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Multicorporate Structuring Basics for Nonprofit Leaders

Innovative nonprofit leaders frequently leverage so-called “multicorporate structures” to achieve multiple beneficial objectives. May nonprofit corporations do so, such as through forming subsidiaries? If so, when, and why? What are the liability and tax implications? This article describes legal aspects of nonprofit multicorporate structuring generally, then answers each of these questions in turn.


Simply put, a multicorporate structure is a legal relationship between a nonprofit and one or more additional entities, for which the nonprofit may or may not be a “parent” of one or more “subsidiary” entities. A subsidiary is analogous to a corporate child of the nonprofit parent, with the parent exercising control through various governance mechanisms. The subsidiary may be a corporation or LLC as well as taxable or non-taxable. Other multicorporate structures may involve lateral relationships, but this article focuses on the parent-subsidiary arrangement.


Perhaps the most common rationale for forming a subsidiary is to silo, or separate, legal risk related to one entity’s assets (the parent) from another entity (the subsidiary). By putting risk-related activities within one entity (essentially any activity involving potential personal injury), and valuable assets in a separate legal entity, a putative plaintiff against the first entity should not be able to reach valuable assets owned by the latter entity.

Many other reasons may warrant developing a multicorporate structure. For example, an established nonprofit may seek to develop a separate endowment entity for long-term stability and major gift campaigns.[1] In addition, nonprofits often develop new organizations for specific programs now extending beyond their original mission – and perhaps to better attract potential donors, to increase program engagement, or to provide distinctive branding. Still other nonprofits may determine that a new Section 501(c)(4) social welfare nonprofit provides a helpful tool for engaging in significant lobbying and other political activity.[2]


Our law firm’s nonprofit corporate clients frequently form additional nonprofit subsidiary corporations, best accomplished through initial leadership planning, careful attention to related tax aspects, development of new leaders and other practical considerations, and then implementation.

With a basic parent-subsidiary structure, the parent governs or controls the subsidiary through corporate bylaws reflecting the power to appoint and remove directors of the subsidiary, to approve any amendments of corporate governance documents, and other control mechanisms. Additionally, the subsidiary entity’s corporate purpose statement may identify exempt activities in furtherance of the parent’s purposes.[3] The subsidiary may qualify itself for public charity status or establish a “supporting organization” tax-exemption arrangement, whereby one entity’s public support qualification is imputed to the other organization.[4]

Another common parent-subsidiary arrangement is through the limited liability company, or LLC. LLCs can be extremely advantageous because they combine characteristics of corporations, partnerships, and sole proprietorships. More specifically, an LLC protects its owners (called “members” in legal parlance, and whether corporate or individual) from liability as with corporate separation. An LLC additionally benefits from multiple taxation options, as addressed below.

Sometimes nonprofit multicorporate structuring involves the creation of a for-profit subsidiary to the nonprofit parent. In the case of a business corporation subsidiary, the parent controls the subsidiary by owning it, controlling the subsidiary’s leadership, retaining certain approval rights, and numerous other control mechanisms. Taxable subsidiaries may generally engage in any lawful purpose without jeopardizing the parent’s tax-exempt status, so long as the two entities remain sufficiently independent. Such a subsidiary could be a corporation or an LLC, but an LLC typically provides preferable flexibility.


To pursue the goal of mitigating risk for a nonprofit entity, its leaders should decide what type of additional structure is best in light of its nonprofit’s particular programs, activities, and overall purpose. Of key importance, a nonprofit corporation may be sued and may be held liable for damages that would put that entity’s assets within the reach of a creditor. Putting that entity’s assets into another entity thus makes sense, such as its real estate, significant savings, and other valuable property. So, if a nonprofit is seeking to operate a specific program that has heightened risk – like a summer camp for children – its leaders may decide to form a new entity for operating that program within which such potential liability is limited (or vice versa).

Some very important ownership and control distinctions consequently arise within this risk management context. If the parent forms an LLC subsidiary, and the organizations observe corporate formalities discussed below, the parent entity’s liability risk for the subsidiary’s activities should be non-existent – or at least quite low. Notably, however, the LLC subsidiary’s assets could be at risk in the collection of a parent’s debt because the parent’s assets include the subsidiary entity itself. Conversely, however, if the parent forms a subsidiary nonprofit corporation, creditors of a nonprofit parent should not have access to the subsidiary nonprofit corporation’s assets because the parent nonprofit cannot legally “own” the subsidiary nonprofit corporation. The parent nonprofit only controls the subsidiary (per the subsidiary bylaws), which should be legally insufficient to give rise to the parent’s liability for the subsidiary’s financial obligations.

Regardless of the actual ownership and control arrangements, corporate formalities must be properly observed for optimal risk management protection. In other words, the subsidiary entity should not merely be a shell that fails to actually operate on its own. More specifically, both parent and subsidiary should reflect the following corporate attributes:

    • be sufficiently capitalized;
    • have their own governing rules (bylaws for nonprofits, operating agreements for LLCs);
    • have clearly identified leadership (directors and officers for nonprofits, one or more managers for LLCs);
    • maintain separate bank accounts;
    • conduct their own operational aspects;
    • enter into contracts and other agreements in their own entity names;
    • take other corporate action as legally required (board meetings or unanimous consent for nonprofits, through managers and/or members for LLCs per operating agreements); and
    • maintain corporate records.

Additionally, to the extent that the parent and the LLC share administrative, employment, or other services with one another, appropriate agreements should be in place consistent with the above list.

If the forgoing formalities are not followed, then a court may well reject the subsidiary’s separate identity and impose liability on the parent. The otherwise available legal protection for either entity thus may fail. The underlying legal doctrine for such imputed liability is known as “piercing of the corporate veil.” While such a result is extremely rare for nonprofits, and typically only occurs with respect to highly egregious personal misconduct, it nevertheless remains possible.


Just as multicorporate structures can be used to safeguard liability concerns, multicorporate structures can be used to optimize tax-related strategies. For example, if a nonprofit utilizes an LLC as its subsidiary, the default tax treatment for the LLC will be “disregarded.” That is, the LLC’s separate entity status will be disregarded for purposes of reporting its revenues and expenses, and instead, such revenues and expenses will be reported on the nonprofit corporate parent’s IRS Form 990 information return. As a result, the LLC’s revenue should benefit from the same tax-exempt treatment as the nonprofit parent’s revenues – i.e., nontaxable.

Other tax options are available too for innovative nonprofits. For example, a tax-exempt nonprofit may utilize a taxable subsidiary to avoid too much commercial activity, thereby putting the nonprofit’s exemption at risk. IRS regulations state that a nonprofit must be operated exclusively for exempt purposes. The IRS defines “exclusively” as “primarily.” If more than an insubstantial part of a nonprofit’s activities is devoted to nonexempt purposes, then the nonprofit may fail the operational test and lose its tax-exempt status.[5]

A multicorporate structure may help alleviate this adverse tax outcome. The nonprofit may locate significant commercial activities in a taxable for-profit subsidiary. The subsidiary would then owe taxes on the net income derived from these activities, with the ability to pay any post-tax revenue to the parent nonprofit. The post-tax revenue to the nonprofit should be exempt from taxation, based on applicable unrelated business income tax rules for passive revenues. In this situation, the subsidiary should file IRS Form 8832, electing to be taxed as a C corporation. This tax filing informs the IRS that the subsidiary entity will report its revenues and expenses as a separate taxable entity. The subsidiary then will owe taxes on its net revenues (i.e., income minus qualifying expenses) at the applicable business corporate tax rate, with its own annual tax return.


Is a multicorporate structure good for your nonprofit? The answer depends on multiple factors including the nonprofit’s current activities, goals for future development, potential opportunities for program expansion, donor considerations, and of course risk management. Once that question is answered thoughtfully and affirmatively, developing a multicorporate structure with these considerations in mind should bode well for effectiveness and flourishing.

By: Wagenmaker & Oberly, LLC.

[1] For related guidance, please see Wagenmaker & Oberly law firm’s blog article on endowments.

[2] For related guidance, please see Wagenmaker & Oberly law firm’s blog articles on lobbying and political campaign restrictions.

[3] For guidance on corporate purpose statements, please see Wagenmaker & Oberly law firm’s blog here.

[4] For guidance on supporting organizations, please see Wagenmaker & Oberly law firm’s blog article here. Other arrangements could include “integrated auxiliary” status for religious organizations as well as group tax exemption, as further addressed in Wagenmaker & Oberly law firm’s blog article here.

[5] For more information about commerciality and nonprofits, please see Wagenmaker & Oberly firm’s blog article here. Note too that a nonprofit may be subject to unrelated business income taxation, whether it arises within such entity or through tax reporting of its disregarded related LLC. For related guidance, please see Wagenmaker & Oberly law firm’s blog article on UBIT Basics.

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