A good example came across my email today, when an attorney asked the NOLS member-attorneys the following question:
Listmates: A small local nonprofit, not itself incorporated, has operated under an umbrella entity which was incorporated and has 501c3 status. The umbrella org. has since stopped functioning, and has by abandonment more or less allowed the smaller agency to continue to operate under the name and structure. All very informal.
As far as I know, there has been no wrongdoing by the umbrella, and it disbanded a few years ago (without dissolving the corp). I am sure the umbrella, if the board had still existed, would be supportive of the smaller entity. Is there any reason why they should not simply amend their name and bylaws to correspond to what they are doing now, rather than separately incorporating the smaller entity and applying for 501c3 status? Of course, we would submit the changes to the IRS. Is there anything else they must do?
My reply was this:
I guess what comes to mind for me is that there is the potential for a hidden booby trap in the past. If the old parent organization de facto dissolved, and there was some issue you and the surviving entity don't know about, it's possible you learn of it when the surviving entity assumes the parent's name and resumes operations. Assume parent EIN, assume parent liabilities, in short. Maybe there are none. Maybe there are some. Do your board members feel lucky?
If I were advising the surviving organization, I would suggest that they call one of the D&O policy issuers and explain the situation; if the D&O issuer is willing to insure them and assume the risk of defending against any claims that pop up once it seems like there's life in the old entity after all, then maybe it's worth the savings.
But, if I were advising anyone, I'd have someone call the last directors for the parent organization to remind them that, as long as the organization is in existence, it can be named in a suit, and that they ought to shut down formally if they don't plan to exist.
And, for the survivor, if all they save by assuming the old entity's identity is the cost of the 501(c)(3) filing, is it worth it? Having to fill out the 1023 form often forces boards to do some of the things they need to do to function properly anyway. Could be some very costly savings if there was some hidden liability trap in the old entity you didn't know anything about.
(Note that I'm not sharing this exchange to suggest that I'm "The Answer Man" -- I'm asking the questions as often as giving my two cents. But that's why I wanted to see the section come together in the first place: so my nonprofit clients could get the benefit of more experience and depth on their unique problems.
If you are now or are thinking about serving on a nonprofit board and you and your board want some help understanding your roles and how to keep things running right, I hope you'll call on me, as I'm always happy to help.)