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4 Items Nonprofits Should Keep in Mind When Considering a Joint Venture

November 8, 2019

By Steven Anseth, CPA

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Joint ventures between Section 501(c)(3) organizations and businesses are becoming increasingly common. Such arrangements can also provide a nonprofit with access to capital and outside expertise while helping to further its mission. But like any business relationship, a joint venture between a tax-exempt nonprofit and a for-profit entity also carries the potential for risk.

If your nonprofit is thinking about joining forces with a business, be sure to follow these best practices.

  • Review IRS rules about structuring joint ventures with for-profit entities.

The U.S. Tax Court defines a joint venture as a combination of two or more entities “where in some specific venture a profit is jointly sought without any actual partnership or corporate designation.” It’s a broad definition, which means that a number of activities—such as a program, event, project, or business—could be considered a joint venture in the eyes of the IRS. Failure to correctly establish the joint venture could jeopardize your nonprofit’s tax-exempt status.

If your nonprofit is partnering with a business on any endeavor, it’s important to make sure your agreement complies with IRS rules. Generally, the rules are designed to make sure the for-profit entity isn’t reaping an improper benefit from the joint venture. The agreement must clearly protect the nonprofit from any loss that would benefit the for-profit partner.

  • Consult with an experienced attorney.

An attorney can help you draft a joint venture agreement that protects your nonprofit and complies with all applicable laws and regulations. Seek out an attorney whose work experience includes nonprofit joint ventures, as for-profit joint ventures are an entirely different animal.

  • Prepare a joint-venture business plan.
    Developing a comprehensive business plan for how the joint venture will work is critical to its success. Your business plan should include at least five years of financial projections—ideally 10 years if possible—as well as an exit strategy in case the joint venture doesn’t go according to plan.
  • Adopt a joint-venture policy for your organization.

A joint-venture policy will ensure your nonprofit’s relationships are properly disclosed and managed. A joint-venture policy is critical for two main reasons:

    • If there is ever a problem with the IRS regarding a joint venture, having a policy in place shows the IRS that the organization was conscientiously monitoring the joint venture and understood the rules regarding joint ventures.
    • Well-intentioned executive directors may not fully understand the risks of a joint venture. A policy will ensure the organization’s board gets involved early on in any potential joint-venture process.
      Explore new opportunities for enhancing your nonprofit’s mission.

Partnering with a business can help your nonprofit expand its capabilities and reach—perhaps in ways you had never imagined. A well-designed joint venture agreement can empower your nonprofit to explore these new opportunities. If you have questions about nonprofit joint ventures, we’re here to help. Our nonprofit-focused CPAs can advise on entity setup, review projections, audit forecasts, and provide you with referrals for experienced attorneys. We can issue reports on projections and forecasts, too, which can be helpful if your joint venture involves other investors. Contact us today to learn more.

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