Nonprofits and Joint Ventures
Wow. Took a bit of a hiatus there. Wonder if I’m cool enough to say I was “summering”? Regardless, what better way to start things back up than talking about joint ventures!
In all seriousness, this topic is one that has become really important for nonprofits and other exempt organizations. What most don’t understand is that joint ventures can manifest themselves in a variety of ways. In many states, a formal agreement isn’t necessary for a joint venture to be created; in fact some states don’t even require that the parties have an intent to form a joint venture. And with funds increasingly stagnating, many organizations that are “teaming” up, or plan to team up, with someone else may want to pay attention to what is happening in the joint venture world.
What is a Joint Venture?
Joint ventures (JV’s) can be created in alot of different ways. They can be as informal as putting an event or program together with another organization, collaborating to create a commercial co-venture or venture by contract all the way up to the grand pumba; creating a JV as an entirely separate legal entity. A separate legal entity is the one most people think about when they hear mention of a joint venture. JV’s can also be created between nonprofits and for-profits, however, there are certain arrangements and precautions that must be taken to protect an organization’s exempt tax status. I’ll talk about this a little later.
Logistics of Putting A JV In Place
One thing to bear in mind when creating a JV is the state laws that may govern its creation. Many states, like New York, require that JV’s be licensed or registered with the state.
Other things to bear in mind are:
- The vicarious nature of JV’s requires that organizations ask themselves a few questions before entering into these arrangements. What is the goal of the JV and why is it being established? How will governance be set up? Who will make decisions? How are disputes resolved?
- Some states will treat certain arrangements like a JV regardless of what the intent is. So if you plan on collaborating with another organization in a way that will involve some type of profit sharing, it might be prudent to put an agreement into place. These terms could lay out the parameters of the relationship, purpose of the relationship, how disputes are resolved, decisions are made, a board is appointed, etc. This becomes really important later down the line if an organizations tax exempt status ever comes into question.
- The larger and longer the JV arrangement, the more likely it is that the board may need to be involved. Would even be a good idea to have a vote taken on the JV’s formation.
In part deux on joint ventures I’ll get a little more into the risks organizations face when entering JV’s and tax considerations organizations should bear in mind particularly when partnering up with a for-profit. In the meanwhile, here are a few resources I think are helpful.
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