Another Way To Understand Nonprofit Entities

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I field lots of questions about entity structures.  But without fail, I start to run through the options and watch the questioner’s soul slowly die. Eyes glaze. Mouthes fall open. Stay with me!  I’ve lost them.

Now, I’m taking a different approach. By pairing each entity with a cartoon character. Because what’s more relatable than cartoon characters? Nothing, that’s what.  And while talk of S designations may induce drowsiness, I dare you to doze off discussing Dora the Explorer.

For anyone making the decision, I hope you find this entertaining but helpful. Keep in mind, some states have structures that other’s don’t. For example, places like California have fancy offerings you won’t find anywhere else. Or the rules for an entity may differ from state to state. So to keep it simple, here are the 4 structures you can use to apply for a 501(c)(3) exemption. 

So What Entity Will You Have?

Mufasa (Corporations): Like Mufasa, everyone recognizes this stalwart. It has plenty of  history (case law) behind it, but the storyline is pretty straight forward. Not much you can do creatively here. So it stays pretty consistent everywhere it shows up, with “tinkering” discouraged.  As is always the case, with high stature comes formality.  The way this entity comes off, some would say the formalities are downright intimidating. But no one can argue it’s not credible and protective. When it comes to might corporations are seen as the Mufasa of the business kingdom; for good or for bad. 

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Dora the Explorer (Unincorporated Nonprofit Associations):
A new(er) kid on the block, unincorporated nonprofit associates (UNA’s) have been around for a little while but are still mysterious to many people. Much like the full contents of Dora’s backpack.  But forming a UNA is as simple as the map Dora uses. Get a group of people together, decide on a common purpose (or in Dora’s case to cross the Laughing Lake) and voila. You don’t even need formation documents in some states (though I recommend it). Which makes this no fuss alternative a good option for niche, local groups.

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Jiminy Cricket (Trusts):
 The rarity and rigidity of trusts reminds me of Jiminy Cricket. Easy to set up, they’re a pain to change or get rid of.  Making them perfect for someone who wants to keep an eye on how the organization conducts itself. These are so fussy, they even require a court get involved to make changes in some instances. Also formal, this entity you typically see families or estates use. Groups with high net worth who can afford to keep up with the management costs. Jiminy was full of rules and trusts are no different, with entire codes dedicated to their administration. Founders with paths they don’t want anyone to veer from love this option. 

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Minion(s) (Limited Liability Company):
People can’t get enough of this entity, it’s popping up everywhere. LLC’s are relatively new, but the appeal is in all the variety you can find in them. Much like the minions.  And don’t be deceived by how low key this entity is, it often comes with the same protections as a corporation.  Sometimes the novelty of LLC’s makes them about as easy to understand as “minion-speak.” But available in most places, the hope is the more we see them the better understood they become. The jury is still out on whether these are a good option for charitable organizations, outside a few specific circumstances.

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What to Remember

Outside of what entity to choose, I always get questions on the newer entities that have come to be in the last 3 or 4 years. But choosing a new entity is like trying to get an iPhone on release day. You’ve got to do a cost- benefit analysis to decide whether being first in line is really worth it.

The rationale behind many of the new entities is that the fluidity of business these days  requires more flexible, varied structures. This is great for PR. And might ultimately prove to be good for the organization. But with “new” comes bugs. Things that haven’t been worked out yet. What this translates to is confusion and legal fees when a situation arises. Because the entity is new, it takes a little digging to figure out what should happen. I’m starting to see this on the LLC front.  Just keep this in mind when making the “pro/cons” chart.

Why Does The Entity Matter Again?

The time spent deciding on an entity structure should be substantive. Not something you decide over pizza pockets and a movie.  

Your entity decision will mold tax exposure (or savings). The liability of your board and management. The types of transactions the organization can enter. Whether the organization can get credit on its own.  The administrative costs of the organization. The list goes on. So be deliberative, look over everything and treat this as one of the most important decisions you’ll make. 

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