Strategic Partnerships Through a Legal and

Funding Lens Allen Bromberger, Perlman & Perlman LLP

Dan Studnicky, Consultant

Collaboration and Strategic Combinations between Nonprofit and

For-Profit Entities

Allen R. Bromberger Perlman and Perlman, LLP

The General Rule:

Charities can enter into collaborations, strategic partnerships and joint ventures with for-profit entities if:

The arrangement furthers the charity’s tax-exempt mission, and

The arrangement does not confer impermissible private benefits on the for-profit partner

“Incidental” benefits” are permitted

Types of Arrangements:

Collaborations (little control)

Cause Marketing arrangements (some control) Qualified corporate sponsorships Commercial co-ventures

Partnerships/Joint Ventures (lots of control)

Controlled subsidiaries (total control)

Factors to Consider:

Independent boards

Arm’s-length negotiation

Benefits to the for-profit partner (and its shareholders or customers) are incidental, not substantial

On balance, the arrangement is more beneficial to the charity than to the for-profit business

If the charity controls the for-profit, the activities of the subsidiary may be attributed to the charity

The World of “Social Enterprise”

Business with a social purpose

May be nonprofit, for-profit, or combinations of both

B Corps

Benefit Corporations

Delaware Public Benefit Corporation

L3C’s, social purpose corporations, flexible purpose corporations, and other special purpose entities

Contract Hybrids

Unrelated Business Income Tax (UBIT)

Trade or business

Regularly carried on

Does not contribute to accomplishment of mission in an important way other than by generating revenue

Exceptions for corporate dividends, rents, and royalties But not for debt-financed property or if services are provided

Funding Models: Consolidation, Diversification, and Focus

by Daniel Studnicky

Not For Profit (NFP) sector in the USA in 2010:

2.3 million NFPs including

1.6 million registered with IRS (1/3 are not registered w/ IRS)

1.1 million are 501c3s

employs 13.7 million people (10% of the workforce)

2000 - 2010, NFP employment grew 18%, faster than the U.S. economy

Most nonprofits are small:

Pyramid of NFPs by Operating Revenue

$5 MM+ 6.5%

$500,000 - $4.99 MM 19.2%

Up to $499,999 74.3%

Pyramid of NFPs by Operating Revenue

$10 MM+ 4%

$5 MM - $9.9 MM 2.5%

$1 MM - $4.99 MM 11%

$500,000 - $999,999 8.2%

$100,000 - $499,999 29%

Under $100,000 45.3%

Of those with annual operating revenue less than $100,000:

272,000 lost their tax-exempt status in 2011 due to new IRS regulations requiring NFPs with less than $25,000 revenue to file a new form

More than 50% of these were human service (31.2%) or public / societal benefit groups

Pyramid of NFPs by Expenditures

$10 MM+ 85.6%

$5 MM - $9.9 MM 4.5%

$1 MM - $4.99 MM 6.2%

$500,000 - $999,999 1.5%

$100,000 - $499,999 1.7%

Under $100,000 0.5%

NFP Revenue : Expenditures

$10 MM+ 4%

$5 MM - $9.9 MM 2.5%

$1 MM - $4.99 MM 11%

$500,000 - $999,999 8.2%

$100,000 - $499,999 29%

Under $100,000 45.3%

85.6% $10 MM+

4.5% $5 MM - $9.9 MM

6.2% $1 MM - $4.99 MM

1.5% $500,000 - $999,999

1.7% $100,000 - $499,999

0.5% Under $100,000

Nearly 2/3 of overall revenue comes from private sources:

Private Sources - 63% 50% Fees at hospitals, health clinics, child daycare centers 13% Private contributions (individuals, foundations, corporations)

Government Sources - 32% 24% Government transfers for Medicare and Medicaid 8% Government grants

Other - 5% (includes income from assets)

Where are we? And where do we want to go?

Diversification & Infrastructure

$10 MM+ 4%

$5 MM - $9.9 MM 2.5%

$1 MM - $4.99 MM 11%

$500,000 - $999,999 8.2%

$100,000 - $499,999 29%

Under $100,000 45.3%

High Infrastructure/ More diversified

Low Infrastructure/ Less Diversified