A nonprofit corporation is a business with assets and liabilities just like any other business.\u00a0 When a nonprofit runs into financial trouble, its creditors usually do the same thing as creditors of a for-profit business:\u00a0 they seek to liquidate the assets to satisfy as much of their debts as possible.\u00a0 There can be another wrinkle for nonprofits:\u00a0 sometimes, a separate charitable foundation provides financial support to the nonprofit.\u00a0 In such circumstances, creditors sometimes seek to satisfy their debts out of the assets of the supporting foundation.<\/p>\n
For example, some supporting foundations are created and exist solely to support one specific nonprofit corporation.\u00a0 Herein lies a potential problem.\u00a0 If the nonprofit runs into financial trouble, a lack of separation between the charitable foundation and the nonprofit could result in the foundation being on the hook for the nonprofit\u2019s debts.\u00a0 It is in both the foundation\u2019s and the nonprofit\u2019s best interests to take steps to limit the possibility of the nonprofit\u2019s debts becoming the debts of the foundation (i.e.<\/em>, to preserve the assets for the desired charitable purpose).\u00a0 If the supporting foundation is organized properly, this risk can be minimized.<\/p>\n To prevent the financial difficulties of the nonprofit from infecting the charitable foundation, it is essential to implement and maintain appropriate separation between the two.\u00a0 Separation can be achieved through a variety of means.<\/p>\n First, consider appointing a different board of directors for the two entities.\u00a0 If the same board controls the foundation and the nonprofit, it creates the perception that they are effectively operating as one entity.<\/p>\n Second, consider designating a second beneficiary for the supporting foundation.\u00a0 If the foundation supports both Charity\u00a0A and Charity\u00a0B, and Charity\u00a0A encounters financial distress, the foundation could more persuasively argue that it is not merely an extension of Charity\u00a0A, but rather, an independent foundation with obligations to both charities.<\/p>\n Third, consider including a provision in the supporting foundation\u2019s bylaws that limits the nonprofit\u2019s access to the foundation\u2019s assets.\u00a0 Preventing the nonprofit from having unfettered access to the foundation\u2019s assets would strengthen the argument that the two are separate, independent entities.\u00a0 This can be achieved by different methods.\u00a0 The foundation\u2019s bylaws could provide that it would only distribute funds to the nonprofit at the foundation\u2019s discretion.\u00a0 Alternatively, the foundation\u2019s bylaws could provide that the nonprofit would receive a limited, specified amount of support each year, e.g.<\/em>, income earned on the foundation\u2019s assets without any access to principal.<\/p>\n Whether you are in the process of forming a nonprofit or modifying the bylaws and practices of one already in existence, implementing one or more of these strategizes may protect the supporting foundation\u2019s assets in the event that the nonprofit runs into financial trouble.\u00a0 However, nonprofits and their supporting foundations should evaluate the level of protection that is appropriate based on their specific circumstances.\u00a0 The need to protect the foundation\u2019s assets should be balanced with the increased administrative and operating costs of utilizing these practices.\u00a0 Nonetheless, for purposes of protecting the charitable assets of the supporting foundation in the circumstance of a financially troubled nonprofit, an ounce of prevention is worth a pound of cure.<\/p>\n","protected":false},"excerpt":{"rendered":" A nonprofit corporation is a business with assets and liabilities just like any other business.\u00a0 When a nonprofit runs into financial trouble, its creditors usually do the same thing as creditors of a for-profit business:\u00a0 they seek to liquidate the assets to…<\/p>\n","protected":false},"author":7,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[12,2],"tags":[59,60,58,5],"class_list":["post-114","post","type-post","status-publish","format-standard","hentry","category-bankruptcy-law","category-business-law","tag-bankruptcy-and-insolvency","tag-charitable-donations","tag-nonprofit","tag-rhode-island-business-law"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.apslaw.com\/its-your-business\/wp-json\/wp\/v2\/posts\/114","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.apslaw.com\/its-your-business\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.apslaw.com\/its-your-business\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.apslaw.com\/its-your-business\/wp-json\/wp\/v2\/users\/7"}],"replies":[{"embeddable":true,"href":"https:\/\/www.apslaw.com\/its-your-business\/wp-json\/wp\/v2\/comments?post=114"}],"version-history":[{"count":0,"href":"https:\/\/www.apslaw.com\/its-your-business\/wp-json\/wp\/v2\/posts\/114\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.apslaw.com\/its-your-business\/wp-json\/wp\/v2\/media?parent=114"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.apslaw.com\/its-your-business\/wp-json\/wp\/v2\/categories?post=114"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.apslaw.com\/its-your-business\/wp-json\/wp\/v2\/tags?post=114"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}