As nonprofit organizations look to diversify funding and expand their missions, experts say affiliate structures can provide both flexibility and protection. In a discussion hosted by Venable, partners George Constantine and Lindsay Nathan and associate Brian Melnyk examined how nonprofits can use affiliated entities—both tax-exempt and for-profit—to achieve growth while maintaining compliance.
The panelists explored how these structures allow organizations to “maximize revenue or take advantage of different types of missions,” as Constantine explained. He noted that a lot of nonprofits have "families of organizations"—not just a 501c3, 501c4, or 501c6—"but maybe all those combined. Or a political entity, or a for-profit."
Affiliate Structures: Expansion, Revenue, and Control
Melnyk noted that the decision to create affiliates is "often driven by the intersection of [an organization’s] tax-exempt status and their business needs." He described how forming a for-profit entity can attract outside investment and offer incentives that the core organization might not otherwise be able to offer.
Nathan observed that many nonprofits "are turning to for-profit activities," especially as they struggle with diminished donations and a search for "innovative ways to generate revenue." But she cautioned that a nonprofit "cannot be substantially engaged in commercial activities that do not primarily serve its tax-exempt purposes," and that “everything has to be done at fair market value." Melnyk echoed that point, noting that when forming a for-profit, affiliated entity to house those unrelated activities" it would be “wise to mitigate risk of too much UBIT for the core organization."
Balancing Separateness and Oversight in Affiliate Management
Nathan stressed that the most important governance question is, "How do we manage the different competing considerations? For nonprofits, she explained, "in order to get the benefit of having the organizations or the affiliates be truly treated as separate entities, we need to maintain appropriate separateness between the two organizations."
That includes separate books and records, separate boards and governance, and ensuring that "the new entity is properly capitalized while simultaneously avoiding co-mingling of assets and accounts." At the same time, she noted, “it’s perfectly reasonable and appropriate to maintain some level of control amongst the various organizations,” such as through a member-manager relationship or some overlapping board members.
Melnyk warned that without careful boundaries, the core organization could lose its tax-exempt status. He cited examples where misuse of shared resources between affiliates led to IRS action, reminding the audience that “it’s extremely important to use caution when sharing services to avoid situations where an affiliated organization’s activities might be imputed to the core organization or vice versa.” To maintain compliance, he advised “strong termination provisions in those shared services agreements,” separate websites, and rigorous “record keeping.”
Constantine added that by managing affiliates carefully, nonprofits can maximize revenue, take advantage of different types of missions, and still protect the integrity of their charitable status.
Watch the full webinar here to learn more. If you or your organization have questions about using affiliates to expand your organization’s reach, contact the presenters or visit Venable.com to learn more about our Nonprofit Organizations Group.