Yet another merger/reorganization option is to make the "surviving" nonprofit the sole member of the target nonprofit.
Most nonprofit entities, however, are nonmember, nonprofit corporations governed solely by a self-perpetuating board of directors. Therefore, the nonmember, nonprofit target corporation must first be converted into a member, nonprofit corporation. The surviving nonprofit corporation would then become the sole member of member, nonprofit target corporation. The result is a parent/subsidiary relationship between the "surviving" nonprofit (as the parent or sole member) and the target nonprofit (as the subsidiary).
In the nonprofit world, a member is akin to a shareholder and therefore has the ability to control the target nonprofit corporation. Under state law, members are given certain voting rights over the corporation, such as the power to appoint directors and approve fundamental transactions (e.g., merger, dissolution, sale of assets).
The advantage of this structure is that the nonprofit entities remain separate, which results in limited liability for both entities. Additionally, no assets or liabilities need to be transferred. Finally, the target nonprofit remains in existence to accept any unknown gifts.
The main disadvantage of this option is costs. There will be transaction costs to covert the target corporation into a membership corporation and issue a membership interest to the "surviving" entity. Post-reorganization, there will be duplicative costs of operating and maintain two separate legal entities (e.g., payroll costs, accounting costs, insurance premiums).
Additional considerations with this reorganization option include control, attribution and branding issues. In terms of control, the nonprofit entities will need to negotiate whether the target nonprofit will have representation on the "surviving' nonprofit's board and whether the "surviving" nonprofit is limited to removing the target nonprofit's directors only for-cause.
Additionally, the two 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 and adversely affect both entities' tax-exempt status). Finally, the nonprofit entities should give thought to post-reorganization branding/name issues so that donors can easily understand the new organizational structure.
Check back soon for our final installment in this series, which will discuss the creation of a mutual parent entity.
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.
