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Tips and Answers to Your Questions
The Forms of Strategic Restructuring
When an organization begins the process of setting up or
chartering chapters, what type of agreement should be established between the
founding organization and the chapter(s)s? Is it a common practice for a central
or founding organization to charge fees of the chapters? What is the advantage
or disadvantage of a non-profit public benefit organization (501)(C3) filing
for a group ruling?
It is quite common, and certainly advisable, for an organization that is setting
up chapters (also known as affiliates, members, councils, sites, or franchised
areas) to implement a formal agreement with those chapters. This type of agreement
is often known as an affiliation agreement. It defines the relationship, identifies
what type and level of control or influence each party has on the other, and
offers protection for mutual assets, such as the name (if it is shared) or
reputation. Some organizations structure their agreements in two parts - the
chapters' responsibilities and commitments to the central/founding organization,
and the central/founding organization's responsibilities and commitments to
the chapters. You do not need to set up a Parent/Subsidiary structure to implement
this type of relationship, though some organizations may do that. More commonly,
the affiliation agreement defines and provides the accountability in the relationship.
Each party is expected to abide by the terms of the agreement, and there is
typically a section in it that defines some sort of periodic evaluation, review,
or "check in" process to ensure that this is the case, and that the
common goals and mission are being best served.
The fee structure you describe is also common in this type of arrangement.
We have done some research on this, and found that the most common means of
charging dues or fees is through a percent of revenue, percent of expenses,
or percent of overall budget formula. We have seen numbers ranging from 0.5%
to 10% here, though understand that there are organizations that charge more
than this. In return for these fees, the central/founding organization is providing
the value inherent in its name, reputation, and marketing efforts, as well
as some level of support or assistance to its chapters or affiliates. Some
organizations decrease the percentage charged as the revenue of the chapter
goes up - an effect opposite to that of the progressive income tax in the United
States. Others charge a flat fee, though this works better if all of the chapters
or affiliates are around the same size. If not, fairness issues could arise.
According to the IRS, a central organization that is tax exempt under IRC
501(c) may obtain recognition of exemption, on a group basis, for subordinate
organizations that are under its general supervision or control. The purpose
of the group exemption is to relieve subordinate organizations from filing
their own exemption applications. To be included in the group exemption letter,
each subordinate organization must authorize the central organization in writing.
After the initial exception is granted, a central organization may file, in
addition to its own annual information return, a group return on behalf of
two or more of its subordinate organizations covered by a group exemption letter,
as long as certain conditions are met. These conditions relate to issues of
supervision and control, each organization's fiscal year, information flow
between the central organization and the subordinates, etc. Group rulings and
group filings can make the work of the subordinate organizations somewhat less
onerous, but they do require the subordinate organizations to be under the "general
supervision or control" of the central organization. Such control would
have to go beyond an affiliation agreement, and involve some sort of legal
parent/subsidiary structure. More information on group rulings can be found
on the IRS web page, at http://www.irs.ustreas.gov/prod/bus_info/tax_pro/irmpart/section/27772.html
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