Considerations in Establishing a Trade Association

So, You Want to Set Up a Trade Association?

Deeply rooted in American history, trade associations can be traced as far back as the first American settlers who formed "guilds" patterned after British trade groups. Since then, the position and intricacy of these types of associations have changed, but the goal remains the same.ⁱ

With the recent growth in startups and innovation, the need for organizing and establishing trade associations to enhance the professionalism of new industries is becoming more apparent. Although the particular purpose of the association is always a unique factor, it's important to note that the structure and organization are very much the same across industries. Below you will find an overview of the considerations in establishing a trade association. 

Considerations

1. Purpose. A well-articulated purpose and mission for a trade association is a must, not so much for the articles of incorporation as for the success of the venture. Potential members and all stakeholders need to see a clear purpose to drive their participation.

2. Incorporation. It is suggested that the trade association be organized as a not-for-profit entity--generally, a nonprofit corporation.

a. The nonprofit status allows for a simpler organizational structure. There are directors and officers, and most trade associations have different classes of members, e.g., full or associate, which are often vendors to the association. In most states, a name is reserved with the Secretary of State, articles are drafted and filed, minutes are kept, all as done with any corporate entity. In some states, the term “incorporated” or “Inc.” need not be part of a nonprofit’s name.

b. The rules of governance are outlined in the association’s bylaws, or when the bylaws are silent on any particular issue, e.g., meeting notice, quorum, director tenure. The corporate code chapter usually supplies the requirements. Committees are typically established in the bylaws as well.

c. Unlike for-profit corporations, there are no stockholders or dividends, and loans to directors and officers are generally prohibited. The nonprofit form of organization best fits the purpose of education, training, and, if appropriate, legislative advocacy.

d. The entity will need minimal staff to bill and collect dues, keep the membership roll, balance the checkbook, purchase insurance, and handle the other day-to-day business of the association. Often, these duties are assigned to “volunteer” members, including the treasurer and secretary of the association. The “lay” president is generally responsible for the direction and strategy of the association. These responsibilities can be outsourced to association professionals. 

e. A paid executive or association director is invariably needed to make sure that everything gets done. 

f. A CPA should be retained to file the IRS Form 990. Trade associations are generally 501(c)(6)ⁱⁱ entities for federal tax purposes. Depending on the size, the association may want to have audited financial statements, though these are not required.

g. The interested parties could act as an unincorporated association, but there can be a potential liability in doing so, just as with a general partnership. This approach is not recommended.

3. Legislative Advocacy.  If the association is going to be involved in political questions and lobbying, it is exceedingly important that the association follows the requirements imposed by state law addressing lobbying. 

a. . Retaining a seasoned lobbyist goes a long way in assuring compliance.

b. Lobbying expenses are generally not deductible to the contributing members, but dues are deductible. Dues are an ordinary business expense. So, to the extent that part of dues is to pay for lobbying, that percentage may not be deductible. 

4. Trade Association Meetings. Associations typically have four basic types of meetings: 

a. Business Meetings - Where committees report on subject matter strategy.

b. Educational Meetings - Where business and industry best practices are reviewed.

c. Legislative Meetings - Where issues concerning legislation are addressed.

d. Annual Meetings - Where relationships are cultivated and the business of the association is conducted, e.g., officers and directors are elected for the coming year, minutes are approved, dues are set, financial reports are given, budgets are approved, etc.

e. Of course, many times, these subject matters are addressed together.