Rules for Entering a Joint Venture Arrangement with a For-Profit
By Michael Wolf, CPA, Manager at Sikich LLP
For decades, non-profit organizations have been looking for ways to increase revenue in order to better achieve their charitable purpose. One way they have found to do this is by entering into a joint venture arrangement with a for-profit entity. The joint venture arrangement provides details on the creation of a partnership of limited liability company that is owned by a non-profit organization and a for-profit entity. Some reasons for forming a joint venture agreement are to raise capital or take advantage of tax credits such as federal Low-Income Housing Tax Credits. An example of a joint venture agreement would be a zoo contracting with a gift shop operator to sell items unrelated to the zoo’s exempt purpose. The revenue earned by the non-profit organization from the joint venture could be tax exempt if the joint venture arrangement follows these guidelines set in Revenue Ruling 98-15:
1. The joint venture member's participation must further a charitable purpose.
2. The joint venture agreement explicitly provides for the furtherance of the charitable purpose and only incidentally for the benefit of the for-profit owners.
According to various court cases, the proper question is simply who has effective control, regardless of whether it is based on a majority of the governing body or on powers granted in the partnership agreement. Before entering into a joint venture (or general partnership or limited liability company) arrangement with taxable partners, please consult a tax professional to help determine if the joint venture satisfies the requirements of Revenue Ruling 98-15. The non-profit partner could lose its exemption if a private party can control or use the non-profit's activities or assets for the benefit of the private party, unless the benefit is incidental to the accomplishment of exempt purposes. More information on this topic can be found on the Sikich Blog.