Corporate houseguests: knowing your own identity or entity.

The one-program, one-corporation, one-site method of structuring the nonprofit organization had been the norm. Today, as demands and opportunities for the nonprofit sector multiply, your organization might at some point need to consider creating a second or even a third corporate structure to carry out your mission safely and effectively.

While the number of options might seem limited to a handful of structures, the strengths and nuances that arise from all the possible combinations can make the real range of choice seem infinite. Legal considerations aside, the major choices all carry distinct implications for management.

At the very least, additional structures can be like bothersome houseguests: high maintenance and likely to stick around for a long time.

Here are some ways to examine the question from a management viewpoint to make sure that you have the homework done first.

First, you must distinguish between program structure and corporate structure. For the purpose of this column only corporate structure will be discussed, not the way that individual programs offered by an organization choose to structure themselves.

Why would an organization create another corporate structure to go along with what they already have? Hint: it's not size alone.

There is nothing to stop any nonprofit from growing to a truly monumental size without ever creating a second entity. In fact, a few of the best-known multi-million dollar nonprofit brand names are actually either single entities or cover the entire country with only a small handful of corporations.

While there were limitations with the old model, it was at least simpler and less costly, and less time-consuming. Corporations as entities require care and feeding in a legal and fiscal accountability sense, and those considering creating a multiple-corporation system need to be sure that the additional costs warrant the benefits. Here are some ways of doing that.

Form follows function

Organizations create multiple corporate structures because they have to do so. Sometimes it is required by the nature of the service to be delivered, as in some of the cases below. Sometimes it is made necessary by regulatory requirements, such as when a city or state insists on only doing business with a domestic corporation. Sometimes it happens for political reasons, or for risk management purposes.

What unites all of these situations is that the function the entity is designed to serve drives the form that is chosen. This is a simple but powerful concept to keep in mind, and we'll use it to examine the functions that each form of corporate organization serves well.

The simplest and probably most prevalent type of multiple corporate structure arrangement is the nonprofit public charity, or 501(c)(3) corporation, that has another (c)(3) as a subsidiary. The word "subsidiary" usually implies ownership, which is not possible in the nonprofit world, but it is a common, albeit technically inaccurate term. These situations are best when the public charity advantages are important to maintain throughout the organization. In dealing with a multiple (c)(3) setup, keep in mind the governance implications.

Multiple boards of directors with true corporate control are usually a prescription for internal confusion and conflict. The most elegant and streamlined way to link multiple (c)(3) corporations is by designating one of the corporations the parent and making the parent board of directors the sole corporate 'member' of each subsidiary. This allows control by the parent while still permitting some level of outside influence on each subsidiary board if that is important.

Another type of multiple corporate structure for public charities is to create a second charity for the sole purpose of holding the endowment. However, in these cases, since the objective of the split is often to provide protection from lawsuits for the endowment assets, there may in fact be no governance linkage at all.

Associations are known as "business leagues" in Internal Revenue Service (IRS) parlance, and they fall under the 501(c)(6) tax code. Since these groups can lobby--although they cannot accept charitable contributions--they are a natural designation for some associations (which are often called trade associations). In these cases, the association might want to add a (c)(3) public charity for the public education and charitable purpose aspects of their activities. You can tell if you are dealing with such a situation if attendees to the association's educational program are instructed to make out their checks to a different entity, often with the word "foundation" in its title. Associations on a national level with multiple corporate structures seem to be about evenly split between those which are primarily public charities and those which are business leagues.

Similar multiple corporate structures exist for the somewhat less common 501(c)(4) corporations, which are social welfare entities. These groups usually have less of a trade association focus and more of an advocacy slant. But they too may create a (c)(3) public charity for their charitable purposes. Or, the reverse situation may exist when a public charity wishes to take on a larger advocacy role than they can through the charitable vehicle.

An obscure but important ancillary corporation is the voluntary employees' beneficiary association or VEBA, under the 501(c)(9) designation. These groups are often found in both the for-profit and the nonprofit world when large employers wish to establish a separate system for employees' benefits. A few large national nonprofit federations have created VEBA's for administering their affiliates' employee benefits.

Poor, overworked "partnership"

The prime candidate for Most Over-worked Organizational Structure word is "partnership," which has come to mean everything from a government funder/service provider relationship to two ships running parallel in the night for a while. Legally, a partnership can often be created relatively easily, not needing to be a corporation.

For serious partnerships, the investment of time, energy and money can be substantial. the key to partnerships is understanding that the IRS essentially ignores the partnership as a structure and instead looks straight through it to treat the income to each partner as an individual matter. This avoids the double taxation of a corporation, although that is not usually an issue in the nonprofit sector.

* Limited liability corporation. Liability considerations, which are treated like partnerships for tax purposes, often figure in the decision about whether to establish another entity. LLCs are popular among some nonprofit managers because they allow managers to effectively quarantine risk within the entity while still offering the benefits of a partnership.

Some of the networks set up to deal with the demands of managed care in the last decade were LLCs, and the form allows for multiple participants.

* For-Profit corporation. This is usually what budding social entrepreneurs think of first when they ponder setting up an entity for the social enterprise. Yet it is relatively uncommon among many nonprofits except for large scale enterprises such as universities and medical centers. One of the reasons for this is that most for-profit ventures in nonprofits don't reach the scale that justifies setting up an entirely new for-profit entity, let alone engage in activities that are more suited to a for-profit structure.

But we suspect that there are other reasons at play. The culture of a for-profit organization, even when it is established by a nonprofit, is very different than a typical public charity. Issues of ownership (literal and figurative), control, and the degree of operational integration all must be managed. These are not always comfortable issues in many nonprofit cultures. Moreover, even very entrepreneurial nonprofit executives don't instinctively venture into territory normally reserved for a for-profit venture. The norms and values of a non-profit public charity are often so thoroughly ingrained in its leaders that for-profit activity seems too removed to be worth considering.

Given enough size or complexity, most modern nonprofit corporations will take on additional structures within the same overall system When that happens, let the mission drive the need for additional structures, not vice versa. Be clear about the desired outcomes, and invite only the best guests into your corporate house.

Thomas A. McLaughlin is a national nonprofit management consultant with Grant Thornton in Boston. He is the author of Streetsmart Financial Basics for Nonprofit Managers and the forthcoming book The Art of Strategic Positioning: Decide Where to Be, Plan What to Do (John Wiley and Sons, early 2006). His entail address is [e-mail]