One major reason for the popular trend of brands utilizing Corporate Social Responsibility practices is that a halo effect can be produced – and it can be far-reaching.
By sponsoring or partnering with a good cause, such affiliation may generate a positive effect on the consumer by borrowing from the equity and goodwill of the partnered cause ultimately increasing purchase intent.
Tandem affiliates are a common structure employed by entrepreneurs who desire to achieve various business and philanthropic objectives.
Common rationales for a tandem affiliate structure include, but are not limited to, asset protection, strategic tax planning, the accomplishment of various competing goals falling outside of the allowable confines permitted of an exempt entity, achievement of legislative and lobbying activities, and serving differing segments of the population.
Tandem affiliate structures are often pursued by entrepreneurs who can maximize profits but also desire to achieve a philanthropic objective.
Often, for a philanthropic entrepreneur, a charity may not be the exclusive or optimal vehicle if the entrepreneur’s proposed activities fall outside the scope of those activities permitted by the Internal Revenue Code.
Further, even where permissibility of activities is not at issue, entrepreneurs may nonetheless consider housing certain activities in a for-profit entity that can, unlike a charitable vehicle, raise money through offering equity, options, and other similar securities.
With correct planning and structuring, an entrepreneur can pursue a tandem affiliate structure, forming both a nonprofit charity and a for-profit business that operate in a complementary fashion to pursue the founder’s goals and objectives. These structures are quite common and can be extremely beneficial to both the for-profit and nonprofit counterparts.
Regardless of the rationale for a tandem affiliate structure, corporate separateness must be maintained. State corporate laws and federal tax laws prohibit any unfair benefit to a shareholder or related for-profit by the for-profit insider relationship to the nonprofit.
The risk of any private inurement resulting in an excess benefit to the for-profit can be minimized significantly where the benefit flows only to the nonprofit and there is no consideration extending to the for-profit counterpart. In any event, the terms of the relationship between the two counterparts must be reasonable and provide for structural safeguards to prevent any private benefit to the for-profit or its owners.
Structure safeguards include independent boards, separate management, third-party valuation of significant contracts, and high-value transactions and escape clauses in joint agreements should the charitable faction of the tandem structure conclude that any aspect of the arrangement is unfair, improper, unethical or might jeopardize its Tax exempt status.
Frequently in a tandem affiliate structure, it makes sense from an economic and administrative standpoint for both counterparts to share in the cost of overhead and resources. This practice is legal so long as the parties ensure that there is no unfair benefit being attributed to the for-profit.
It is advised that the parties entered into a written Shared Services Agreement whereby the obligations of each party are outlined and there is an articulated framework for allocating costs between them to ensure that the nonprofit is never subsidizing the for-profit or overpaying for goods and services. Costs that properly belong to the for-profit are paid by the for-profit, and costs that properly belong to the nonprofit are paid by the nonprofit.
Other structural safeguards should be considered regarding the governance of the affiliated entities. It is advised that at least a majority of directors are not interlocking to ensure corporate separateness and independence are maintained.
Further, any interlocking directorate should recuse themselves from all decisions regarding contemplated transactions involving the affiliated entities, as a conflict of interest would present itself.
In summary, tandem affiliate structures are legal, mutually beneficial, and quite common but must be carefully structured and maintained to ensure protection for both entities.
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