Agreement Between Charity and Trading Subsidiary: A Guide for Nonprofit Organizations
Charities often engage in commercial activities to generate revenue and support their mission. However, these activities can be subject to restrictions and regulations, which is why many charities choose to create a separate trading subsidiary to carry out their commercial activities. This article discusses the agreement between a charity and its trading subsidiary, including its purpose, content, and potential legal issues.
Purpose of the Agreement
The agreement between a charity and its trading subsidiary serves several purposes. First, it outlines the terms and conditions of the relationship between the two entities, including the scope of the trading subsidiary’s activities, the amount of revenue to be shared with the charity, and the reporting requirements. Second, it helps to ensure compliance with the legal and regulatory requirements related to charities and trading subsidiaries, such as tax laws, accounting standards, and corporate governance. Third, it can help to manage conflicts of interest and mitigate risks associated with the commercial activities of the trading subsidiary.
Content of the Agreement
The content of the agreement between a charity and its trading subsidiary may vary depending on the specific circumstances and needs of the organizations involved. However, there are some common provisions that should be included in most agreements:
1. Purpose and scope: This section should describe the purpose of the agreement, the activities to be carried out by the trading subsidiary, and how they relate to the charity’s mission and objectives.
2. Revenue sharing: This section should outline the amount and method of revenue sharing between the charity and the trading subsidiary. Generally, the charity should receive a significant portion of the profits generated by the trading subsidiary.
3. Reporting and monitoring: This section should establish the reporting and monitoring requirements for the trading subsidiary, such as financial statements, audits, and compliance with the charity’s policies and procedures.
4. Conflicts of interest: This section should address any conflicts of interest between the charity and the trading subsidiary, such as shared personnel, resources, or services, and how they will be managed and disclosed.
5. Governance and accountability: This section should outline the governance structure of the trading subsidiary, including the composition of its board of directors, the role of the charity in its decision-making process, and the mechanisms for ensuring accountability and transparency.
Legal Issues to Consider
The agreement between a charity and its trading subsidiary may raise some legal issues that should be carefully considered and addressed:
1. Tax implications: The trading subsidiary may be subject to different tax rules than the charity, and the agreement should reflect this. For instance, the charity may need to ensure that the trading subsidiary’s activities do not jeopardize its tax-exempt status or trigger unrelated business income tax.
2. Accounting standards: The trading subsidiary may be required to follow different accounting standards than the charity, and the agreement should address this. For example, the trading subsidiary may need to prepare separate financial statements and comply with specific regulations related to its business activities.
3. Corporate governance: The trading subsidiary should be governed by a separate board of directors, which may include members of the charity’s board, but should not be dominated by them. The agreement should establish clear lines of accountability and avoid conflicts of interest.
4. Branding and reputation: The trading subsidiary should not tarnish the charity’s brand or reputation, and the agreement should address how the charity will monitor and control the use of its name, logo, or other intellectual property by the trading subsidiary.
Conclusion
The agreement between a charity and its trading subsidiary is an important tool for managing the relationship between the two entities and ensuring compliance with legal and regulatory requirements. Nonprofit organizations should carefully consider the purpose, content, and legal implications of such agreements and seek professional advice if needed. By doing so, they can maximize the benefits of their commercial activities while minimizing the risks and conflicts associated with them.