Tax considerations are not the only elements to take into account when preparing a joint venture. Good business sense should always be applied to anything you do, whether alone or with another organization. Be sure to keep these things in mind.
Maintain Contractual Integrity
Contracts are valid only so long as they respect the relative bargaining positions of the parties. They should be drafted in such a way that it is clear that they were between willing parties who bargained in good faith and at arm’s length. If there was a preliminary proposal that was approved before the governing documents were drafted, be sure that the provisions of the proposal are reflected in the final documents. Contracts that deviate substantially from the agreed-upon deal, or are unduly burdensome to one party while unduly benefiting another, are likely to cause trouble in the long run. Be sure that any joint venture agreement is reasonable and fair.
Insure Against Risk
Indemnify the parties within the governing documents and obtain insurance to protect against risk.
Allocate Responsibility and Establish Standards
Make sure the party that accepts ultimate responsibility for outcomes is clearly identified and that standards against which that entity will be held accountable are set forth. Evaluate the performance of each party against these agreed-upon standards and take action if the performance is not up to par.
Avoid Overblown Promises
Don’t promise more than you can deliver. Don’t guarantee results that cannot be guaranteed. Spend sufficient time in setting things up and getting the paperwork done. This will bear fruit after operations begin and issues arise that can only be ironed out by reference to your governing documents.
Be Careful With Insiders
Your officers, directors, and key employees are especially vulnerable when you work with private for-profit corporations. They have a tendency to offer sweetheart deals that could be detrimental to the exempt organization and raise the specter of excess benefit transactions.1 If you suspect that there is even a possibility of a conflict of interest, be sure to have the transaction thoroughly examined by experienced legal counsel. When your joint venture is up and going, be sure to insist upon adherence to conflict of interest policies if a situation arises that must be dealt with under them.
Maintain Control of the Joint Activities
Although it has been addressed in the article, never forget that the exempt organization must remain in control of a joint venture with a for-profit entity in order to maintain its tax exemption and the exempt status of the enterprise. Draft governing documents (partnership agreement, bylaws, or operating agreement) so that the exempt organization always has the ability to block any action that would frustrate the charitable mission, improperly use charitable assets for private benefit, or allocate profits against the stated intent of the joint venture. Operate the joint venture in a way that carries this out.
ENDNOTES
1. Excess benefit transactions are described in Section 4958 of the Internal Revenue Code (26 U.S.C. §4958 et seq.). Any “disqualified person” under that section can be required to pay back the entire amount of the benefit to the organization and, in addition, pay an excise tax to the IRS of up to 25% of the amount.
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