Desparately Need Some Help on a Transactional Assignment Forum

[Anonymous User]

Not even sure if this is allowed on here, but I'm in a significant jam here and panicking. I do 99% litigation. I have no idea why this partner gave me this assignment, but I've had a crazy week and now she is looking for a memo by the end of the day. The memo is basically a BA assignment: what type of entity should this company create (if any). The actual transactional documents are due by the end of the month.

In short, a nonprofit corporation was set up in a nearby city about 20 miles away. It is incorporated as a nonprofit corporation but I'm not sure of any 501(c)(3) paperwork (it's not in the file).

They now want to open a second location in my town and somebody else will be running it. But our client, who started the original corporation, wants to know how best to accomplish opening this second location. The client is convinced he needs to create some sort of entity to do this, and he is leaning towards establishing a franchise. Again, I don't do any transactional work so I don't understand why that makes any sense. I just don't understand why they don't set up another 501(c)(3), or hell, why they even need a new entity at all (I assume there's corporate liability reasons, but again, I haven't touched any of this stuff since the bar exam).

The client's main concerns are as follows:
(1) Wants control of the branding/website;
(2) Wants a ton of control over things (no alcohol, no religion, reporting requirements, grant approval, etc.);
(3) Essentially wants this to run the same way as his initial nonprofit corporation.

And that's basically it. Again, I think franchising this is insane given that it's a small 501(c)(3), and I hope I'm not off my rocker there. Any advice pointing me in the right direction would be great.

[Anonymous User]

It's actually surprising how many small "non-profits" don't file any paperwork, or don't file all of the necessary paperwork, especially for 501c3 status. Would the new location that's 20 miles away be in a different state from the original location?

If not, I don't understand why the client can't just pay someone a salary to run the new corporation, but keep it under the same umbrella of his initial NPO so it remains as part of the same entity (then he'd continue to have complete control).

[SFSpartan]

You're not crazy. For a small nonprofit, forming a separate 501(c)(3) is nonsensical in relation to the formation costs and paperwork that are required.

To the extent that finding defects in the original 501(c)(3)'s paperwork can help you add value for the client, you can look that information up on ProPublica: https://projects.propublica.org/nonprofits/. Most states also maintain directories of 990s (or whatever the particular state's equivalent of IRS form 990 is).

[Anonymous User]

I believe you're talking about "social franchising". The idea of franchising is to provide a turnkey operations system to new prospective franchisees, such that they can leverage the brand name, processes and experience of the franchisor/other franchisees and use that to be successful in the new "chapter" or location. With the information you've provided, consider the following:

-Determine whether to create a franchise concept or not (research social franchising, legal steps, pros/cons, etc.); have a good answer for this when you talk to client/the partner
-Determine the process to file a new non-profit entity in your state (usually a simple designation when filing an LLC) (this is a state process)
-Determine the process/requirements to qualify as a 501(c)(3) (this is an IRS application)
-Get all the necessary information/documents and have it ready to go
-Get in touch with client to determine what their goals are and whether this is necessary, or whether they can just expand on the operation/filings/tax status that they have

-The LLC for the new location will have a limited liability company agreement, and this can state all of the requirements/restrictions that the officers/new operators can perform. You can have it either controlled by a board (probably controlled by your client) or by the member (i.e. the parent company/your client). The franchise documents (which might have operations manuals, an employment handbook, licensing agreements, etc. (along with restrictive covenants and confidentiality provisions)) can contain a host of information that would cause the parent/your client to control the new chapter, etc. Filing for a new LLC/creating these docs vs. creating the franchise concept is not mutually exclusive, although you can probably just do a new LLC (probably simpler) without having to go the franchise route.

Don't have much time but hope this helps.

[Anonymous User]

Do some research, but being considered a franchise entails a lot of additional rules in many states, which a lot of companies try to avoid. I don't see how there's any benefit for the client to do more than just create a new LLC and have that owned by his parent company. He would have total control anyway, and may not even need a new 501c3 because the subsidiary could pass all profits etc. on to the parent anyway.

[dixiecupdrinking]

Nothing to add, just checking in on the most shockingly helpful thread in tls history