Legal Considerations, Alternatives, and Strategic Reflection
When a nonprofit begins to consider merging with or acquiring another organization, the conversation is never just legal or operational—it’s personal, purposeful, and often emotional. Unlike in the for-profit sector, a merger or acquisition in the nonprofit world is not about maximizing shareholder value; it is about aligning resources, scaling impact, or weathering uncertain times to further a shared purpose. Whether you’re a founder who built your organization from the ground up or a board member entrusted with safeguarding its future, approaching a potential merger requires balancing heart and mission with legal responsibility and foresight.
Federal and California Legal Considerations
At the federal level, tax-exempt organizations must comply with the requirements of Internal Revenue Code Section 501(c)(3), which mandates that all organizational assets continue to be used for public, charitable purposes. A merger or acquisition that would redirect those assets inappropriately—such as redirection that results in private inurement or improper benefit—may risk revocation of tax-exempt status or other IRS penalties. When tax-exempt organizations complete a merger or acquisition compliantly, the IRS only requires notice of such structural changes from both the merging and surviving entity, through disclosures in the tax-exempt organizations’ next annual information return.
In California, nonprofits must follow specific legal procedures under the Supervision of Trustees and Fundraisers for Charitable Purposes Act. The Attorney General’s Office—through the Registry of Charitable Trusts—requires nonprofits to provide written notice and, in many cases, receive prior approval before completing any merger, dissolution, or significant asset transfer. These steps ensure that charitable assets are protected and continue to be used only for the intended charitable purposes in accordance with the charitable trust doctrine.
Before completing any such transaction, organizations must provide notice to the California Attorney General’s Office, which typically requires submission of:
- A detailed description of the proposed transaction
- Financial statements, governing documents, and board resolutions from both entities approving the transaction
- The proposed merger agreement
Alternatives to Full Merger
While a merger may seem like the logical next step in a nonprofit’s lifecycle, it’s worth exploring whether other forms of collaboration could accomplish the same goals with fewer complications. Fiscal sponsorship, for instance, allows one organization to house a program or startup initiative under its legal umbrella without requiring full integration. Shared services agreements let two or more nonprofits consolidate administrative operations, like accounting, HR, or IT, while remaining legally distinct, and affiliation agreements allow nonprofits to share branding and fundraising efforts while maintaining distinct operations.
Program transfers are another option, particularly if one organization wishes to discontinue a specific program while ensuring its legacy continues under another nonprofit’s management. In these cases, only the program, not the full corporate entity, is transferred.
Strategic partnerships or co-branded initiatives also allow organizations to serve overlapping missions without the permanence of a legal merger.
What Founders and Boards Should Reflect On
For founders, mergers can bring mixed emotions. There may be pride in growth, but also grief at the prospect of letting go of a brand or vision that’s been nurtured for years. Board members, meanwhile, must think from a fiduciary perspective, carefully assessing legal risks, operational capacity, and alignment with the organization’s mission. For instance, they must determine the surviving board’s composition, integrate the entity cultures, and preserve donor relationships.
When weighing a merger, it’s essential to look beyond immediate efficiencies. Is the cultural fit right? Are there shared values and compatible leadership styles? Will staff and clients feel supported through the transition? Will a merger allow the organization’s purpose to endure and be served more effectively? These qualitative factors are just as important as financial or legal alignment and should be part of the boardroom discussion from day one.
Conclusion
Mergers and acquisitions in the nonprofit world are not about winning or absorbing; they’re about legacy, stewardship, and strategic alignment for greater impact. California and federal law offer important protections to ensure charitable assets are used as intended. With thoughtful planning, open communication, and legal compliance, nonprofit leaders can approach this process with confidence and clarity, knowing that the mission comes first, no matter the structure.