with communications that make clear the benefits of consolidation – both for the system as a whole and for the members of the chapters being consolidated.
With proper planning, a chapter consolidation can streamline the operations of a federated nonprofit that has become unwieldy.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.