Tandem Structures
Entrepreneurs seeking the best from both for-profit and nonprofit structures will sometimes work to combine the two into what is commonly referred to as a “tandem” structure.
A tandem structure entails the creation of two separate legal entities which are linked by legal design:
A tax exempt nonprofit eligible for charitable grants, and
A for-profit that can raise unrestricted funds from angels, VCs, and institutional investors and can make tax-deductible donations to the nonprofit entity
When are tandems relevant?
Social entrepreneurs typically seek a tandem structure when:
A nonprofit's unrelated business income threatens its nonprofit status.
A nonprofit desires a separate liability shield for its profit-generating activities, so that in the case where liability attaches, donor contributions are not at risk.
A nonprofit desires to establish a fund for investing.
Operating overseas results in advantages for the nonprofit to operate through a for-profit subsidiary.
A for-profit needs to differentiate its philanthropic work from its core business.
What’s the catch?
Tandem structures aren’t a simple solution and aren’t a good match for many social enterprises , especially those that are just starting out. Such a structure demands intensive planning, coordination, time, resources, and legal counsel, both in its creation and throughout its operation.
Cross-border tandems can be orders of magnitude more complex and require navigation of numerous factors, including other countries’ nonprofit, corporate, and tax laws, restrictions on outside funding, profit repatriation, transfer pricing, etc.
Entrepreneurs thinking they can transition to a tandem structure at a later time need to know that this is very hard.
Tandem structure in-depth
In this video, legal expert R. Todd Johnson introduces the key factors that are important to consider for the tandem structure.
Explore the two types of tandem structures available to social entrepreneurs
Contracts and other legal instruments determine the relationship between the nonprofit and the for-profit entities in a tandem structure. Explore the two types of tandem structures available to social entrepreneurs.
Subsidiary Tandem
In the Subsidiary Tandem (or parent-child model), the nonprofit owns a for-profit subsidiary.
Learn More
Collaboration Tandem
In the Collaboration Tandem (or brother-sister model), the nonprofit and for-profit entities are independent and their relationship is governed by contract law.
Learn More
Additional Resources
Julie Battilana, Matthew Lee, John Walker, & Cheryl Dorsey, Stanford Social Innovation Review , Summer 2012
Global Health Innovation Insight Series, Stanford Graduate School of Business
Jane Chen, Harvard Business Review, February 2013
Law for Change.org, Adler & Colvin, originally published in The Practical Tax Lawyer, Fall 2011 Issue