NFPs with a related Foundation
There are many not-for-profit organizations (NFP) with an independent Foundation whose function is to obtain contributions to support certain unbudgeted activities of the NFP. Usually the Foundations hold substantial assets that generate cash flow that is also used to support the mission of the NFP. The entities have separate Boards, management and obtain separate tax returns and separately audited financial statements. A question frequently arise about whether the boards should be merged. My partner Ruben Cardona, CPA, recently met with the separate boards of related entities and here are some of his considerations.
- A multi-structure provides a degree of asset protection for the assets held by the Foundation separate from the NFP.
- With only one board overseeing both entities, a consolidated financial statement would be prepared reducing some costs.
- If consolidated statements are prepared, income generated by the Foundation might be required to offset the potential amounts to be reimbursed or contributed by overseeing, support, governmental or nongovernmental agencies.
- If the current structure was approved by the Attorney General, then permission of the AG might be required to make any changes.
- Based upon state regulations, a merger of the boards might need acquiescence of the state attorney general.
- If a disastrous even occurred exposing the assets of the Foundation, a question could arise concerning why the boards merged in a way that exposed the Foundation’s assets without a compelling or regulatory reason.
- In considering a potential merger of the entities, consideration should be given to a persuasive rational purpose for such a merger other than just for the convenience of administering the entities.
Many times there are multiple bodies serving different functions for the same end result. The above illustrates two entities, but many times there are much more than that and questions arise continuously about the efficacy of some of the obvious duplication.
Ruben also recommended that legal counsel should be consulted before any actions are taken, and to also verify his recommendations. The above illustrates some of the issues that need to be considered, and while any number of entities more than one usually has some duplication, many times there are sound reasons for the structure. This needs to be reviewed when a new purpose, activity or fund raising method is decided upon causing consideration of a separate entity; where substantial fund raising for a specific long-term purpose will be initiated; or there is or will be an endowment fund or substantial restrictions of funds and the funds will be separately and independently maintained or managed. Further, regardless of the structure, it should be reviewed annually by the Board to determine if the present structure is still necessary
If you have any questions about the above or any NFP governance issues you are welcome to reach out to me at [email protected] or Ruben Cardona at [email protected].
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