Nonprofits considering dissolution are thinking creatively and working to survive some of the toughest operational and funding challenges most have ever faced. We all know that 2020 has been a brutal year for everyone – including nonprofits. Over the years, we have counseled many organizations winding down their operations, and in many cases, there have been one or more core programs that could be salvaged.
In many cases, collaboration with another nonprofit is the answer. A joint partner can allow a struggling nonprofit to continue to provide its most viable programs in one form or another.
Although most people think of mergers when they think of non-profit collaborations, nonprofit collaboration can take many forms. Some examples of the collaborative partnerships that we have helped develop include:
- Contractual Relationships. The organizations remain legally independent but contractually agree to collaborate on a project or program. Such arrangements can also lead to shared resources such as shared space or administrative services.
- Strategic Alliance/Affiliation. The organizations remain legally independent but alter their board structure so that boards’ membership overlaps. Additional approval or veto rights may be granted. This arrangement may also lead to joint funding proposals, shared space, and staffing arrangements.
- Management Agreement. Sometimes, it makes sense for an organization that is struggling to maintain qualified staff to contract with a larger organization to manage it. Management agreements can help a struggling nonprofit get back on its feet. Nonprofit management agreements can also be a precursor to a merger because they permit the larger organization to better understand the risks and opportunities associated with the struggling nonprofit before committing to take it over.
- Fiscal-Sponsorship. Fiscal sponsorship is a wonderfully flexible tool that can be used to address myriad needs. Nonprofits that are resource-challenged often use a fiscal sponsor to off-load its back-office functions to a larger more stable nonprofit. Nonprofits that are experiencing serious budget shortfalls during the pandemic may be able to reduce expenses and keep their organization going by turning the administrative functions over to an experienced fiscal sponsor. In this manner, the nonprofit can live to fight another day.
- Merger. A merger is one nonprofit’s legal consolidation into another. The merged nonprofit’s board is either disbanded or incorporated into the surviving entity’s Board. The assets, liabilities, and other legal obligations are also absorbed by the surviving nonprofit.
- Consolidation. A consolidation typically refers to a legal combination of organizations by creating a new organization with a new name and brand identity. Typically, a new board and staff made up of representatives of each organization are appointed to lead it.
- Joint Venture. Joint ventures refer to both contractual relationships and new entities that are typically jointly governed by the collaborative partners.
- Program Transfer. A program transfer is the transfer of the administration of one or more programs from one organization to another. This can be achieved by moving the program’s assets (including restricted funds) and liabilities from one nonprofit to another via a contract.
- Parent-Subsidiary. Creating a parent-subsidiary structure typically involves vesting ultimate control of the subsidiary nonprofit in the parent. Typically, the Parent then takes on some of the administrative functions while the subsidiary nonprofit and its programs remain intact.
- Contribution and Affiliation. The nonprofits create a membership structure whereby one organization becomes a member of the other with various governance and distribution rights. The party gaining membership rights also contributes certain assets to the organization in exchange for these rights.
Financial challenges do not have to mean the failure of a nonprofit’s mission. With the right strategic partner and a strong desire to cooperate, there’s often a way to preserve crucial services.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters and fundraising regulation nationwide. To schedule a consultation with Ellis, call 602-456-0071 or email us at firstname.lastname@example.org.