Originally Posted: October 8, 2015
Author: Benjamin Takis
Tax-Exempt Solutions, LLC
The chapter model (sometimes called the federation or affiliate model) is common among nonprofits of all types, and is often viewed as a fast and effective way to grow a nonprofit from small to large.
However, the chapter model is not without risk. Local chapters that are improperly organized or poorly managed can quickly destroy the parent organization’s reputation, drain the time and energy of its staff, and potentially leave the organization liable for the chapter’s activities. Minimizing these risks and building a chapter structure that lasts requires preparation, communication, and a well-drafted chapter affiliation agreement (sometimes called a chapter charter agreement).
The chapter affiliation agreement establishes the right of the chapter to use the parent organization’s name and receive specified assistance in exchange for agreeing to certain standards of conduct, oversight, and formal requirements. It is, in effect, the nonprofit version of the “franchise agreements” found in the business world. When properly drafted, the chapter affiliation agreement is an essential tool to communicate expectations and protect the reputation of the parent organization. A well-drafted chapter affiliation agreement must, at a minimum, include these eight essential provisions:
1. License of the Parent Organization’s Trademarks to the Chapter
This is the essence of the chapter affiliation agreement. The chapter is given a limited right to use the parent organization’s name, logo, and other trademarks and call itself a “chapter” of the parent, subject to various terms and conditions set forth in the agreement. To ensure uniformity in branding and messaging, the parent organization should be prepared to specify in detail how its name must look and be used on the chapter’s website and other promotional materials.
Most chapter affiliation agreements specify a particular territory within which the chapter will operate. Sometimes the chapter’s status is exclusive within this territory. This helps to avoid competition between chapters and duplicative fundraising efforts, although the borderless nature of online fundraising has complicated this issue in recent years.
3. Required and Permitted Activities
This provision sets forth the activities the chapter should or must undertake as well as activities that are prohibited or require advance authorization. The approach to this provision can vary widely, depending on how much autonomy the parent organization prefers its chapters to have.
4. Formal Requirements (Incorporation and Tax-Exempt Status)
A very basic consideration is whether chapters are required to form independent corporations with formal boards of directors and governing documents. This is highly recommended, as a parent organization is more likely to be held liable for the activities of its chapters if the chapters are not incorporated. It is also generally advisable for chapters to obtain tax-exempt status from the Internal Revenue Service. This can be accomplished either by having the chapters individually submit an IRS Form 1023, 1023-EZ, or 1024 (as applicable) or by having the parent organization submit a group exemption application to the IRS.
5. Recordkeeping, Reporting, and Inspection
It is essential that the parent organization have adequate oversight of the chapters so that it can fix any problems or revoke chapter status before the problems turn into public scandals. At a minimum, the chapter is generally required to issue an annual report to the parent organization, keep adequate financial and corporate records, and allow the parent organization to inspect its records.
6. Fees and Dues
Fees and dues paid by the chapter to the parent organization can be structured in various ways, including flat annual or monthly payments, a percentage of money raised, payments for a la carte services provided by the parent organization, or any combination thereof. This revenue is essential for the parent organization, as administration of the chapter relationship usually requires significant outlays of funds and staff time.
7. Obligations of the Parent Organization
A chapter will not be an effective representative unless it sees value in aligning itself with the parent organization. The parent organization should set forth in detail the assistance it will provide to the chapter. This might include administrative assistance, insurance and other benefits, fundraising help, training, and more.
8. Revocation and Modification of Chapter Status
The parent organization’s most crucial protection is its right to revoke the chapter’s affiliation or otherwise modify the chapter’s role (e.g. by forcing a merger of two or more chapters from different territories). Revocation is sometimes subject to a notice period or dispute resolution procedures. A revoked chapter must cease all use of the parent organization’s trademarks, including by amending its corporate documents, if necessary.
Written by Benjamin Takis, and originally published at www.asaecenter.org. Copyright 2015, ASAE: The Center for Association Leadership, Washington, DC.