Most people use the terminology “partnership” believing a partnership is when two or more organizations come together to pool their resources and collaborate to achieve a common purpose. Unfortunately from a legal and tax perspective, a “partnership” is a legal agreement between two or more organizations that involve a complex interaction of business law, tax law and intellectual property rules.
There are many positive outcomes for a nonprofit organization to form a partnership with another organization(s) such as:
- increasing revenue
- reducing costs
- gaining efficiencies
- taking on larger projects
- new and broader markets
- gaining new advocates
As part of a nonprofit’s due diligence in determining whether a partnership is beneficial, the nonprofit organization should contact their legal/tax advisors and consider the following steps:
- Understand the legal/tax structure of your partner(s)
- Understand the legal nature of your relationship/agreement
- Understand the tax issues for entering into a new “business relationship”
Understanding the legal and tax structure of your Partner(s)
The first step is to understand the legal/tax structure of your Partner. You should determine the following:
- How is your Partner set up legally? Is it a legally incorporated entity; a partnership; a limited liability company or some other type arrangement
- Is your Partner a tax-exempt organization? If so, is tax-exempt classification the same as your organization?
- Is your Partner a taxable organization?
Understanding the structure of your Partner will provide your advisors the information needed to adequately identify and recognize the issues involved in completing Steps 2 and 3.
Understanding the legal nature of your relationship/agreement
In determining the type of the agreement/relationship with your Partner both parties should agree on the following:
- Define the specific expectations and roles of each party
- Determine operational control and how and how decisions will be made
- Define the time period (if any)
- Define an exit strategy
- Determine the financial and capital resources required for each party
- Determine how the relationship will evaluate the success of the project
- Determine the intellectual property issues
- Understand the liability risk and insurance
- Consider separate legal representation
- Document your relationship in writing
The legal structure may be a separate legal entity such as a type of partnership or a limited liability company or a type of contractual arrangement (such as joint programming; shared services and back office support; memorandum of understanding). Your legal advisor can assist in determining the nature of our relationship and in understanding each type of legal structure.
Understanding the tax issues for a nonprofit organization entering into a new business relationship
Nonprofit organizations must be mindful of the IRC and the conditions of its tax-exempt recognition. Depending on the nature and structure of a nonprofit’s partnership” the following tax issues should be considered:
- Consistent with your Mission
- Unrelated Business Income
- Private Inurement/Benefit
- State Charitable Solicitation Statutes
- Protecting Intellectual Property Rights
- Employment law and employment tax
- Sales Tax and Other State Tax Issues
- Lobbying and Political Activity
- Control
Bryan Pautsch is the Nonprofit Tax Leader at VonLehman CPA & Advisory Firm. He has over 25 years of nonprofit tax experience. You can contact Bryan at 859.331.3300 or bpautsch@vlcpa.com.
