How do the two entities relate to each other?

I've created a thread for discussing a proposed structure I'm calling the "Hub" structure. It's an attempt to capture and combine what I've heard most discussions about the relationship between the Holding and Operational entities to be.
Please check it out and weigh in with any ideas or concerns.
We'll amend it as we go and then I'll put for ward a formal proposal later in the workshop for us to consider as a way forward.
Check it out in its thread or click here.

@Susanne Parris you vote here

This article is from the US but was really helpful for me today. I am trying to understand the entity's legal structures in relation to each other in greater detail. So this is American but I am certain Australia would have analogous ways of setting up affiliated orgs (think Country Women's Association with a headquarters and geographical chapters). I will post any local info I find for discussion following this.

Trying to understand the best relationship between the orgs has been bothering me because where the members sit in the arrangement between different entities has not been abundantly clear. While I thought of the idea of chapters in our conversation about memberships, I originally meant it in the sense of membership levels that form out of the different types of participation in the cultural org. It only occurred to me yesterday that the operational entity should be a chapter of the national cultural org. If you join the Event/operational chapter you are automatically a member of the national org. You may have voting rights only in your chapter or voting rights for the national org on some issues.

I will be posting more research as I focus on Australian jurisdictions but we should seek advice from counsel about the best way to establish an Event Chapter (rather than a geographical chapter...or perhaps this could be Red Earth City Chapter??).

https://charitylawyerblog.com/2011/02/01/nonprofit-chapters/

An interesting taxation question comes to mind, as well, in this dual entity structucture, is that hypothetically, if the Cultural org gets registered firstly with the ACNC to receive Income Tax exemption, does this exemption apply to its wholly owned single membership CLG Subsidurary Production entity?

OR - does the Subsidurary Production Company have to suck it up and pay Income Tax?

Maybe an Accountant Question.

I would imagine both the Cultural Org entity and the Production entity, both have two separate ABNs.

Maybe the licence fee for the Production Enity, to use the 'Burning Seed' name, could be any Income Tax payable on any taxable profit made by the Production Entity.

This licence fee payment would be made to the Cultural Org.

If the Cultural Org is registered with the ACNC, as a charity with Income Tax exemption, then no Income Tax would ever need to be paid by the Production Entity, or the Cultural Org, under this arrangement.

So if the Production Entity makes a profit, this calculated amount is then considered as a licence expense payable to the Cultural Org.

Just before the end of the Production Entity's financial year, any calculated profit made by the Production Entity, becomes the licence fee amount, which is then invoiced by the Cultural Org to the Production Entity for the annual licence fee.

The Cultural Org is then paid this licence fee by the Production Entity.

Boom! Boom!

If avoiding income tax is the objective then couldn't the ops org be allocated the break even budget as its contracted fee to produce the event on behalf of the cultural org?

I am also not certain that what I am proposing is feasible without asking a tax lawyer. The issue I see with the idea above is that it repeats the current state of the ops org having control over all the ticket revenue, that money is supposed to be used for broader based purposes than the event alone according to the agreement with Burning Man.

My idea is that the Cultural Org has the endorsement of Burning Man, owns the IP and is the ticket vendor for the event; Burning Seed is the annual fundraiser for the purposes of the cultural org and they contract the ops org with an agreed budget to produce Burning Seed. That amount is negotiated prior to the event between the two organisations and I would go so far as to say the whole amount might need the cultural org members to vote on it (not how it used by the production but the whole amount). The production company could invoice the cultural org (incurring GST) OR it could be a joint venture as Phil suggested early on where the split of the revenue is predetermined in the service agreement. That way any operating profit never needs to be transferred back to the cultural org.

IMO profit should never be the focus of the operational entity's board and management. They should be solely focused on their purposes which have a different evaluation criteria that relates putting on a safe, excellent event.

Be very careful with your words, we do not avoid tax which is against the law and intent is as good as having done. We are dilligent and ensure we minimise our tax, there is a huge difference.

Point taken. I am fairly confident that everyone here understands that every business seeks to minimise its tax obligations so that maximum funds go towards its purposes and that there are a myriad of eligible ways to do so. It did not occur to be that anyone would interpret what I said as suggestion of illegal activity and will clarify it by saying that the transferring of funds between the entities is fraught with risk of unnecessary tax liabilities if we aren't thorough. I have been asking to bring in an accounting/tax consultant for a number of months now.

It is my current opinion that the Cultural Org may form any number of relationships with aligned organisations and that each one with have an independent agreement that defines how they relate. Some orgs may offer reciprocal membership rights, some may have financial ties etc.

The only permanent tie proposed at this time is between the Cultural Org and the Ops org. The Cultural Org retains ownership of the trademarks and the funds raised by the event.

My question is: how do the entities relate to each other financially?

I have been putting some thought into this for a number of weeks now, prompted in part by the real life example of a new Eastern Australia burn in its advanced stages of inception. This exciting development gives us the opportunity to really think about the scope of the Cultural Org's purposes, and which affiliated organisations might be eligible to receive grants or funding from the pool of assets raised through event revenue.

It is not realistic in my opinion to expect a great deal of revenue being generated by private donation if/when DGR status is achieved. So the assumption in my comment here is that Burning Seed will remain the primary source of revenue.

A committee member has previously mentioned that their preference is that money generated by the event is spent on the event, and there may be many in the community who agree with that position. Initially I disagreed and felt that the operating profits (less any amount kept in savings to cover unforeseen events) should be made available for any organisation that chooses to affiliate with "Sunburnt Arts".

I now agree that there should remain a primary focus on funding creative collectives, theme camps, artists, educators, training and workshop facilitators (who must be members of the Org to apply) that intend to participate in Burning Seed, BUT with a clear proportion of funding opportunities made available for interesting projects that clearly demonstrate diversity from the standard burn event model. A diverse range of projects that align to the principles of the BMP and the purposes of the cultural org should be able to be resourced (funded and supported in other ways) by the Cultural Org, but I am struggling to justify another facsimile burn event having access to cultural org funds and not demonstrating any clear deviation from the current BRC model of creative social change. The only way I can resolve this as appropriate is if a joint venture structure was agreed to, whereby a proportion of operating profits from the other events also flow back to the cultural org to resource the creative cohorts and innovative projects.

A recent chat with an RC who is quite good at governance led to an idea. That Town Council is actually a subcommittee of both CO and OO and is the team in charge of only managing the governance of the OO and particularly the agreements in place between the CO and OO (and for a while maybe REC as well while in transition years). It is made up of members of CO Board and OO Board. This would allow the two Boards to be separate but to have a unifying force that bridges both.