A Look at Strategic Alliances through Both a Legal and Funding Lens

2014 Nonprofit Empowerment Summit Giving It Our All!

Kelly Nowottnick, ESQ, Associate, Venable, LLP John W. Dyess, Senior Consultant, Like Minds

A Look at Strategic Alliances of

Nonprofits through both a Legal and

Funding Lens Presented by

Kelly Nowottnick of Venable LLP and John Dyess of Like Minds, LLC

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What is a Strategic Alliance?

• Two or more organizations combine, affiliate or

otherwise come together; and • At least one of the organizations gives up some

level of independent decision-making in order to accomplish an organizational or community goal.

• Strategic alliances usually occur for common

mission-related objectives.

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Temporary/Contractual Alliances vs.

Permanent/Fully-Integrated Alliances

• Strategic alliances can be contractual or temporary in

nature, such as programmatic collaborations, administrative back-office consolidations and joint ventures.

• Alternatively, strategic alliances can involve more permanent, full integration, such as federations, acquisitions of dissolving organizations’ assets, mergers and consolidations.

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Some Common Types of Strategic Alliances

ROUGHLY RANGING FROM LEAST INTEGRATED TO MOST INTEGRATED: • Sponsorship Agreements • Programmatic Collaborations • Back-Office Consolidations/Common Management

Company • Joint Ventures • Federations • Asset Acquisitions • Mergers • Consolidations

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Sponsorship Agreements • Fiscal Sponsorships vs. Corporate Sponsorships: two

different concepts • A corporate sponsorship is the payment of money

by a for-profit company to a nonprofit to further the nonprofit’s mission, with an acknowledgment that the business has supported the nonprofit's activities, programs, or special event.

• Fiscal sponsorship refers to the practice of nonprofit organizations offering their legal and tax-exempt status to groups engaged in activities related to the organization's missions. It typically involves a fee-based contractual arrangement between a project and an established non-profit.

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Programmatic Collaborations

• Nonprofits may share policies, procedures and best

practices and pool financial and human resources to accomplish a common programmatic objective.

• These programmatic collaborations are sometimes referred to as “co-sponsorships.”

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Back Office Consolidations

• Nonprofit organizations with similar purposes can

affiliate through a common management structure, whereby the groups realize the efficiencies of coordinated “back office” operations such as accounting, meeting management, IT, human resources, and other supportive functions.

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Joint Ventures

• Relationship that arises from an express or implied agreement between two or more parties to undertake some common objective for their mutual benefit.

• Cross-sector joint ventures between one or more nonprofit organizations and one or more for-profit organizations are becoming increasingly popular.

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Pros and Cons of Cross-Sector Joint Ventures

• Pros for nonprofit:

o Greater access to capital and professional expertise; o Opens up business opportunities otherwise unavailable to a tax-exempt organization.

• Pros for the for-profit: o New sources of capital; o Access to/exploitation of specific assets owned by the nonprofit (e.g., intellectual

property rights or specific real property); o Certain tax credits o Greater community or political support o May further the philanthropic goals of for-profit company owners.

• Cons for nonprofit: o May threaten tax-exempt status, if not carefully structured o May generate UBIT

• Cons to nonprofit and for-profit: o May unintentionally result in a partnership whereby one partner is liable for the sole

action of the other partner, if such action was carried out in the name of the partnership.

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Federations

• A Federation is generally an association of nonprofit associations, often structured around regional lines.

• An affiliation agreement is a binding contract that sets forth the nature of the relationship between the parties.

• Examples: United Way and various national associations

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Asset Acquisitions • A nonprofit organization may acquire the assets of a

dissolving nonprofit organization. • Preferable when one organization is much smaller in size

than the other. • Also preferable when there are significant future

contingent liabilities, because successor organization does not, by law, assume the liabilities of the dissolving organization.

• Procedural requirements can be complicated for dissolving entity. The dissolving organization must typically satisfy due diligence requirements; obtain member approval; adopt a plan of dissolution; satisfy outstanding liabilities; transfer any remaining assets to the other nonprofit entity; file Articles of Dissolution with the State; and wind up affairs.

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Mergers and Consolidations

• With a Merger, one entity legally becomes part of the other, surviving entity and dissolves.

• With a Consolidation, each entity dissolves, and an entirely new nonprofit corporation is created to take on the programs, resources and membership of the former entities.

• Pros: o Increases assets o Reduces costs o Permits new corporation to provide enhanced services and serve larger

constituency o Reduces members’ dues

• Cons: o Legal fees o State filings o Member approval o New corporation may need to submit its own IRS application for tax-exempt status

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Tax Considerations

• Minimizing Unrelated Business Income Tax

• Maintaining Tax-Exempt Status

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A Strategic Alliance Can Improve Fundraising

Capabilities by . . . 15

o bringing in new board members and staff with new competencies and fundraising potential;

o providing the organization with access to donors from the other constituent nonprofit organizations;

o improving the community’s awareness of the organization and its mission;

o increasing administrative capacity; o centralizing decision-making; and o improving organization-wide accountability.

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Your Experiences?

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Questions?

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