Nonprofit affiliation should always be considered before a decision to dissolve. Nonprofits considering dissolution are thinking creatively and working to survive some of the toughest operational and funding challenges most have ever faced.
Over the years, we have counseled many organizations in winding up their operations, and in many cases, there are one or more core programs that could have been salvaged. No matter the reason for dissolution, often collaboration with another nonprofit is an ideal outcome. A joint partner can allow the struggling nonprofit to continue to provide its most viable programs in one form or another.
These days, when anyone mentions collaboration, most people think of mergers and acquisitions. However, nonprofit affiliation can take many forms. Some of the collaborative partnerships we have helped develop include:
A common form of nonprofit affiliation include contractual relationships such as affiliate agreements. Affiliate agreements are contractual agreements that allow nonprofits to remain legally independent while collaborating on a specific project or program.
These arrangements benefit struggling organizations by sharing resources (such as offices or administrative services) to mitigate operating costs. This solution is ideal for nonprofits that want to work together or for a nonprofit that may want to partner with a more established organization on a particular program without losing its autonomy.
In this form of nonprofit affiliation, each nonprofit remains legally independent but alters its broad structure so that Board members overlap. Like contractual relationships, this arrangement may lead to joint funding proposals, shared space, and staffing arrangements.
Commonly, nonprofits struggle to hire and retain qualified staff. Inadequate staff can cause a few headaches and lead to higher and unnecessary costs. The nonprofit’s focus should be on its charitable activities, not employment.
To achieve to that end, the nonprofit might contract with a larger organization to manage it. Management agreements can help the 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 is a wonderfully flexible tool that can be used to address a myriad of needs. Nonprofits that are resource-challenged often use a fiscal sponsor to help off-load their back-office functions to a larger, more stable nonprofit.
Nonprofits that are experiencing serious budget shortfalls may be able to reduce expenses and keep their organization afloat by turning their administrative functions over to an experienced fiscal sponsor. In this manner, the nonprofit can promote its charitable purposes, build relationships, and maximize resources all in one.
An acquisition 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. An acquisition is ideal for those nonprofits that can benefit from a larger organization’s name and resources.
A merger 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. Mergers are ideal for similar organizations with comparable missions and values to maximize their charitable reach.
Sometimes, the best option is to collaborate with a for-profit entity. Joint ventures are partnerships among for-profit and non-profit organizations. The nonprofit benefits from the resources and expertise of its for-profit collaborator, while the for-profit accomplishes its charitable goals in an efficient manner. Joint ventures refer to both contractual relationships and new entities that are typically jointly governed by collaborative partners.
Even though a nonprofit is struggling, it may have one or more viable programs that can be saved. In some circumstances, it makes sense to transfer a program to another nonprofit.
A program transfer is the transplantation 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.
When a nonprofit needs more resources it might be beneficial to create a hybrid structure whereby the nonprofit creates a taxable for-profit subsidiary. The benefit here is that the subsidiary can engage in activities unrelated to the nonprofit’s exempt purposes, thus more easily generating income. That income can then be distributed back to the nonprofit parent to supplement its revenue.
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 contribute 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 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.