Nonprofit organizations differ from for-profit organizations in many notable ways, including their purpose and how they are owned. While there may be owners or shareholders of for-profit businesses, nonprofit organizations are not technically owned by anyone. They are founded to create a public good and governed by a board of directors or trustees who are accountable to state and federal authorities to ensure the nonprofit operates in a legal manner and for the purposes the organization outlined when it was formed. Nonetheless, the time may come when a nonprofit organization wants to transfer control or put a new leader in place who can envision a different future for the organization. For these reasons, Mission Counsel has prepared the following guide to taking over a nonprofit organization to help stakeholders better understand this process and anticipate potential issues. If you are interested in taking over a nonprofit organization, consider contacting the experienced nonprofit attorneys at Mission Counsel at (816) 368-1181. We have assisted with several leadership transitions at nonprofits and would be happy to assist with yours.
The Cost to Take Over a Nonprofit Organization
Before making the decision to takeover a nonprofit organization, it is important to consider the costs to do so. The nonprofit may have some assets that can help ease the transition. However, considerable costs may be involved in changing the nonprofit's name, marketing materials, digital assets, and overall branding. New donors may need to be identified and vetted. The new board may want to seek legal counsel before making an offer, and these additional legal fees will also need to be considered in the overall costs to take over a nonprofit organization.
Amend Articles and Bylaws
When one nonprofit organization takes over another, it may be necessary to amend the articles of incorporation unless the nonprofit organization being taken over was formed for the exact same purpose. Additionally, if the entity does not have the same governance structure the new board wants to put in place, the entity's bylaws will need to be amended. These changes will require official filings and the payment of a filing fee. Copies of the new governing documents may need to be provided to the Internal Revenue Service.
The bylaws provide a useful framework for how the organization should be managed, so special care should go into creating them. Unless the bylaws say otherwise, the board of directors generally has the power to amend or repeal bylaws. The bylaws may contain information about holding meetings, electing directors, appointing officers, and handling other formalities that come along with managing a nonprofit organization.
Report Changes to Exemption Status to the IRS
Most nonprofits secure 501(c)(3) exemption status from the Internal Revenue Service. Section 501(c)(3) of the Internal Revenue Code allows for the exemption of nonprofit organizations when they are organized and operated exclusively for exempt purposes, such as for charitable, educational, scientific, or literary purposes. However, if the new nonprofit organization has different intended programs, beneficiaries, or sources of support than the existing nonprofit organization, the nonprofit organization will need to report these changes to the IRS.
Typically, these changes are reported on Form 990. However, major changes may need to be reported through a formal letter to the IRS. This letter should clearly indicate the changes that are being made and request a formal confirmation of the entity's tax-exempt status. If there is a change in public charity status, the nonprofit organization will need to report this change on Form 8940 and pay a user fee.
How to Approach a Takeover
After recognizing the legal, financial, and practical logistics involved in taking over a nonprofit organization, it is important for stakeholders to consider the cultural implications. Nonprofits often owe much of their success to their culture and reputation. This means that a nonprofit organization cannot typically sweep in, plant a new board of directors, and consider the transition complete. Instead, it may take finesse and care to successfully go through this transition. Here is a guide to taking over a nonprofit organization in a respectful and proactive manner:
Make the Announcement
Once the nonprofit organization has made the decision to complete the takeover, be honest with the organization. Explain that you are there to listen and your objective to run the organization in a way that makes others feel good about their work and want to continue contributing. The new leader can discuss their background, connection to the mission, and motivations.
Conduct One-on-One Meetings
One of the best ways to get to know the existing team better is to meet with each of them separately. This gives the new leadership the opportunity to learn about their unique stories and experiences. Then, any implemented change can be made based of these individual insights. The new leader can ask them what they like about the organization, why they began working there, and what changes they would like to see
Talk to the Whole Group
Once all one-on-one meetings have been completed, the leader can then have a group session in which they share insights they have gleaned from the process. The leader might ask for additional written information about the changes they would like to implement so the leader can include this information in the report they make to the board. This will also help the team members feel like they are an integral part of influencing change within the organization.
Present to the Board
Next, the leader will condense the information they gathered from the rest of the team and present it to the board. This report should discuss some of the emotions surrounding the transition, as well as the overall culture within the nonprofit organization. They can also address any challenges or areas of concern. After receiving direction from the board, the leader can prioritize issues and follow up with the team.
Contact Mission Counsel for Help with Your Nonprofit Organization
After reviewing this guide to taking over a nonprofit organization, you may realize how complex process can be. If you would like assistance with this process, consider contacting the experienced nonprofit attorneys at Mission Council at (816) 368-1181 to ensure your legal and financial rights remain protected.