Affiliated Organizations: Sharing Resources

In a previous post (“Affiliated Organizations: Sharing Employees“), we examined how an affiliated 501(c)(3) organization and 501(c)(4) social welfare organization (or 501(c)(6) business league) can “share” employees. Such affiliations provide an ability to coordinate activities and share resources to more effectively and efficiently further a common goal. But, as we noted, the affiliated organizations must maintain appropriate separation to mitigate against the risks of (1) liability ascending from one organization to the other and (2) attribution of one organization’s activities to the other. The 501(c)(3) organization must be particularly careful to ensure political intervention activities of an affiliated organization are not attributed to the 501(c)(3) organization due to its control of, or provision of resources to, its affiliate. Accordingly, the 501(c)(3) organization should generally make sure that it pays only its fair share for shared resources if such resources may be used by its affiliate to engage in or support political intervention activities.

Affiliated Organizations – Sharing Space

There are a few options and traps related to affiliated organizations sharing common facilities or space. This post will review a couple options using the example of an established 501(c)(3) organization (“Charity”) with a new 501(c)(4) affiliate (“Action Fund”):

  1. Charity leases/subleases space to Action Fund.
  2. Charity, pursuant to a contract to provide services to Action Fund, carries out the operation of Action Fund, thereby negating the need for Action Fund to lease/sublease space from Charity.

Under option 1, Charity will want to receive from Action Fund no less than the fair share of costs associated with the space. If it’s a space that is leased by Charity, Charity will want to sublease to Action Fund for the space Action Fund is using. For example, if Charity uses 80% of the space and Action Fund uses 20% of the space, then Action Fund should pay 20% of the rent to Charity under this formula.

But the analysis is usually more complicated because there may be some exclusively used space and some commonly used space. For example, Charity may exclusively use 50% of the space, Action Fund may exclusively use 10% of the space, and both organizations may use 40% of the space. One possibly reasonable allocation method would be to charge Action Fund for 10% of the rent (for the exclusive space) plus half of the 40% of the rent (for the common space). In such case, Action Fund would be responsible for 30% of the rent. But there may be other factors, including actual use of the common space, that might demand a different allocation method.

If Charity and Action Fund have all common employees and other workers who use the space and none of the space is exclusive to either organization, the allocation method may be based on the time the employees and workers spend working for Charity and the time they spend for Action Fund. For example, if the employees and other workers spend 75% of their time working for Charity and 25% of their time working for Action Fund, Action Fund should pay 25% of the rent to Charity under this formula.

Regardless of the allocation formula, Charity will want to ensure that it is not violating its own lease if it is subleasing space to Action Fund. In addition, the parties will want to document the sublease in an appropriate agreement. If Charity owns the facilities and is leasing it out to Action Fund, the parties should enter into an appropriate lease agreement. In such case, Charity may want to charge Action Fund based on a formula that uses a fair market lease value.

Under option 2, Charity may remain the only occupant of the facility or space. Accordingly, a lease or sublease may not be necessary. However, Charity may want to use the same allocation methods described above in an independent contractor agreement to help assure it is at least recovering the costs of its resources used for the benefit of Action Fund. For example, if Charity is contracted by Action Fund to provide administrative services, Charity should charge at least the cost of its employees and other workers, including the amount of their benefits. And it should charge at least the cost of the space occupied by its employees and other workers and the cost of other resources used in performing services to Action Fund. Alternatively, all such costs might be factored into the equation if Charity charges Action Fund a fair market rate for the services (rather than a cost-allocation rate).

Sharing Non-Employee-Related Overhead

If the affiliated organizations share common facilities or space, they may also be sharing the benefits of utilities and other overhead-related items associated with the space (collectively, “Overhead”). Again, Charity will want to ensure that it recoups at least the cost of Overhead attributable to Action Fund. This may be calculated by using one of the ratios described above. For example, if, collectively, Charity and Action Fund employees and other workers spend 75% of their time working for Charity and 25% of their time working for Action Fund, and the space is all used by both organizations, then a fair Overhead Ratio for allocating costs to Action Fund may be 25%. But individual facts and circumstances might mean another formula should be used.

The overhead items to be charged to Action Fund may include: utilities; storage; equipment rental and maintenance; depreciation of equipment and furniture owned by Charity; premiums for liability and other insurance; general office supplies; general telephone service (if shared); other telecommunications equipment; computer and word processing supplies; local taxes; software license fees; subscriptions and other publications; internet access costs; and legal expenses.

Where it’s practical, certain costs may be more accurately divided by having each organization track and pay for its own use rather than by using a single Overhead Ratio. Many photocopiers allow for usage tracking. A consultant used by both organizations can be hired separately by each. And  business trips and related travel expenses are generally best allocated on a case-by-case basis, factoring in the purposes and activities associated with each particular trip.

Affiliated Organizations – Resource Sharing Agreements

Affiliated organizations will often enter into resource sharing agreements to memorialize their mutual understandings of how certain resources are to be shared. Sharing resources without a formal written agreement may heighten the risks of ascending liability from one organization to the other and attribution of the 501(c)(4) organization’s activities to the 501(c)(3) organization, which could jeopardize the latter’s tax-exempt status.

What to include in a resource sharing agreement will of course vary depending on what is to be shared and how the costs will be appropriately allocated. To the extent a cost allocation formula is used, the parties must be careful to assess how it may apply to each shared cost area and whether any modifications may be required to individual shared cost areas.

If one organization is to be contracted by the other to provide services, the parties may enter into  a separate independent contractor agreement, though it’s not uncommon to see both the independent contractor agreement and resource sharing agreement combined. In such case, the parties must be clear in accurately describing the relationship between the parties. Otherwise, there may be a lack of clarity as to whether the individual employees are employees of just one organization or employees of both.

If one organization is to share the leased space of the other, the parties may need to enter into a separate sublease agreement, as described above. This will typically require notice or approval of the landlord. With such sublease, there will be related considerations, including insurance.

The resource sharing agreement may also cover other specific areas in which the affiliated organizations are collaborating or coordinating. They may share a name for which one has trademark/servicemark rights. They may operate a shared website or social media account. They may produce joint publications. They may have an arrangement through which one organization produces materials that are used by the other organization. They may co-sponsor events. And they may fundraise together. These activities raise more specific issues that will be addressed in future posts. And if you’re in Washington DC on Wednesday, April 25, I’ll be speaking on these issues at the 2018 Georgetown Law Nonprofit Governance Conference – Charitable Advocacy.

 

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