Nonprofit organizations frequently face the question of whether to consolidate a second nonprofit organization. There are three instances in which consolidation of two nonprofit organizations is usually required:
1. Organization A has a controlling financial interest in Organization B. Controlling financial interest includes sole membership in Organization B or any direct or indirect ownership of a majority voting interest. Generally, such control is documented in Organization B’s articles of incorporation.
2. Organization A has an economic interest and a majority voting interest in Organization B. Majority voting interest is the ability of Organization A to appoint individuals that constitute a majority of the votes of the fully constituted board of Organization B.
3. Organization B is a special purpose entity lessor, substantially all of the activities of Organization B involve assets that are to be leased to Organization A, and certain other criteria are met.
In situations described above, consolidation is required unless the organizations conclude that control of Organization B does not rest with Organization A, in which case consolidation is prohibited. Such exceptions are rare.
There is one instance where consolidation is recommended, but not required:
1. Organization A has an economic interest in Organization B and has control by some means other than those noted above.
For all other circumstances, consolidation is not permitted. However, various disclosures apply in most cases, including when consolidation is not permitted.
Paul Kelsey is a Senior Assurance Manager at JTaylor, the largest locally owned CPA firm in Tarrant County. His focus for more than 15 years has been to serve nonprofit organizations in the North Texas area. He has managed, audited and consulted with a broad range of organizations in the nonprofit sector.