TWEETS OF THE WEEK

Nonprofit Tweets of the Week – 3/27/15

Smart Media World

TED 2015: Truth and Dare was held in my hometown of Vancouver from March 16-20. Have a listen to tween pianist Joey Alexander (featured at TED) perform Giant Steps while perusing our curated nonprofit tweets of the week:

  • Gene: Read Erin Bradrick‘s Basic Legal Considerations Before Launching a Planned-Giving Program in The Chronicle of Philanthropy
  • Council of Nonprofits: Frequent Q we are asked: “Is it ok to pay a commission on $$ raised?” NO! http://buff.ly/1AJM90F [Ed. Just one of the issues discussed in “Ethical Fundraising” article.]
  • Debra Beck: Nonprofit governance toolbox: The Gene Takagi effect http://bit.ly/1HalOjr [Ed. An unexpected acknowledgment from one of the country’s leading governance experts. Thanks Debra! And thanks to the American Bar Association Bar Services for its kind related tweet too!]
  • BoardSource: Have you read this note from @npquarterly on “Fatally Incurious Governance”? You should: https://rlm.ag/1IcpGI
  • Nonprofit Quarterly: TRENDING: Seven Ways Your Nonprofit Can Avoid Mirroring Practices That Perpetuate Inequality http://hubs.ly/y0DWWz0
  • For Purpose Law: “A Reminder to Nonprofit Employers
  • Melissa Mikesell: Influencing lawmakers: A primer on special interests’ muscle in Sacramento: http://ow.ly/KI1yx
  • Nonprofit Times: #IRS Stats Show Huge Jump In Tax-Exempt Approvals, Applications in 2014 http://ow.ly/KKTXU #nonprofit #philanthropy
  • Law Firm for Nonprofits: IRS Targets Nonprofit Self-Declarers http://wp.me/p3yhYM-DR
  • Gene: Nonprofit Social Enterprises 101 – what they are, how they’re structured http://linkd.in/1MUzWh7 #socent
  • NGOSource: Can Mark Zuckerberg Redefine Philanthropy for a New Generation? HT @GenWeSolve @RockefellerFdn http://ow.ly/KNKlg
  • Rick Cohen: Cohen Report looks at the progressive & less progressive politics of “fourth sector” social enterprise movement here http://goo.gl/RE8b7q
  • McKinsey on Society: “How @Etsy’s IPO could spark investor interest in #BCorps,” from @dennisaprice http://ow.ly/KozmW via @Entrepreneur
IRS & FEDERAL TAX ISSUES   PRIVATE FOUNDATIONS / PHILANTHROPY

Private Foundations & Self-Dealing  

InvestmentWe recently added a post to the blog about private foundations and the rules that they are subject to.  Of the private foundation rules, those regarding self-dealing are some of the most complex and have some of the most serious potential ramifications for a private foundation if violated.  In this post, we’ll take a closer look at the self-dealing rules and some of the exceptions to the rules.

Internal Revenue Code (“IRC”) § 4941 sets forth the self-dealing rules for private foundations and defines self-dealing as any direct or indirect:

  • “sale or exchange, or leasing, of property between a private foundation and a disqualified person;
  • lending of money or other extension of credit between a private foundation and a disqualified person;
  • furnishing of goods, services, or facilities between a private foundation and a disqualified person;
  • payment of compensation (or payment or reimbursement of expenses) by a private foundation to a disqualified person;
  • transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation; and
  • agreement by a private foundation to make any payment of money or other property to a government official…, other than an agreement to employ such individual for any period after the termination of his government service if such individual is terminating his government service within a 90-day period.”

IRC § 4946 provides the definition of a disqualified person for purposes of the rules applicable to private foundations.  With respect to the self-dealing rules, a disqualified person includes anyone who is:

  • a substantial contributor to the foundation;
  • a foundation manager (which includes officers, directors, trustees, or other individuals who have similar powers or responsibilities);
  • an owner of more than 20% of the combined voting power of a corporation, the profits interest of a partnership, or the beneficial interest of a trust which is a substantial contributor to the foundation;
  • a family member of any such persons;
  • a corporation, partnership, or trust of which any such persons own more than 35% of the total combined voting power, profits interest, or beneficial interest, respectively; or
  • a government official.

As we discussed in our recent post, if a private foundation enters into a self-dealing transaction with a disqualified person, both the disqualified person and the foundation managers who knowingly participated in the self-dealing transaction will be subject to taxes.  (See this IRS page for additional information on the taxes on self-dealing)

However, there are exceptions and special rules that apply to the self-dealing restrictions that private foundations and potential disqualified persons should be aware of, including:

  • Gifts – Although the furnishing of goods, services, or facilities by a disqualified person to a private foundation is typically considered an act of self-dealing, that will not be the case if the goods, services, or facilities are to be used exclusively for IRC Section 501(c)(3) exempt purposes and are provided to the private foundation without charge.
  • Compensation – The payment of compensation or the reimbursement of expenses by a private foundation to a disqualified person (other than a government official) for personal services that are reasonable and necessary to carrying out the foundation’s exempt purposes will not be considered self-dealing, so long as the compensation amount is not excessive. Although we don’t have a clear definition of what constitutes reasonable and necessary personal services, the Regulations state that personal services include legal services, investment advice, commercial banking services, and the services of a broker serving as an agent for the private foundation.  This exception does not apply to the purchase or sale of goods, even if services are a part of the process of producing the goods.  A private foundation may also provide goods, services, or facilities (such as meals or lodging) to a foundation manager, employee, or volunteer without engaging in a self-dealing transaction if the value of the items provided is reasonable and necessary to the performance of the foundation’s activities in carrying out its exempt purposes.
  • Loans – A disqualified person may loan money to a private foundation without it constituting a self-dealing transaction if the loan is made without interest or other charge and if the proceeds of the loan are used by the private foundation exclusively for IRC Section 501(c)(3) exempt purposes. A loan by a disqualified person to a private foundation at below-market rates, however, will still be treated as an act of self-dealing to the same degree that a loan at market rates would be.  The provision of general banking services, including checking and savings accounts (subject to certain conditions), will generally not be considered self-dealing.
  • Leases – The lease of space by a disqualified person to a private foundation will not be considered an act of self-dealing if the lease is without charge. The lease will still be considered to be without charge even if the foundation pays for janitorial expenses, utilities, or other maintenance or administrative costs it incurs, so long as the private foundation does not make the payments directly or indirectly to a disqualified person (rather, the payments should be made directly to the utility provider, for example).  There is also an exception for the leasing of office space to a private foundation in a building with other tenants who are not disqualified persons if the lease is pursuant to a binding contract that was in effect on October 9, 1969, or renewals thereof, and the lease reflects an arm’s length transaction.
  • Publicly Available Services – A private foundation may provide goods, services, or facilities to a disqualified person on a basis no more favorable than that on which the goods, services, or facilities are provided to the general public without violating the self-dealing rules. However, this exception only applies if a substantial number of persons other than disqualified person actually use the goods, services, or facilities in question.
  • Incidental Benefits – The receipt by a disqualified person of an incidental or tenuous benefit from the private foundation’s use of its income or assets is not sufficient in-and-of-itself to make the use an act of self-dealing. For example, if a substantial contributor gets public recognition for the activities of the foundation, that alone generally will not be sufficient to constitute self-dealing.
  • Recapitalization – A transaction between a private foundation and a corporation that is a disqualified person is not self-dealing if it is pursuant to a liquidation, merger, redemption, recapitalization, or other corporate adjustment, organization, or reorganization so long as all of the securities of the same class as those held by the foundation are subject to the same terms and the private foundation will receive no less than fair market value. In order for the securities to be considered subject to the same terms, the corporation must make a bona fide offer on an equal basis to the foundation and every other holder of securities of the same class.
  • Government Officials – Certain payments to government officials, including certain prizes and awards, scholarships for educational study, incidental gifts or services, and reimbursement of domestic travel expenses, will not constitute self-dealing.

Unless an exception applies, the prohibition on acts of self-dealing for private foundations is absolute and, given the stiff penalty taxes that are imposed, private foundations are well-advised to understand these rules and to ensure that they refrain from violating them.

TWEETS OF THE WEEK

Nonprofit Tweets of the Week – 3/20/15

 

WhartonSF

This week I had the pleasure of attending the Wharton Social Impact Conference (see Storify). Have a listen to Ramy Essam‘s Irhal (anthem of the Egyptian protests in Tahrir Square) while perusing our curated nonprofit tweets of the week:

  • La Piana Consulting: 6 assumptions + 3 critical uncertainties = 9 key trends affecting the charitable sector http://ow.ly/KgyiA from @IndSector
  • Council of Nonprofits: 2015 Nonprofit Trends to Watch http://buff.ly/1xbomuy
  • Council of Nonprofits: Why bother w/advocacy? Good description of value of advocacy http://buff.ly/1FEIkzx Policy Agenda 4 any #nonprofit http://buff.ly/1FEImHw
  • Independent Sector: The Senate Finance Committee’s working grps on tax reform are now open to comments frm the public. Send yours today: SenateFinanceCommittee
  • Nonprofit Quarterly: California revokes the tax-exempt status of Blue Shield, how will this affect the healthcare insurance industry? http://hubs.ly/y0D6D90
  • Manny / Diabetes: So you want to start a Private Foundation? Via @GTak https://lnkd.in/bB-iWcg
  • Rusty Stahl: The Wrecking of a “Blue-chip” New York Nonprofit
  • For Purpose Law: Pa. Supreme Court To Consider Attorney-Charity Confidentiality | Nonprofit Issues
  • CreateEquity: With introduction of Form 1023-EZ & streamlined procedures, IRS has significantly reduced 501c3 applicant backlog http://bit.ly/1Ay3XM7
  • Philanthropy: Opinion: Impact Investing Can Help Foundations Avoid Obsolescence http://ow.ly/KuKY5 @BillBurckart
  • Amy Sample Ward: Thanks, @nonprofitorgs, for the awesome #15NTC storify recap!
  • Fast Co. Exist: The world changing ideas of 2015 from @fastcoexist: http://f-st.co/5I8Jyyi
  • Bridgespan Group: Don’t miss out! Follow the TechSocial blog series on @FastCoExist. @AbeGrindle starts us off : http://bit.ly/1Fw6g7D #transformativescale
  • Alex Counts: Just published blog on what impact investing can learn from #microfinance … on @CFI_ACCION blog

 

 

 

IRS & FEDERAL TAX ISSUES   PRIVATE FOUNDATIONS / PHILANTHROPY   STARTING A NONPROFIT

NEO Law Group’s Video on Tips for Nonprofits: Private Foundation or Public Charity?

 

Yesterday, NEO Law Group released a new short video in its series of videos on tips for nonprofits, available on YouTube. This video focuses on the differences between private foundations and public charities. We hope that you enjoy it and please stay tuned for additional videos from NEO Law Group on tips for nonprofits.

BOARDS / GOVERNANCE

Independent Sector’s Principles for Good Governance

The phrase Own It in magazine letters on a cork notice board

The legal duties of a board member go beyond ensuring that the organization complies with applicable law. A board member must act with reasonable care and good faith in the best interests of the organization. The best interests of a 501(3)(3) organization are related to its performance of its charitable, educational, religious or other qualifying exempt purpose. Accordingly, the board should take reasonable steps to position the organization to be able to pursue its exempt purpose effectively and efficiently. Independent Sector’s Principles for Good Governance and Ethical Practice is a valuable resource for boards to consider in fulfilling its responsibilities.

The Principles for Good Governance and Ethical Practice outlines 33 principles of sound practice for charitable organizations and foundations related to legal compliance and public disclosure, effective governance, financial oversight, and responsible fundraising. The Principles should be considered by every charitable organization as a guide for strengthening its effectiveness and accountability. The Principles were developed by the Panel on the Nonprofit Sector in 2007 and updated in 2015 to reflect new circumstances in which the charitable sector functions, and new relationships within and between the sectors.

A very abbreviated summary of the principles follows:

Legal Compliance and Public Disclosures

  • Comply with all applicable laws
  • Adopt a code of ethics
  • Adopt conflict of interest policies and procedures
  • Establish and implement a whistleblower policy
  • Establish and implement a document and data retention policy
  • Make information about the organization’s operations, including its governance, finances, programs, and activities, widely available to the public

Effective Governance

  • Review and approve the organization’s mission and strategic direction, annual budget and key financial transactions, compensation practices and policies, and fiscal and governance policies
  • Meet regularly enough to conduct the organization’s business and fulfill its duties
  • Establish and periodically review the board’s own size and structure
  • Include members with diverse backgrounds
  • Maintain a board composed of a substantial majority (at least 2/3rds) of independent members
  • Hire, oversee and annually evaluate the executive
  • Ensure that the paid executive (if any), board chair, and treasurer are positions all held by different individuals
  • Establish an effective, systemic process for educating and communicating with the board
  • Evaluate the board
  • Establish the length of terms and appropriate consecutive term limits
  • Review governing and organizational documents at least every 5 years
  • Serve without compensation or with compensation, but only after using appropriate comparability data and full disclosure

Strong Financial Oversight

  • Keep complete, current, and accurate financial records and ensure strong financial controls; have financials audited or reviewed annually
  • Institute an investment policy
  • Do not provide loans to directors, officers, or trustees
  • Spend a significant amount of the organization’s annual budget on programs that pursue its mission while ensuring that it has sufficient administrative and fundraising capacity to deliver those programs responsibly and effectively
  • Establish an expense reimbursement policy
  • Do not pay or reimburse for travel expenses of a spouse or other companion

Responsible Fundraising

  • Ensure solicitation and other public communication materials clearly identify the organization and are accurate and truthful
  • Use contributions consistent with donor’s express intent or the applicable solicitation materials
  • Provide donors with sufficient acknowledgments
  • Adopt an appropriate gift acceptance policy
  • Provide appropriate training to, and supervision of, the organization’s solicitors
  • Do not compensate fundraisers based on a commission or percentage of the amount raised
  • Respect the privacy of donors (except where disclosure is required by law)

The more the nonprofit sector promotes and succeeds at effective self-regulation, the less likely it will face new legislation that addresses a problem with a tiny segment of the sector but creates burdensome and restrictive requirements that apply to a much, much broader group (e.g., all charities). While the term “best practice” may similarly be overbroad, the principles of good practice here are a worthy discussion point for all nonprofit boards.

TWEETS OF THE WEEK

Nonprofit Tweets of the Week – 3/13/15

DC

I’m in Washington DC today to attend a meeting of the Independent Sector Public Policy Committee. Appropriately, the past week was marked by the 50th Anniversary of Bloody Sunday in Selma and International Women’s Day. Have a listen to David Bowie‘s Changes while perusing our curated nonprofit tweets of the week:

IRS & FEDERAL TAX ISSUES   PRIVATE FOUNDATIONS / PHILANTHROPY

Private Foundation Rules

Paragraph

A Section 501(c)(3) exempt organization is presumed to be a private foundation unless it qualifies as a public charity. The distinction between the private foundation and public charity classification may be critical for organizational leaders to understand, as public charity status is generally far more advantageous when there is a choice.

Since private foundations are generally governed by a smaller, more insular group of individuals and receive funds from only a few sources, they are subject to many more burdensome rules, regulations, and potential penalties to help assure proper operation. Private foundations must also complete the lengthy annual information return, Form 990-PF, and cannot make use of the short-form options (Form 990-EZ and Form 990-N). Further, as compared to public charities, private foundations face significant disadvantages in terms of fundraising opportunities from other private foundations (due to the expenditure responsibility rules of Section 4954 of the Internal Revenue Code (the “Code”)) and major donors (due to the smaller charitable deduction limits applicable to gifts made to a private foundation).

Private foundations are also subject to a set of federal tax laws that impose monetary penalties on the organization and its managers for various infractions and activities. These rules regulate areas such as self-dealing, minimum distributions, excess business holdings, jeopardizing investments, and taxable expenditures. Leaders of private foundations should know how to manage their compliance with these laws and understand the potential consequences of a violation.

Private Foundation Excise Taxes

Self-Dealing – (IRC § 4941)

In general, a private foundation is constrained from having any financial transactions with persons who create, control, or fund the organization. These individuals are known in the Code as disqualified persons. A disqualified person may be a director, officer, substantial contributor, family members, or a 35% controlled entity. The Code identifies six specific transactions that, if engaged in by the foundation and a disqualified person, constitutes an act of self-dealing:

  • Lending money or credit;
  • Payment of compensation;
  • Furnishing goods, services, or facilities;
  • Selling, exchanging, or leasing property; and
  • Agreeing to pay a government official.

If such a transaction occurs, the disqualified person benefiting from the transaction will be subject to a 10% first-tier tax and 200% second-tier tax if the violation is not corrected within the taxable period. Generally, the tax is measured by the “amount involved,” which is defined as the “greater of the amount of money and the fair market value of the other property given [to the disqualified person] or the amount of money and the fair market value of the other property received [by the disqualified person].” Treas. Reg. § 53.4941(e)-1. To avoid the second-tier tax, the self-dealing error must be corrected between the date of the transaction and the date on which the tax is assessed or a notice of deficiency with respect to the tax is mailed, whichever is earlier.

Foundation managers (including directors) who knowingly approve a self-dealing transaction may also be subject to a 5% first-tier tax and 50% second-tier tax.

Additionally, there are several exceptions to self-dealing, where certain transactions are permitted between private foundations and disqualified persons. These include:

  • Payment of reasonable compensation for personal services (professional services reasonable and necessary to carrying out the mission); and
  • Furnishing of goods, services, or facilities to a disqualified person on a basis no more favorable than that on which such goods, services, or facilities are made available to the general public.

For more information on exceptions to the self-dealing rules, see Exceptions – Self-Dealing by Private Foundations.

Minimum Distribution Requirement – (IRC §4942)

A private foundation must spend a minimum amount for grants, administration, and other charitable distributions annually. The minimum disbursement required in order to avoid excise taxes, also known as a qualifying distribution, is 5% of the organization’s assets, not including those which are used (or held for use) directly in carrying out the foundation’s exempt purpose. The purpose behind this mandatory payout is to ensure private foundations are actively funding charitable programs and not simply hoarding charitable funds in perpetuity. Note that, a private foundation in its first year of existence has no distribution requirement.

For some grantmaking private foundations whose sole charitable activity is related to grantmaking, the minimum distribution requirement is equal to 5% of its investment assets. Qualifying distributions include grants to charities and reasonable and necessary administrative expenses paid to accomplish the foundation’s charitable purposes.

Failure to make the required distribution may subject the foundation to a first-tier tax equal to 30% of the amount of undistributed income at the beginning of subsequent taxable year. If uncorrected by the close of the taxable period, a second-tier tax of 100% of the undistributed portion remaining may be imposed. 

Excess Business Holdings – (IRC §4943)

Generally, a private foundation and its disqualified persons together may own no more than 20% of the voting or ownership interest in a business enterprise. The term “business enterprise” includes partnerships, joint ventures, or other unincorporated enterprises. The penalty for a violation of the excess business holdings rule is a first-tier tax of 10% of the value of such excess business holdings and a second-tier tax of 200% if the foundation still has excess business holdings at the end of the taxable period. The amount of excess holdings is determined as of the day during the tax year when the foundation’s excess holdings were the greatest.

There are a few exceptions to this general rule, including:

  • Where the private foundation (together with certain related private foundations) owns less than 2% of the voting stock and 2% of the value of all outstanding shares of all classes of stock.
  • Where the private foundation and its disqualified persons own up to 35% of the business enterprise but a third party effectively controls the management and policies of the enterprise.

Also note that the initial tax may be abated if the private foundation can demonstrate that the excess holdings were due to reasonable cause and not willful neglect, and that the excess holdings were disposed of within the correction period.

Jeopardizing Investment – (IRC §4944)

A private foundation’s managers must exercise prudence and good business judgment in investing the foundation’s assets. If a private foundation invests in a manner that jeopardizes its ability to carry out its exempt purposes, the foundation may be subject to a first-tier tax of 10% of the relevant amount so invested for each year in the taxable period. A 25% second-tier tax may be imposed if the violation is not corrected within the taxable period. Foundation managers (including directors) who knowingly participated in making that investment may also be subject to a first-tier tax of 10% and a second-tier tax of 5% of the relevant amount.

The general approach to avoiding the tax on jeopardizing investments is to look at the entire investment portfolio of the foundation rather than at individual investments. A diverse portfolio of investments may be characterized as prudently invested without looking to whether individual investments are jeopardizing, but that may not be the case where one single highly speculative investment dominates the investment portfolio.

There is a specific exclusion from the jeopardizing investment prohibition for program-related investments (PRIs). Generally, a PRI is an investment in which (1) the primary purpose is to accomplish one or more charitable purposes; (2) the production of income or the appreciation of property is not a significant purpose; and (3) lobbying or electioneering is not a purpose. A PRI might take the form of a loan to a charity or a loan to, or equity investment in, a business entity for a charitable purpose, such as, to develop or distribute a lifesaving drug for use in developing countries that would not otherwise be commercially viable.

Taxable Expenditures – (IRC §4945)

A private foundation must devote its income and principal exclusively to the charitable purposes for which it was created. Any payment made by the foundation for a non-charitable purpose is therefore a taxable expenditure. Examples of taxable expenditures include payments used for:

  • Lobbying;
  • Political intervention;
  • Grants to individuals for travel, study, or similar purposes unless such grants are awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the IRS and otherwise meet certain statutory requirements;
  • Grants to domestic organizations that are not public charities, unless the foundation exercises expenditure responsibility over the grant; and grants to foreign charities, unless the foundation exercises expenditure responsibility or the grantee meets determines that the grantee passes an equivalency determination (i.e., is determined to be the foreign equivalent of a U.S. public charity); and
  • Other than charitable purposes.

If a private foundation makes such an improper expenditure, the foundation is subject to a first-tier tax of 20% of the amount and a 100% second-tier tax if the violation is not corrected within the taxable period. Foundation managers (including directors) who knowingly participated in making that taxable expenditure may also be subject to a first-tier tax of 5% and a second-tier tax of 50% of the relevant amount.

Excise Tax on Investment Income – (IRC §4940)

Private foundations must pay an excise tax of 2% annually on the income earned on its investments, including dividends, interests, royalties, rents, and capital gain from properties producing such income. In certain cases, the tax amount may be reduced to 1% in a year during which the foundation’s percentage of charitable giving in relation to its total assets increases.

For more information about payment and calculation of this tax, see the Instructions for Form 990-PF.

TWEETS OF THE WEEK

Nonprofit Tweets of the Week – 3/6/15

Racial Justice

This week, the Department of Justice released a report of its investigation of the alleged civil rights abuses and other acts of misconduct by the police department in Ferguson. Have a listen to The Game‘s Don’t Shoot while perusing our curated nonprofit tweets of the week:

COLLABORATIONS & MERGERS

Nonprofit Collaborations: The Structural Options

Unity is strength - teamwork concept

A recent article in The Nonprofit Quarterly titled “Collaborations: The Nonprofit Trend” discussed the movement towards collaborations and linkages of many kinds among nonprofits to combat a growing need for services with fewer resources. While there is no denying the importance of collaborations for many organizations, and particularly to tackle larger social problems, leaders of nonprofits should have a basic understanding of the legal structures possible before entering into these collaborations.

MOU or Contract

An organization should determine at the outset whether it wants to enter into an enforceable agreement with another party or just a mutual set of understandings where neither party is legally responsible for complying with the terms.

If an enforceable agreement is desired, the parties should enter into a written contract that clearly states each party’s obligations and promises to the other party. The contract should also address the term of the agreement and how the contract may be terminated.

A memorandum of understanding or MOU may be appropriate where the parties don’t want an enforceable agreement. But organizations must be very careful about the drafting of an MOU if they don’t want it to be legally binding. An MOU can easily turn into a contract by virtue of the words regardless of what the document is called. Adding to the confusion, it’s common among nonprofits to call a contract an MOU because it sounds more friendly and collaborative. Generally, this isn’t a good idea because it may result in misunderstandings between the parties about what each party wants in the event the other party doesn’t perform.

Service Agreement

A simple form of collaboration is one in which one party provides services to another party in exchange for money or some other form of consideration (value). For example, a nonprofit research firm might provide its research services to a nonprofit service provider in a way that benefits both parties and furthers their respective missions. The research firm gets paid to do research that may have valuable application the firm itself is not designed to pursue. The service provider gets to use the research it is not designed to conduct to better serve its intended beneficiaries.

Mutual Service Agreement

A service agreement may be a little more complicated and involve a deeper form of collaboration where each party commits to performing services without a transfer of money from one party to the other. The services may also be directed towards a common class of beneficiaries rather than to each other. For example, several nonprofits supporting healthy families but focused on different aspects (e.g., domestic violence, child abuse, mental health) may enter into an agreement to provide their respective services in a coordinated fashion or perhaps at a common center.

License Agreement

A license agreement generally provides for one party’s right to use certain intellectual property of another party. Intellectual property includes trademarks/service marks (e.g., names, logos), copyright (e.g., writings, music, art, film), patents (e.g., inventions, designs), and trade secrets (e.g., mailing lists). A nonprofit might license use of its name and logo in connection with its support of an event or use of its film to allow for broader viewership and revenue-generation.

Resource-Sharing Agreement

A resource-sharing agreement can facilitate the sharing of office space, equipment, and even employees for greater efficiencies. Such agreements are common with smaller affiliated nonprofits like a 501(c)(3) public charity and related 501(c)(4) social welfare organization but can involve otherwise unrelated organizations too. Resource-sharing agreements should specifically detail what resources are to be shared and how the costs will be allocated to each party. Generally, a 501(c)(3) organization party to such an agreement must ensure that it is not paying more than fair market value in the arrangement if it involves a non-501(c)(3) party, and particularly if it is making any form of payment to a for-profit. Resource-sharing agreements can trigger many issues involving leases, insurance, licenses, permits, employees, and independent contractors. So, nonprofits must enter into these agreements with great care.

Fiscally Sponsored Collaborative

Nonprofits seeking to create a deep collaboration but only on one particular program (and not their entire operations) may find it advantageous to use a third party fiscal sponsor. By establishing the collaborative within a fiscal sponsor, the parties may be able to collaborate without worrying as much about control and liability issues. The fiscal sponsor would own and ultimately be responsible for the project, but the parties could each assign individuals to collectively serve as the steering committee to the project. Such arrangements are quite common among funders who may look to pool their grants and leverage other resources to focus on a specific issue area while minimizing some of the administrative burdens of their grantees.

“Partnership”

For nonprofits pursuing a deep collaboration on one particular program that do not want to use a third party fiscal sponsor, creation of some form of “partnership” may be a viable alternative. A true partnership would be owned by the two parties, and each party would be jointly and severally liable for any liabilities of the partnership. A limited liability company (LLC), including a low-profit limited liability company (L3C), would be owned by the two parties but could be structured so that liabilities of the LLC would not normally ascend to the owners. A for-profit corporation, including a benefit corporation or social purpose corporation, would be owned by the two parties and would similarly provide its owners with the protection of limited liability. A nonprofit corporation, which has no owners, would be governed by a board appointed by the two parties, who might retain other rights (e.g., the rights of a voting member) with respect to the corporation. The choice of entity to house the collaborative effort should be made carefully and preferably with the assistance of appropriate counsel.

Cross-Sector Joint Venture

Nonprofits may want to enter into joint ventures with for-profits to raise capital, to access the expertise possessed by their for-profit co-venturers, and to take advantage of opportunities otherwise unavailable to them. For-profits may want to enter into joint ventures with nonprofits to access new sources of capital, to exploit specific assets owned by the nonprofit (such as intellectual property rights), to take advantage of available tax credits (such as the federal Low-Income Housing Tax Credit), and to acquire greater community or political support. As is the case with the “partnership” option discussed above, the choice of entity to house the joint venture should be made carefully. Among the issues to manage unique to nonprofits are:

  1. the operational test issues (e.g., substantial unrelated business activities attributed to the nonprofit co-venturer from a pass-through joint venture – like an LLC – could jeopardize its 501(c)(3) status); and
  2. the control issues (e.g., the nonprofit must retain control of the charitable activities of the joint venture and must have the right to appoint at least half of the board of a corporate joint venture entity).

Merger

A merger is sometimes referred to as the ultimate collaboration of two parties. In the most typical form of merger, the corporation that remains in existence is referred to as the surviving corporation and the corporation that is merged out of separate legal existence is referred to as the disappearing corporation. In a merger, the surviving corporation inherits not only all of the assets of the disappearing corporation(s), but also all of its liabilities and obligations. Accordingly, it becomes extremely important for the parties to engage in thorough due diligence prior to an agreement to merge.

Mergers are complex transactions that generally require negotiation over matters such as the addition of board members from the disappearing corporation to the board of the surviving corporation, preservation of certain programs previously run by the disappearing corporation, and decisions on which, if any, employees of the disappearing corporation will continue as employees of the surviving corporation. Particularly if the parties were not sufficiently prepared, a merger can result in many potentially unanticipated consequences such as real property transfer taxes, breaches of contracts (e.g., for failure to notify the other party of the merger), and loss of future planned gifts.

As for cost savings, don’t expect that at the outset and maybe not at all. The costs of a merger, including all of the due diligence, preparation, and integration activities, can be very substantial.

But a merger entered into thoughtfully and with diligence can result in tremendous benefits, most notably, an increase in the efficiency and effectiveness of advancing the missions of both organizations and a stronger organization to conduct the charitable activities that further the combined mission. More specifically, a merger may increase the ability of the organizations to expand their service area, their programs, and their internal capacity to create new and better ways to further their mission.

Concluding Thoughts

We often hear the expression – “Trust, but verify.” The same wisdom applies to collaborations. Verify, exercising reasonable care in the process, that your collaborator is trustworthy and is capable of pursuing your common goals and meeting all of its obligations. And protect yourself, to a reasonable extent, in the event your collaborator doesn’t meet its obligations.

TWEETS OF THE WEEK

Nonprofit Tweets of the Week – 2/27/15

Red carpet at night with flashlights

Last Sunday, the Oscars telecast featured several films and acceptance speeches that focused on themes of social justice and social good. Have a listen to Bob Marley‘s Get Up, Stand Up while perusing our curated nonprofit tweets of the week:

  • Atlantic: What the FCC’s historic net neutrality ruling means in plain English http://theatln.tc/1DvznGh
  • Independent Sector: The 2015 Principles for Good Governance and Ethical Practice, our answer to a new world of opportunity for nonprofits http://ow.ly/IDIGK
  • CompassPoint: Real world insights show a better path to successful #nonprofit #boards: http://ow.ly/JADmx From @HaasJrFund
  • Nonprofit Quarterly: 10 signs your nonprofit is on a destructive path to its demise http://hubs.ly/y0s9760 #10WaystoKill
  • Olive Grove: Why is “generative thinking” so important for #KickAssGovernance? Find out in this @PwC_LLP article: http://ow.ly/JnTTo
  • Jan Masaoka: Forms 990 and IRS passwords hacked; allows access to restricted data like Schedule B donor lists @UrbanInstitute The Hill
  • Lucy Bernholz: Strategy and collaboration in #philanthropy – working at cross purposes? PND Blog  … @fdncenter
  • CA Attorney General: AG Kamala Harris Announces Legislation to Improve Transparency & Accountability for Commercial Charitable Fundraisers
  • ScaleChange: The Top Nonprofit Crowdfunding Risks
  • Insider Higher Education: .@AlliantU becomes a benefit corporation, blurring the line between for-profit and nonprofit: http://bit.ly/1BemMtn
  • Leonard Nimoy: A life is like a garden. Perfect moments can be had, but not preserved, except in memory.  LLAP [Ed. Live long and prosper, Leonard Nimoy’s final tweet. Rest in peace.]