Question: We are a regional 501(c)(3) exempt organization looking to form local chapters expand our reach. Can these chapters simply use our EIN and exempt status?

Answer: It depends. Parent-chapter relationships can be very difficult to manage. The first question is whether you want the chapters to be separately incorporated under state law as stand-alone entities, or whether they are merely chapters (or divisions) of your organization. If they are merely “subparts” of your organization and not separate entities, they can use your EIN and are covered by your exemption. However, the national “parent” organization will be 100% responsible for everything that happens at the chapter level. Effective oversight and control will be very important from a compliance and risk management perspective. On the other hand, if the local chapters are individually organized as separate entities, you will not be directly responsible for their activities (including debts and liabilities), and those local chapters will not qualify under your exempt status unless you have filed for a group exemption and list them annually with the IRS. As separate nonstock corporations, each local chapter would have to obtain its own EIN, and without a group exemption, would have to apply for and obtain their own exempt status by filing either Form 1023-EZ or Form 1023, as applicable.

Under either structure, the relationship between the parent and its local chapters should be memorialized in writing, particularly as relates to the use of the parent organization’s name, logo, and other intellectual property.