Merging, sharing services or joining another charity

This guide is for boards of small charities thinking about the future: the founder is retiring, a key funder has left, another group down the road does nearly the same work, or the charity is simply too small to keep going alone. Closing isn't the only answer. After reading, you'll know the main options for working with or joining another charity, the board's role in deciding, why your state may need to approve a merger, how restricted gifts are protected, and what the IRS asks you to report.

If you've decided to close instead, see our guide to closing a charity.

Why charities combine

The New York Attorney General's guide to mergers lists common reasons: organizations with similar missions "may separately have higher administrative expenses, a smaller donor pool, and lesser impact," funders or members may prefer one organization, the original goals "may have been largely accomplished," or "the existing leadership may be close to retirement."

None of these means anyone has failed. Combining can be the best way to protect the mission and the people you serve.

The options, from light to full

For a collaboration or shared services, put the terms in writing. Our guide to partnership agreements and our memorandum of understanding template can help. If you're considering a sponsor, see our fiscal sponsorship guide.

The board's role

Staff can explore and recommend, but the board decides. The New York guide says board members and volunteer leaders "play a very important role" in:

• considering whether to merge;
• assessing possible partners;
• due diligence (checking the other organization's finances, legal standing, obligations and reputation);
• reviewing the merger agreement;
• making sure the required approvals are met;
• planning the future mission, leadership and finances.

It also says experienced professional advisers and lawyers "are usually necessary" for a successful merger, and that boards should involve other stakeholders "at an early stage" and keep them informed.

Questions to ask a possible partner

• Mission: Are our purposes compatible? Will our programs and the people we serve continue?
• Money: What are each side's assets, debts, leases and contracts? Are both up to date with taxes and state filings?
• Restricted funds: What gifts and grants come with conditions, and can they still be honored?
• People: What happens to staff, volunteers and the board?
• Name and identity: Which name survives? What will donors and the community see?
• Legal standing: Is either side under investigation, in a dispute or behind on filings?

Why your state may need to approve

A merger is a formal legal process under your state's nonprofit corporation law, and many states protect charitable assets by requiring the attorney general, a court, or both to review it. Rules vary a lot, so check your state's law and talk to a lawyer early.

New York is a detailed example. Its Attorney General's guide says "every merger or consolidation of a not-for-profit charitable organization must be approved by the Attorney General and/or a court," to protect donors and beneficiaries and to prevent private benefit. Under New York's law:

1. The board of each charity adopts a plan of merger. If a charity has voting members, the members must also approve it, by a two-thirds vote at a meeting with a quorum. If it has no voting members, board approval is enough. Our guide to members and annual meetings explains the difference.
2. The charities apply to the Attorney General or the court with a verified petition, including the plan, governing documents, financial statements, Form 990s and a list of restricted funds.
3. The Attorney General reviews it, including whether the purposes are compatible, each organization's finances, and its endowment and restricted funds.
4. After approval, the certificate of merger is filed with the Department of State, and a copy goes to the Attorney General.

The guide also says charities required to register with the Attorney General should be registered and up to date with their annual reports before the merger.

California works differently. Its Corporations Code lets a public benefit corporation merge with another public benefit corporation, a religious corporation, or certain other organizations whose assets are irrevocably dedicated to charitable purposes without the Attorney General's consent. A merger with any other kind of entity needs the Attorney General's prior written consent. Either way, the Attorney General must get a copy of the proposed merger agreement at least 20 days before the merger is completed. Other states have their own rules, so ask your state's charity regulator or a lawyer what applies to you.

Protecting restricted gifts

Donors' restrictions don't disappear in a merger. The New York guide says the Attorney General "reviews endowment and other restricted funds" to make sure money given for a particular purpose keeps being used for it. Where that becomes "impossible or impracticable," the court can approve a change, using a legal doctrine called cy pres (pronounced "see pray"), which lets a court redirect a gift to the closest possible purpose.

Before you talk seriously with a partner, list every restricted gift and grant, with its terms. Our restricted funds guide explains how to track them. Ask funders early whether they'll allow their grants to move to the combined organization.

What the IRS asks

If your charity files the full Form 990, a merger may need to be reported on Schedule N. The Form 990 instructions say Schedule N covers organizations that liquidate, terminate or dissolve, and those that make a significant disposition of net assets: a sale, exchange or other transfer of "more than 25% of the FMV" (fair market value) of the organization's net assets during the year, whether or not it received full value in return, or a series of related transfers that together pass that line.

If your corporation ends as a result of the merger, it also files a final return. The Form 990 instructions say an organization that has merged into another checks the "final return" box and must attach a certified copy of its articles of merger approved by the state, or, if that isn't available, the board resolution approving the plan of merger. The instructions also list transfers of assets in a reorganization where the organization survives as an example of a significant disposition, so the surviving charity may need Schedule N too. Our guide to closing a charity explains final filings, and our guide to filing your first 990 explains which return you file.

Your merger checklist

• The board has discussed the reasons and the options, from collaboration to merger
• Directors with a personal interest have disclosed it and stepped out
• We've done due diligence on the partner's finances, legal standing and obligations
• We've listed every restricted gift and grant, and asked funders about them
• We know whether our state requires attorney general or court approval
• We have a lawyer to guide the legal steps
• We know whether we must file Schedule N or a final Form 990
• We have a plan to tell staff, volunteers, donors and the people we serve