Federated not-for-profits are single corporate entities with multiple chapters. There’s no one definitive legal structure for federated organizations. But local chapters generally operate independently of their national headquarters and pay a certain percentage of income to their national office in exchange for the name, branding and other benefits.
Many large organizations, including Boys & Girls Clubs of America, Habitat for Humanity and Junior League are federated. If your nonprofit is growing and developing offshoots in different communities, you may want to consider the benefits (and drawbacks) of a federated structure.
From ad hoc to organized
Often, offshoots of a founding nonprofit grow on an ad hoc basis, with scant attention paid to the relationship between affiliates and the founding group. In fact, it’s common for field offices to feel disconnected from the national group or for relationships between regional and national leaders to become strained.
A federated structure can level the playing field for chapters and provide other benefits, including:
- Economies of scale,
- A single voice in advocacy,
- A distinct brand,
- Better visibility,
- Greater consensus between chapter and national leaders,
- Shared technological and other resources, and
- Increased accountability (if chapters are legally responsible for their actions).
The ultimate success of a federated organization depends on whether it maintains an adequate and effective structure.
4 models
There are four main models of federated organizations:
- A single corporation. The primary advantage of this model is that the founder generally retains control over activities nationally. Because the founder is liable for out-of-state activities, a successful claim exposes all chapters to risk.
- Separate corporations. Independent corporations can be created in each state, enabling chapters to enjoy relative autonomy. They’ll have an agreement with the founder that governs the use of intellectual property and other resources.
- Separate subsidiary corporations. A founder creates individual subsidiaries in each state where it operates and retains ultimate control of them. But the subsidiaries are legally protected from liabilities of other subsidiaries. Each subsidiary must obtain tax-exempt status.
- Separate limited liability companies (LLCs). LLCs with the founder as the sole member are similar to separate subsidiary corporations. The subsidiaries are treated as separate entities under state law for asset protection purposes, but they’re disregarded by the IRS for taxes.
Be careful
Deciding on a federated structure and initiating new procedures can be challenging. Among the possible pitfalls is the national office’s uncertainty about its responsibilities when local chapters deliver the actual community services. Local chapters may also underestimate their parent’s value. This situation can become particularly fraught if the chapters must pay fees to the national office.
The parent’s authority over local chapters is another sensitive issue. Typically, the national office’s power to enforce its decisions on chapters is limited. But it can remove or limit access to the group’s name, logo and trademarks or restrict a chapter’s ability to represent the organization.
Power struggles may ensue if the federated organization and its affiliates have different agendas. For example, a local organization might assume it understands the services its community wants and needs. Meanwhile, the parent may stress the need to maintain standards and consistency nationally without undue risk to the brand.
Such scenarios can lead to conflict and, ultimately, the secession of individual affiliates. So it’s vital to carve out roles and responsibilities and clearly communicate them when the structure is introduced.
Flexibility is critical
No matter what federated structure you choose (if you choose any), some conflict between offices is almost inevitable. Provide for resolution of any squabbles and make it easy to amend your federation agreement. As with most things in life, flexibility is critical! Contact us and your legal counsel for more information.
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