How to Merge Nonprofit Organizations | Attorney Aaron Hall
Minneapolis Business Attorney Aaron Hall, Minnesota

How to Merge Nonprofit Organizations

What is a Merger of a Nonprofit Organization?

In this video, you get answers to these questions:

  • What is a Merger of a Nonprofit Organization?
  • What is a Nonprofit Organization?
  • What would be an example of a Nonprofit Organization?
  • Who owns a Nonprofit Organization?
  • What is a 501C3 Organization?
  • Can you receive donations as a 501C3 Organization?
  • When is a merger necessary for a Nonprofit Organization?

Transcript

What is a merger of a nonprofit organization? I’m Aaron Hall. You can learn more about me at aaronhall.com, and please see the disclaimer below this video.

Today I’m talking about the question, what is a merger of a nonprofit organization? Well, let’s first look at, what is a nonprofit organization? A nonprofit organization is a legal entity formed in a state, like Minnesota, registered with the state, but it’s set with a special registration that designates it as not having an owner and not being for a purpose of profit, but rather being for some other purpose. For example, a charitable purpose. Examples might include a church, a private school, a local community organization, a hospital, et cetera.

A nonprofit organization is usually a corporation that is designated as not-for-profit, and so in a sense, it’s owned by the state or it’s for the benefit of the state or the public, and you have a board of directors who is responsible for taking care of the property and assets that are within that nonprofit organization. You have a stated purpose of the organization, and the assets of that organization must be used for that purpose.

Sometimes a nonprofit organization will apply to be recognized by the IRS as qualifying as a 501(c)(3) organization. The idea here is that if people donate money to a 501(c)(3) organization, they can deduct that donation on their income tax return at the end of the year, so that’s one benefit of seeking 501(c)(3) tax status. Also as a 501(c)(3) organization, you can receive donations from other 501(c)(3) organizations, but otherwise, generally, a 501(c)(3) organization may not donate assets to a corporation or an individual unless it is clearly within the nonprofit purpose. For example, providing school books to low income students or something like that.

A merger of nonprofit organizations is typically when two organizations with a similar purpose decide that it doesn’t make sense to continue to operate separately. Often they’ve talked and they’ve determined, “Hey, there’d be value if our donors came together, if our volunteers came together, and if we consolidated some of the overhead and expense that we have as an organization.” That is why organizations may want to merge. You can watch some of my other videos or visit aaronhall.com to learn more about the requirements, restrictions, and other tips when merging nonprofit organizations.

What Problems Arise When Nonprofit Organizations Merge?

In this video, you get answers to these questions:

  • What problems can arise when nonprofit organizations merge?
  • How can a nonprofit organization avoid potential pitfalls?
  • What are the different cultures in a nonprofit organization?
  • How do you merge the integration of cultures?
  • How do you communicate to donors about the merge?
  • Who do you give notice to when there is an organization transitioning?
  • What is required when there is a merge with two organizations?

Transcript

What problems can arise when nonprofit organizations merge? I’m Aaron Hall. You can learn more about me at aaronhall.com and please read the disclaimer below.

Nonprofit organizations that are considering merging together could keep a number of things in mind to avoid potential pitfalls. First, you often have different cultures in nonprofit organizations. They have different values, different personalities, and so that clash or integration of cultures is something that takes a lot of intentionalities and thought. How are you going to merge those and which aspects will you keep? Similarly, which members in leadership on the boards of directors or in other significant roles, which people will be kept? What will their roles be and how will they feel about those roles?

Another problem that can come up is communications with donors. Donors may be surprised to find out that one nonprofit has merged into another and so thinking through how do you want to communicate that to donors? Giving them some advance notice is often helpful, explaining the purpose for it, perhaps doing a video with the presidents of both organizations talking about how the organizations can be more effective if they work together in advancing the cause for which they were founded.

The other room for potential pitfalls is in the process of transitioning one of the organizations out legally. You need to give notice to the secretary of state, the attorney general, the IRS. The attorney general, at least under Minnesota statute, is permitted to object to the merger and asks for very specific information about the merger.

The attorney general also has an opportunity to inquire and request more details and nonprofit organizations by statute must comply. That means, in order to merge your nonprofit organization, you need to follow a specific format in giving the attorney general’s office notice. Permit the attorney general time to analyze it. Respond to any requests that come from the attorney general. And then typically, the attorney general will issue a letter that says, we have no objection, you may proceed.

If you are interested in learning more about merging nonprofit organizations, visit my other videos or see the articles at aaronhall.com.

What Are The Options for Merging Nonprofit Organizations?

In this video, you get answers to these questions: What are different ways you can do a merger of like-minded nonprofit organizations?

  • What are the three options when merging organizations?
  • What is a formal merger?
  • Can you keep both organizations open?
  • What are your options when merging nonprofit organizations?

Transcript

What are the options when looking at emerging nonprofit organizations? I’m Aaron Hall. You can learn more about me at aaronhall.com and please read the disclaimer below this video.

Today I’m answering the question, what are different ways that you can do a merger of likeminded nonprofit organizations? Well, there are a few options. One is you can terminate one entity and just give all of its assets to the other entity. A second option is a formal merger, which is typically done by filing articles of merger with the Secretary of State. A third option is keeping both of them open. This is often done when the nonprofit organizations know that donors have put one of the organizations in their estate plan, for example, their will or trust. You don’t want to close that nonprofit organization and then find out later that money was coming in to the nonprofit, but since it no longer exists, it went elsewhere.

There are times when you will seek approval from the Attorney General’s office to essentially liquidate one nonprofit and transfer its assets to the other. And that nonprofit will continue operating as though it were a merged organization, but you leave that other nonprofit out there simply to capture estate planning gifts and then re-gift them into the ongoing nonprofit organization.

Now, in that option where you keep both open, you do need to continue to have a board of directors on each file and your reports on each, so it’s not something to take lightly, but it is an option when you know that estate plans may have gifts that will eventually go to the organization. If you’d like to learn more about merging nonprofit organizations, you can check out my other videos or visit Aaronhall.com.

Instead of Merging Nonprofit Organizations What Options Are Available?

In this video, you get answers to these questions:

  • What are some alternatives to merging nonprofit organizations?
  • What are the examples of alternatives?
  • Do franchises exist as a nonprofit organization?
  • What is a partnership or joint venture?

Transcript

Instead of merging nonprofit organizations, what options are available? I’m Aaron Hall. You can learn more about me aaronhall.com, and please read the disclaimer below this video.

What are some alternatives to merging nonprofit organizations? Well, sometimes organizations realize they want to work together, but they’re not quite sure what to call it. Options might include a partnership, which is sometimes called a joint venture, or perhaps a license. You license a brand or you license some curriculum to the other organization. Or perhaps even a franchise model where one nonprofit is the franchisor with a brand, perhaps some curriculum or products or services, some rules, some structure, some systems. Then other nonprofits pay a fee to the franchise or nonprofit for this. Franchises are fairly rare in the nonprofit world, but they do exist and they are permitted.

Instead of merging a nonprofit organization with another, you might consider them partnering together. A partnership or a joint venture can look all sorts of different ways. It could be very integrated or it could be just help working occasionally on different items. What’s important to keep in mind is that in a partnership or a joint venture, both parties are liable for the acts of the other. That means the first nonprofit organization and the second nonprofit organization are both liable if something goes wrong or one of their volunteers hurt somebody in one of their activities. You may want to consider, is that appropriate for us, do we have insurance for that? Now, there are ways around that. You can set up an LLC, you can have some contract that says, look, this isn’t a joint venture, we’re each doing specific roles and we’re going to handle liability in that way.

There are a variety of options available. This is a cursory or summary review of those. An attorney who’s familiar with corporate law and nonprofit law is often able to talk you through these sorts of issues and figure out based on your circumstances, what is the best legal configuration. To learn more about merging nonprofits, click on my other videos or visit aaronhall.com.

What Are The Steps To Merging Nonprofit Organizations?

In this video, you get answers to these questions:

  • What are the steps when merging nonprofit organizations?

Transcript

What are the steps to merging nonprofit organizations? I’m Aaron Hall. You can learn more about me at aaronhall.com, and please read the disclaimer below this video.

There are a number of steps if you want to merge nonprofit organizations. Typically, it’s going to involve contacting an attorney who’s experienced in this first. The second step is both organization boards adopting a resolution to proceed with the merger, and by the way, that of course involves talking through which one is going to acquire the other or is it going to be an actual merger. What does that format look like?

Once the boards have done that, the third step is to notify the attorney general in your state or at least Minnesota, regarding your plans. The attorney general by law has a number of days to review the proposed plan and raise any objections, in which case you cannot proceed. This is a way to protect the interests of donors who have donated to the organization, protect the interests of the public. And so you send that notice of your intent to merge or transfer assets or dissolve to the attorney General’s office.

And then you wait. And then finally, once the attorney general has either not objected or sent a letter basically saying, “Look, you’re fine.” Then you can go ahead and proceed with the actual merger. So at a real high level, those are the steps. Contact an attorney, figure out the details and pass a resolution at the board of directors level for both organizations. Notify the attorney general and then finally implement the plan. I’m Aaron Hall. If you’d like to learn more about merging nonprofit organizations, you can visit my other videos here or visit aaronhall.com.

How Should You Handle Conflicts of Interest When Doing a Nonprofit Organization Merger?

In this video, you get answers to these questions:

  • How should you handle conflicts of interest when doing a nonprofit merger?
  • What is a special litigation committee?
  • What conflicts of interest do you disclose to the Attorney General?

Transcript

How should you handle conflicts of interest when doing a nonprofit organization merger? I’m Aaron Hall. You can learn more about me at aaronhall.com and please read the disclaimer below this video. So how do you handle conflicts of interest when nonprofit organizations are voting on whether to merge or perhaps even voting on other important issues? Well, typically the best practice is for those who have a conflict to abstain from voting.

Now let’s say you don’t have enough votes in that case. There is a process where the board can approve a special committee to handle voting on issues of conflict of interest. For example, a special litigation committee is one such committee permitted by statute. So general rule though, those who have a personal conflict of interest in a decision are best to abstain in that decision. The second part is in a merger, it’s important that you are disclosing to the attorney general any conflicts of interest that exist. That might be with existing board members or perhaps other organizations that are a part of the merger. By doing that, you reduce your potential personal liability, should there be problems or an attorney general investigation later. To learn more about merging nonprofit organizations, you can see my other videos here or visit aaronhall.com.

Which Government Agencies Need To Be Notified When A Nonprofit Organizations Merges?

In this video, you get answers to these questions:

  • Which government agencies should be notified of a merger?
  • What are the steps needed to notify government agencies in Minnesota?

Transcript

Which government agencies need to be notified when a nonprofit organization merges? I’m Aaron Hall. You can learn more about me at AaronHall.com and please note the disclaimer below this video.

When nonprofit organizations merge which government agencies need to be notified? The three big ones are the attorney general’s office. That’s usually first because you need to give the state’s attorney general… At least in Minnesota, that’s the agency that oversees nonprofits. You need to give the attorney general an opportunity to object to the merger. Second, you’re typically going to do the merger by doing a filing at the secretary of state office. So, that’s number two. Number three is the IRS. The IRS needs to know that one of these organizations no longer exists and what happened there.

So, there you have it. There are three steps. Notify the attorney general, and typically wait to find out if the attorney general is going to object or authorize the transaction, the merger. Two, notify the secretary of state by doing a filing regarding the merger. And then three, notify the IRS. Those are the three government agencies that you need to notify when doing a merger of a nonprofit organization, at least here in Minnesota.

To learn more visit AaronHall.com or you can check out the other videos here.

What Is The Attorney General Concerned About When Nonprofit Organizations Merge?

In this video, you get answers to these questions:

  • What is the Attorney General concerned about when merging Nonprofit Organizations?
  • What are the three things the Attorney General will be concerned about?

Transcript

What is the Attorney General concerned about when nonprofit organizations merge? I’m Aaron Hall, you can learn more about me at aaronhall.com, and please see the disclaimer below.

When nonprofit organizations merge, the Attorney General is concerned about a few things. First, donor intent. When donors gave money to the organization, did they intend for it to be used in the way that it now will be after the merger? For example, if they gave to a veteran’s organization, does the merger move that veteran’s organization into a dog shelter? If so, that would violate donor intent, and that would be problematic.

Second, the Attorney General is concerned about any sorts of conflicts of interest, conflicts that might arise with individuals in the organization. Also, conflicts with the other organization that it’s merging with.

Third, the Attorney General is concerned about compliance with the Minnesota Nonprofit Act. That basically is a statute that protects nonprofits, it protects donors, and it is good public policy in order to allow nonprofits to exist in a way that fulfills their purpose without illegal or undue influence by others.

If you’re interested in learning more about nonprofit organizations merging, check out the other videos here. Also, you can learn more at aaronhall.com.

What Are The Practical Non-Legal Considerations When Nonprofit Organizations Merge?

In this video, you get answers to these questions:

  • What are the practical non legal considerations when nonprofit organizations merge?
  • What are the most important considerations?
  • How do you communicate to donors, employees and the public?
  • What are the values of merging nonprofit organizations? – How can you start communicating your vision in operating together as a new organization?

Transcript

What are the practical non-legal considerations when nonprofit organizations merge? I’m Aaron Hall. You can learn more about me at AaronHall.com. Please see the disclaimer below. When nonprofit organizations are contemplating a merger, one of the most important considerations is how will this be communicated first to donors, second to employees and third to the public? How will that message get out and what is that message? Is it a message of fear and worry, like, “We can’t make it unless we merge.” Or is it a message of opportunity?

By merging, we’re able to consolidate expenses and further the cause for which our organizations were founded. Maybe it’s about synergy, leveraging the strengths of both organizations. But typically in a merger, a lot of thought goes into how to communicate that. Then typically it’s first going to go to the employees with the understanding that it needs to remain strictly confidential.

Second, it’s going to go with a public-facing message to donors. Maybe that’s a letter. Maybe it’s a social media video from the founders of both organizations. Video can work especially well when announcing a merger because, like a written message, it allows you time to prepare and make sure the message is just right. But it also, unlike a written message, has emotion, a vocal tones. It allows you to communicate some emotion and excitement and passion. So often, a video is a helpful way for two organizations to share their vision for operating together in the future after the organizations have emerged.

And as far as the public, sometimes a separate message is done to the public, but usually what I find is whatever message was communicated to donors is now going to go out to the public in general. Of course, it might depend on the size of the organization and how many people care about the organization who are not on the donor list.

By the way, too, speaking of donors, it’s often helpful before any public message goes out, just before, to have a personal call from the president to any key stakeholders. This might be major donors or key decision-makers so that they not only feel valued and appreciated but if they have any concerns, they can raise them promptly with the president. The key here though is timing. If it’s too far before the message goes out to all the donors, the rumors can leak.

So typically it needs to be done with the understanding that it strictly remain confidential until publicly announced, even though we know that it’s still may leak. Then a second, very quickly, get that public announcement to donors on social media, email, et cetera. To learn more about merging nonprofit organizations, you can check out the other videos here, or visit AaronHall.com.