Non Profit Holding Company: Everything You Need to Know
A non-profit holding company is a business designed to act as a structure for maintaining multiple non-profit companies beneath its protection, much as a regular holding company works for for-profit businesses.3 min read
2. Joining a Non-Profit Holding Company
3. Non Profit Holding Company Benefits
4. Non-Profit Holding Company Risks
Non-Profit Holding Company Overview
A non-profit holding company is a business designed to act as a structure for maintaining multiple non-profit companies beneath its protection, much as a regular holding company works for for-profit businesses. Such a company works to assist smaller non-profits succeed by acquiring them in order to protect them from the burden of maintaining a sustainable earned income model or access to greater government funding. This allows non profits to focus more on their original social missions.
Joining a Non-Profit Holding Company
In order to join with another company to form non-profit holding company relationship, the following model may be an effective one to follow:
- Find an anchor partner. Ideally this should be credible organization with a solid operating platform and a clear vision for why it wants to add new organizations to its structure.
- Begin with a partnership. Before attempting to join with the anchor partner, it makes sense to first partner in a non-binding way on non-profit work in order to see how effective working with the potential holding company can be. If one or several projects work out well, then it may be possible to move on to the next step.
- Move to a joint decision-making and leadership model. If partnering has proven effective in a certain country or location, combining leadership for a project will show you how well budgeting, planning, and decision-making can go. This can be done with joint funding and clear milestones for advancing the partnership to the holding company stage.
- Form a holding company relationship. If the partnership proves successful, you can then merge further. Back-office operations can be consolidated, redundant legal entities can be wound down, and fundraising efforts can be combined, although program brands should remain distinct. Leadership teams that worked on joint-projects should become part of the holding company management team to better facilitate joint operations.
Non Profit Holding Company Benefits
Benefits of non profit holding companies include:
- Allowing funders to more efficiently allocate capital toward a more sustainable and robust non-profit sector.
- Less risk in investing in non-profits.
- The ability for non-profits to maintain their leadership, brand, and governance while receiving support from a more experienced enterprise.
Non-Profit Holding Company Risks
The main risk of establishing or working under a non-profit holding company is the legal liability that one company may hold for all the other companies. For instance, if one company is held liable for a transgression and it cannot pay the penalties levied against it, then all the other companies under the holding company, and the holding company itself, may ultimately be liable. In the worst-case scenario, assets of the related companies may be liquidated to pay court costs and settlements. Thus, some lawyers advise against taking on the possible risk inherent in a holding company.
One way to alleviate this risk, however, would be to establish a 501(c)(2) holding company. A 501(c)(2) is similar to the typical holding company except its sole purpose is to hold property for other tax-exempt organizations. It is controlled by a larger tax-exempt organization, and in theory, if the larger organization is sued, the 501(c)(2) will be protected from liability related to any lawsuit. Other benefits of the 501(c)(2) may include:
- A greater ability to borrow money.
- Accounting simplification.
- Clarity of the title.
However, it should be remembered that 501(c)(2)s cannot operate a business themselves or conduct in trade, even if business and trade is conducted on the premises of a property the 501(c)(2) owns. Also, benefits and other protections the 501(c)(2) might enjoy will depend on the correct legal structuring of the businesses and the correct observance of corporate formalities. Thus, professional legal counsel should be consulted before this route is pursued.
As a further alternative, one might consider establishing a 501(c)(3) company to hold property as a means of risk management. This may be a better choice for religious-affiliated non-profits, as these organizations, if properly structured, can qualify for exemption from filing Form 990 with the IRS, which is not the case for 501(c)(2) organizations run or affiliated by religious institutions.
If you need help understanding issues related to the non-profit holding company, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.