Innovative Non-Profit Companies

Starting With 501(c)(3) holding companies?

 

For too long we have thought about for-profit and nonprofit as a strict dichotomy. While there is a clear delineation with the IRS, the difference is really just a tax distinction. What we are seeing develop in the landscape is a blurring of what we have traditionally thought of within these two distinct camps of entities. We are seeing for profit companies becoming increasingly concerned with things like purpose and impact while aggressively marketing their social and environmental benefits. Meanwhile nonprofits are slowly waking up to the fact that they might not just be able to pan-handle their way to where they hope to go. Businesses are having to learn to be good neighbors and nonprofits are having to learn how to make money.

This is why we have embraced the transition to a hybrid model that has the ability to accommodate missional and altruistic works that bless a city as well as leverage commercial enterprises to generate revenue for our cause. An aggressive business model will enable us to hire top talent and also market ourselves in the marketplace. All net income, both from sales and donors, will be used to further our mission and social impact.

 

By standing together each entity and enterprise can contribute a portion of the overall costs for the administrative overhead needed to maintain accounts and good legal standing with state and federal filings. Our intent is to create a collaborative ecosystem in which enterprises intended to build the church, effect social change, create jobs, or further the cause of justice will find the support they need as well as an onramp that bypasses many of the roadblocks for small start-ups.

 

Reasons for planting with this model

Efficacy:

From a purely strategic standpoint, top heavy organizations require massive overhead, large and highly qualified staff, unreasonable facilities, and are easy centralized targets to take down. Think Elephants. In contrast, a grassroots ground up organization holds simplicity and sustainability at its core, seeks to multiply small and contextualized impact, and works not to build its organization, but rather to empower and expand it’s organisms. Think Rabbits.

In this model, the organization serves the movement.

 

 

Startup Incubation:

Servant leadership is a pillar in a true grassroots movement. When we start with a “leading from the bottom” mentality, this model of organization makes perfect sense. Offering services such as branding, admin, finance, business acceleration, missional innovation, media, and high level coaching, counseling and training, as part of the core leadership team is a proven method of empowering and releasing impactful initiatives throughout a city that are interconnected in a common mission

 

Decentralization:

Bottom up leadership structure necessitates decentralization which in turn feeds a polycentric leadership model. That is, a communal effort that hinges on the various gifts and skill sets and does not remain dependent on a single leader or single vision. It is always seeking to create interdependence and interconnected autonomy

 

Reasons from a business/market standpoint

Optics:

If the enterprise is owned by an individual (or a group of individuals), then all profits and benefits come back to those individuals and, if the entity is being leveraged for the common good of the city, it creates a potential for (or at least the appearance of) a conflict of interest.

Ethics:

While there is nothing unethical about owning a company, if that company is aiming at hybrid/ non-profit social impact, then it is best to have the company owned by a non-profit holding company. This both prevents temptations toward and accusations of corruption.

Proclamation:

We are trying to demonstrate a new and communal effort in our cities. By holding our enterprises in common we demonstrate that we all take ownership of the needs of our city and the work to be done there while the actual equity and ownership is held by a public charity. We work toward equity in all things while taking equity in none of the entities.

Reasons for creating Subsidiaries

Tax Exemption:

If the new entity is a wholly owned, single member LLC then it inherits the 501c3 tax exemption status of its parent company.

  

Liability:

When an organization has multiple programs, locations, ventures, etc it is best to break them apart from one another as stand alone subsidiaries of the Parent/Holding Company so that a lawsuit against one doesn’t affect the others. Picture a hospital network that runs several locations and clinics. Each of the clinics will typically be their own legal entity so that a problem (lawsuit/defaulted debt) doesn’t open the other clinics or the parent company up to vulnerability. (It is extremely important that the subsidiaries be set up with their own pay roll, liability insurance, bank accounts, staffing, etc so that it cannot be claimed that they are actually a single entity which creates the possibility of “piercing the corporate veil”

 

Independence:

Ensure that a particular project or activity will be conducted and governed independently, without too much involvement or interference from the parent organization. This may stem from branding strategy to ensure that the public perceives the project or activity as unbiased by the parent organization. Or the parent organization may simply believe that the new project or activity would be more effectively governed by its own Board of Directors, which will be less influenced by the parent organization’s other priorities.

 

Interdependence:

Provides the legal and practical opportunities for all entities from within the holding company to share certain resources, vision and personnel in their effort to make a unified impact in their context.

 

Accountability vs. Power:

In a freedom-loving culture, being a “subsidiary” of any kind reeks of lost privilege and status.

Although it might seem otherwise, the subsidiary structure is more about accountability and protection than it is about power. In a corporate sense, power often refers to the ability of a person such as a CEO or a department head to compel certain behavior on the part of those who report to that person. This is the classic power imbalance that is usually muted but unmistakably underlies classic relationships in a corporation: the boss is in charge.

In a parent/subsidiary model the word “parent” refers to the corporate entity that is in charge of the subsidiaries. It might also be called a holding company or a management company. There is a power imbalance between the two entities, but it is nothing like that between boss and employee. In fact, for those employed in a subsidiary it is not unusual for the parent company to seem more like it’s located somewhere else all together. The parent is a recognizable organization but employees of each corporation may well regard each other as though they are simply citizens of moderately allied countries or, for our purposes, both distinct members of the Brave City.

 

The reason for this apparent estrangement is that it is a by-product of a major advantage of subsidiaries — they represent boundaries. This is one of the most compelling reasons for subsidiaries, because corporate boundaries represent a kind of firewall between the parent corporation and outsiders who might be intent on suing a subsidiary. Rarely does an aggrieved outside party succeed in attacking the parent company by first trying to go through a subsidiary. Lawyers refer to this as piercing the corporate veil and it is rarely accomplished because each corporation is expected to stand on its own in all legal proceedings.

This isn’t a corporate version of dodgeball. Different types of services have different risk patterns, and there could be dramatically negative economic consequences of treating all services in a parent-subsidiary environment alike. For example, major hospitals that co-exist in a complicated multi-corporate structure will virtually always run nursing homes or home care services as subsidiaries. This is because a successful lawsuit against a hospital could potentially bankrupt a nursing home if it were part of the same subsidiary.


 

Brand management:

Well-run nonprofits know how to manage their brand(s). While it is possible to manage a brand through many different departments — even through many different corporations — it is much easier if that brand has implicit boundaries. Brand management is a top-down function, which is why parent companies will not usually meddle in the promotion of a successful subsidiary’s brand.

 

The Top Line, not the Bottom Line:

Many nonprofit board members and some executives feel that a successful merger should save money. This is a worthy goal, but subsidiary corporations still need CEOs, audits, executive staff, and other expenses. Skeptics will ask why a nonprofit should do something like this if it doesn’t save money.

 

The answer is that, while the bottom line is important, in many sectors of the nonprofit field today, the top line – revenue – is even more important. Hospitals began creating numerous parent-subsidiary models two and even three decades ago. Arts groups are doing a similar version of the same thing in many locations.

Integrated systems of care almost always have more power with funders – who themselves are often enlarging their scope as well — than individual organizations do.

When parent-subsidiary models are used in these situations ‘savings’ may or may not be realized. But what often does happen is that the newly enlarged organizations, simply put, increase their power at the bargaining table.

 

This kind of scaling up is fairly rare in the nonprofit world, which is why subsidiary corporations are still rarely found outside of hospitals, universities, research institutes and other large entities. But forces like managed care, shifting risk management requirements and health care reform are providing fertile ground for more parent-subsidiary relationships.

 

The Organization Serves The Movement

 

Think SCLC and the Civil Rights Movement 

In 1957 an organization was formed out of the Montgomery Bus Boycott called the Southern Christian Leadership Conference. The SCLC was at the forefront along with many other orgs nationwide that undergirded one of the most notable movements in American History. 

 

The prevailing model of church and church leadership is the developing of an organization that sits a top a movement. The role of the movement is to serve the organization. We must build the organization, brand the organization, join the organization and draw everything back to the organization. This is a flawed model and must be flipped on it’s head. 

 

Just as the SCLC came under the Civil Rights Movement, we have to design organizations that serve the movement of bringing the Kingdom of heaven to earth. Laying down the need to make our orgs known, to measure and compare to others, or to seek to build them up for validation. We are one movement, building Kingdom Ecosystems in many contexts. In this model, we can flip the order on its head, to where our 501c3 holding companies only serve as they are needed. Whether it’s receiving funds, or launching LLC’s, providing certain staff positions, or specific needed legalities. It’s the movement that must be elevated, not the organizations. 



 

Think Fight Club

In a similar way, think Fight Club. The key distinction here is about what the world sees. Do they see a collective of Emcees united under one banner or do they see a ton of different initiatives, projects, or expressions that may or may not actually have anything to do with one another. Remember, “The first rule of Fight Club is, you don’t talk about Fight Club.” The club still grew as the the rule was broken here and there but the first and second rule were both, keep it to yourself. The central is not important. It isn’t central. Fight Club is the collective that is behind any individual expression of the movement but each expression is representative of the ethos on it’s own. It doesn’t need to be branded and it doesn't need to feel like it must bring acclaim back to some mothership. In fact, in Fight Club that’s forbidden. What matters is the fight itself. The movement. The work. The first rule is, don’t talk about it and the final rule is, “If this is your first night at Fight Club, you have to fight.” Don’t talk about it, be about it. 

 

Practical Considerations

Board Integration

The parent company’s board will likely become the “sole corporate member” of the new subsidiary, giving it official control of the entity. This creates a legal tie in lieu of a “purchase” which for-profit corporations routinely carry out. In practical terms, however, this too is an accountability mechanism, not a control technique.

In practice, wise parent companies will seek board integration. Ideally the subsidiary board of directors will contribute at least one or two board members to the parent company board. This is important symbolically and it also helps build cultural compatibility. Note that this individual or individuals abruptly must do “double-duty” between the board of origin and the new parent board, but it is nearly inconceivable to create a smooth integration of parent and subsidiary any other way.

 

Treatment of Brand Name:

In most cases this element will be an early topic of negotiations and may be especially important for the smaller organization. Brand name philosophy – and the systems that support it – should be an early topic of discussion unless the future subsidiary has a damaged brand or the parent has a far stronger one.

 

CEO Role in New Entity:

For obvious reasons this is both a symbolic and very real indicator. While most of a subsidiary’s employees are unlikely to have intense, sustained contact with the parent company, the CEO should be deeply involved in these relations. Ideally the subsidiary CEO’s role will be articulated and important.

 

Same Funder Positioning

 Another key indicator is the new subsidiary’s role in future relationships with a shared funder. The parent company is likely to take the lead in these negotiations, so the most important cue will be how the subsidiary CEO’s role changes. Note that this and the previous indicator is the only instance in which staff of the parent and the subsidiary play the classic boss/subordinate roles.

 

Money Decisions

Relatively small, ordinary financial decisions might be largely unchanged by a subsidiary designation. But acquiring and using capital for things like buildings or specialized equipment are almost certain to change in some fashion. The decision-making process around major ex- penditures will often change, and some decisions will be made, or at least affirmed, at a higher level than before.

 

Subsidiary prerogatives

There is a whole category of what we would call subsidiary prerogatives that could change – or remain untouched. These are things such as purchasing decisions, marketing, fundraising and development activities, and personnel management practices. The future direction of these kinds of items is a good potential clue about future relations between the two entities. Subsidiary corporations are a valid and effective way of managing risks, distinguishing brands and other assets, and approaching neighbors, city officials, donors, clients, consumers, etc in different yet coordinated ways.