There are unique characteristics and relationships between association chapters, subsidiaries, and affiliates with their nonprofit parent.  These beneficial relationships, when executed correctly, provide means to expand and grow. Understanding the organizational structures, and the related legal and financial issues, is vital to avoid issues and potential pitfalls.

Why Establish Chapters, Affiliates, or Subsidiaries?

There are unique characteristics and relationships between association chapters, subsidiaries, and affiliates with their nonprofit parent.  These beneficial relationships, when executed correctly, provide means to expand and grow. Understanding the organizational structures, and the related legal and financial issues, is vital to avoid issues and potential pitfalls.

Chapters expand the reach of the organization

Expand your reach – Using chapters, subsidiaries, and affiliates is a great way to expand your mission. One focus of chapters is to ensure a community-level connection. This local engagement could be by geography at a regional, state, or local level and as a part of a broader national or international organization with the same mission. Chapters can also be organized by subject matter, expertise, or job function as long as they directly support the overall mission.  

Affiliates expand the focus and activities of the organization

Unlike chapters, subsidiaries and affiliates have a different, but related, focus to the parent’s core mission. Reasons for establishing a subsidiary or affiliate include taking on for-profit activities that can pay the parent profits in the form of tax-free dividends, establishing a lobbying arm, or establishing a 501(c)(3) each with a mission that supports that supports the other.  Generally, the label subsidiary is used when there is ownership while an affiliate is another organization with common control.   

Other advantages of establishing affiliates, or subsidiaries:

    • Creates a liability barrier to the parent organization. If an organization owns certain assets like real estate, forming an affiliate can shield the parent from risk or loss.    
    • Allows organizations to gain tax benefits.  For example, organizations formed under certain sections of the tax code cannot engage in political activity per the IRS; others may want to establish charitable organizations to allow tax deductible contributions from their supporters.  
    • Take advantage of grants and other funding opportunities. In general, government and foundations will not award grants to an organization formed as a 501(c)(6).   
    • Enable the organization to utilize the skills of a new board.  For example, a related board might have one that focuses on fundraising or banking. 

Tips for Proper Administration

Proper administration of the relationship between chapters or affiliate entities is needed to mitigate legal and financial risk. To maintain liability protection both legally and financially, the corporate veil – a clear separation of entities – must be maintained or the liability protection goes away. This means no overlap – perceived or actual – by the IRS or courts. 

Proper documentation – Have a written affiliation agreement that governs the rights and obligations of both parties – a legal document that speaks to the relationship while maintaining separation. Common pitfalls in association relationships can be avoided with a written agreement. An operating handbook and clear organizational chart that details the requirements and relationship of the parent and related organizations. 

Other tips for strong chapter, subsidiary, and affiliate relationships  

    • Maintain open and effective communication to ensure a smooth relationship. 
    • Develop guidelines to avoid competing for the same dollars in fundraising and dues.  
    • Gather input when raising dues to consider the chapters’ members’ capacity to pay.  
    • Create reports for budget and forecasting that are meaningful to the parent and related organizations. 

Internal controls establish and maintain independence to ensure separate organizations are respected as separate entities  

    • Officers for related entities are not identical and should have some independence and separation. Conduct regular board meetings and record minutes.  
    • Open separate bank accounts for each entity.  
    • When staff is shared, keep track of time spent on each entity and charge each entity for its share of employee time. 
    • Enter contracts independently, and file separate 990 tax returns 

Financial administrative best practices  

    • Have regular check-ins with chapter, affiliate, and subsidiary staff.  Establish a practice of sharing financial information up and down the organizational structure.   
    • To properly document effort, use timekeeping programs to document time spent on each entity. 
    • Have the right technology for your organization.  Technology can integrate your operations – including membership, education, certifications, and training – into the accounting and finance systems.   
      • For example, electronic payment methods can automate approval flow, improve controls, and document transactions.   
      • The Association Management System (AMS) system can function as the sub-ledger for your accounting system if you have the proper controls and processes in place.  Be sure that each system is properly mapping data for financial information to ease financial reporting 

With proper parameters in place, establishing and maintaining chapters, subsidiaries, and affiliates is an opportune way to expand your nonprofit’s presence. To learn more, click here and watch the webinar Best Practice and Common Pitfalls for Association Chapters, Subsidiaries, and Affiliates. 

Associations nationwide trust Your Part-Time Controller, LLC, as a financial expert that contributes to overall, lasting success. By doing what we do best, association members may focus on the most important aspect of their work: furthering the mission of the organization.  

Ready to get started? Our Associations experts are ready to help. visit https://www.yptc.com/associations-specialization/ to learn more!