Now more than ever, nonprofits are turning to collaboration with other nonprofits to pool resources, gain efficiency, and better serve their mission. Nonprofits can merge their back offices to enjoy lower overhead costs, enter into a joint venture to expand their offerings or service area, or even merge completely into one complete entity. But navigating which option is right for your nonprofit can be challenging. The first step is to understand the differences between the types of nonprofit collaboration.
1. Joint Ventures
A joint venture is historically used when two nonprofits want to collaborate on an isolated program or project. When we say “nonprofit collaboration,” this is what people think of most often. This can be beneficial in a variety of ways.
A nonprofit can enter into a joint venture with another nonprofit organization, like a youth-serving organization and a horse rescue, coming together to create a free horse-riding summer camp for foster children. Joint ventures can help you expand what your nonprofit is able to offer your target population, or it can help you expand your geographic reach. Joint ventures can also be great for combining administrative costs, which most grant providers love. Collaborating with another nonprofit for a specific grant is often in the form of a joint venture (or a partnership if it is long-term).
But a nonprofit can also enter into a joint venture with a for-profit company. For those arrangements, you’ll need to make sure your nonprofit’s part in the joint venture furthers your charitable mission and doesn’t run amuck with private benefit issues. Private benefit is a complex topic, but the reason it’s important here is because it can cause tax penalties or even the loss of your tax exempt status. So if you are engaging in a joint venture with a for-profit, have a nonprofit attorney involved in drafting the agreement to ensure you can steer clear of hefty fines or the loss of tax exemption.
Overall, joint ventures can increase your impact by allowing you to take on more than you might be able to normally. Joint ventures can be extremely helpful, whether it provides you with an opportunity to increase the geographic reach of a program, add more resources or expertise, or creates a new programmatic offering.
2. Mergers
Mergers are the most formal process in this list. A merger combines two nonprofit entities. This form of collaboration might be right for your situation if at least one of the following is true:
- One of the organizations is insolvent (they owe more than they own) or heading towards insolvency within the next 1-2 years
- One or both organizations are struggling to keep up with administrative back office costs like admin staff, printing, computers, payroll expenses, etc.
- One of the nonprofits is closing and wants to provide property or assets to the surviving organization
- The organizations serve similar populations or work towards a common mission
The merger process ranges from short and simple to lengthy and complicated. Often, the amount of time a merger takes is determined by the amount and types of assets the entities own, the debt they owe, and how many people are involved. When you’re working with more (whether it’s debt, people or assets), the process will likely lengthen. The process can also lengthen when members of either board are not willing to negotiate with the other organization’s board. An uncomfortable truth about mergers is that only one entity will legally exist afterwards, though you’re welcome to use one of the names currently being used by the entities OR create a new name.
It is always important to do your due diligence during a merger no matter the size of the organizations. Many nonprofits use a consultant during the process to help perform due diligence and implement best practices. When you’re ready to officially merge after the due diligence process, it’s important to have an attorney who is knowledgeable about nonprofit law. While a volunteer attorney may be well meaning, there are differences in how the law handles nonprofits and for-profit entities, so an attorney who works primarily with for-profit companies or individuals could put your organization at risk of noncompliance. If you’d like a free consultation with our team to discuss a potential merger, reach out here and we’ll be in touch within 1 business day.
3. Fiscal Sponsorship
We have details about fiscal sponsorship in one of our previous posts, but at its most basic level, fiscal sponsorship allows a fledgling charitable program to be incubated by an established nonprofit organization. Usually the larger organization handles the compliance paperwork like donation acknowledgements and solicitation registration, while the new charitable program is actually running the program itself. The new program gets the benefit of raising tax deductible donations and applying for grants before getting their own 501(c)(3) status, while the existing nonprofit often benefits by taking a percentage of the donations raised for the new program as revenue for their other charitable programming.
This arrangement is often used in churches. A new ministry being operated under the “umbrella” of a church before the ministry is ready to break off and become its own nonprofit organization is a common use of fiscal sponsorship. But within the last 30 years, there are now nonprofits that exist primarily to act as fiscal sponsors. We have a sister organization that has provided fiscal sponsorship to hundreds of fledgling nonprofit programs during their launch stage.
4. Partnerships
People use the word “partnerships” to mean many things, but in this case, we’re referring to a formalized agreement between 2 or more nonprofits that has a specific goal, and can be ongoing, unlike the defined timeline of a joint venture. Partnerships can allow your nonprofit to pool resources with another organization to help you reach your goals. A good partnership increases efficiency and/or number of resources for both parties involved. Partnerships can also allow two charities to apply for joint funding in some instances. Many grant funders are fond of nonprofit partnerships (and joint ventures) because they allow nonprofits to provide more services at a lower cost.
For example, let’s say there are two organizations providing educational STEM programs for school-aged kids. One of them (Nonprofit A) historically serves kids in 4th-6th grade on the south end of a city. The other organization (Nonprofit B) usually serves kids in 1st-3rd grade on the north side of the city. By pairing up, Nonprofit A can likely introduce Nonprofit B to contacts at schools on the southside so that kids in grades 1st-6th can be served on the southside, rather than just kids in grades 4th-6th. And with similar programs, these organizations likely have similar materials needs for their programs. If they order their science kits together instead of separately, they could both benefit from bulk discounted pricing. And rather than having one person at each organization coordinating the scheduling with the schools, they can likely just have one person for both organizations. In this example, they’ve lowered the costs of materials and staff, and expanded their geographic reach so more kids can be served.
Nonprofit Collaboration Conclusion
No matter what type of nonprofit collaboration you pursue, it’s always important to do your research about the organization you’re looking to collaborate with. While the impact of a successful partnership, joint venture, fiscal sponsorship, or merger can be great, the implications of one of these methods going poorly are also great. It’s also important to define the terms and goals of the arrangement formally, so be sure to get the appropriate agreements or contracts created by an attorney competent in nonprofit law. The Charitable Allies team is happy to help with any of these methods of collaboration, so please reach out to us if you have questions or would like to schedule a consultation.
