Another reorganization option for nonprofit organizations is "consolidation". Under the consolidation option, the two nonprofit organizations that wish to affiliate with one another both merge into a newly-formed, third entity ("NewCo"). As a result of the mergers, both target entities dissolve into NewCo.

All of target entities' assets (including their contracts and licenses) automatically transfer to NewCo. NewCo also assumes all of the target entities' liabilities.

The main advantage of consolidation is that, like a statutory merger, it is simple. All assets and liabilities automatically transfer to NewCo by operation of law upon filing the combined certificate of merger for both target entities. Once the combined certificate of merger is filed, the target nonprofits ceases to exist.

The main disadvantage of consolidation is that NewCo assumes all of the target entities' liabilities, including lawsuits, employment contracts and any unknown liabilities (e.g., environmental, payroll taxes).

Another disadvantage of a consolidation is that the target nonprofits no longer exist to accept known and unknown gifts and then transfer them to NewCo.

Finally, there will likely be increased transaction costs to effectuate the consolidation. For instance, the plan of merger and the combined certificate of merger will be more complex because there are three parties, not just two. There will also be additional costs to form NewCo and apply for tax-exempt status on behalf of NewCo.

Despite the disadvantages associated with consolidation, consolidation is frequently used to affiliate two nonprofit entities that cannot agree on which nonprofit entity will survive (e.g., who will control, whose name will be used). With a consolidation, both target entities receive a fresh start and can be placed on even footing, equally incentivized to ensure NewCo is successful.

Check back soon for our next installment in this series, which will discuss conversion to a sole member corporation.

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.