The final option we will discuss in this series is the creation
of a mutual parent entity. Under this merger/reorganization
structure, the two nonprofit entities wishing to affiliate with one
another both convert into member, nonprofit corporations and create
a new nonprofit corporation to serve as their sole member/parent
As we discussed in our
last post, NewCo, as the target nonprofits' sole member,
will have the power to appoint and remove each target entity's
directors and to approve any fundamental transactions the target
entities desire to effectuate. Thus, NewCo will act as the target
nonprofits' parent organization, and the target entities will
act as brother/sister organizations to one another.
The advantage of this structure is that the target entities and
NewCo remain separate legal entities, which results in limited
liability for all entities. Additionally, no assets or liabilities
need to be transferred, and the target nonprofits remain in
existence to accept any unknown gifts. This structure also lays the
groundwork for future affiliations because NewCo, once formed, can
easily form or "acquire" additional subsidiaries.
The main disadvantage of this option is costs. There will be
costs involved with forming NewCo and applying for tax-exempt
status on behalf of NewCo. There will also be transaction costs to
covert the target entities into membership corporations and to
issue membership interests to NewCo. Post-reorganization, there
will be triplicate costs of operating and maintain three separate
legal entities (e.g., payroll costs, tax preparation fees,
accounting costs, insurance premiums).
Additional considerations with this reorganization option
include control, attribution and branding issues. In terms of
control, the target entities will need to negotiate (I) their
representation on NewCo's board and (ii) whether NewCo is
limited to removing the target nonprofits' directors for-cause
Additionally, the three nonprofit entities should avoid having
fully overlapping boards because that could cause piercing the
corporate veil issues or attribution issues (e.g., one entity's
lobbying or unrelated business activities could be attributed to
the other entities and adversely affect each entity's
Finally, the nonprofit entities should give thought to
post-reorganization branding/name issues so that donors can easily
understand the new organizational structure.
In sum, there are numerous options for nonprofit entities
seeking to merge/reorganize. The correct structure will likely be
determined by the assets and liabilities at play, the existing
relationship between the nonprofit entities, the transaction costs
involved and post-transaction control and operational issues.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Lawyers are often asked to serve on Boards of nonprofit corporations and if they do so, they will often be asked by other directors about the potential individual liability of a director for actions of the nonprofit, for actions of the director and for actions of other directors. - See more at: http://www.wcsr.com/Insights/Articles/2017/March/Liability-for-Directors-of-Nonprofit-Corporations#sthash.fomRRxiJ.dpuf
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