Seminar Recap: Exploring Nonprofit Collaborations, Mergers, Affiliations, and More 

During AAFCPAs’ recent Nonprofit Seminar (April 2024), Joshua England, LLM, Esq. and Chris Consoletti, Esq. updated approximately 400 attendees on nuances related to nonprofit collaborations, mergers, and affiliations. 

The full session was recorded and may be viewed as a webcast at your convenience. >> 

Now, more than ever, nonprofits need to explore collaborations, both formal and informal, to address the complex challenges they face. These collaborations, in their various forms, may provide nonprofits with unique advantages to continue and even strengthen their exempt mission. They may help nonprofits overcome financial challenges, enhance program effectiveness, broaden service offerings, deliver cost efficiencies, and expand program reach. Informal relationships may include collaborative learning, coordinated action, joint advocacy, or networking among two parties. A collaboration could also involve multiple entities from multiple sectors on a wide range of initiatives. There are many ways for nonprofits to collaborate, and many are not mutually exclusive. 

As nonprofits increasingly turn to collaborations and linkages to meet a growing demand for their services while constrained by limited resources, the importance in partnerships becomes clear. Here’s a closer look at some of the various options you might consider. 

• Memorandum of Understanding (MOU): MOUs are not enforceable agreements, meaning neither party has a legal responsibility to comply with its terms. AAFCPAs advises that clients draft MOUs carefully to avoid unintentionally creating a legally binding contract, which may cause confusion between the parties involved. 

• Service Agreements: A service agreement is a simpler form of collaboration where one party provides services to another in exchange for payment or other consideration. For example, a research firm might provide research services to a service provider in a way that benefits both parties and furthers their respective missions. The research firm, in turn, is paid for their services and has valuable applications that they would have not otherwise have been designed to pursue. 

• Affiliation Agreements: If a more binding agreement is needed, nonprofits should consider an affiliation agreement or a formal contract. These agreements outline terms and conditions of the relationship and detail obligations, rights, scope, limitations, and terms of termination. Affiliation agreements, which vary based on the specific relationship, ensure both parties’ interests are protected and mutual expectations are met.  

• Shared Resources: Nonprofits may share office space, equipment, or employees to alleviate staffing shortages and reduce costs. 

Fiscal Sponsorships 

Fiscal sponsorships allow sponsors to lend their nonprofit status to another organization who may not have a tax-exempt status or who is in the process of obtaining theirs. This can help startups or associations accept donations and operate under the sponsor’s umbrella. There are several reasons to consider fiscal sponsorship, e.g., to secure funding for your programs by offering donors a means to receive a charitable deduction or also to collaborate with an organization whose resources you may use. There are several types of fiscal sponsorships, but the two most common types are: 

• Model A Fiscal Sponsorship: The project exists entirely within the sponsor organization, which manages donations and administration. 

• Model C Fiscal Sponsorship: The project is a separate entity with a grantor-grantee relationship, where the sponsor oversees grants but does not manage the project. 

Partnerships, Joint Ventures, Affiliated 501(c)(4), and 501(c)(3) Relationships 

Partnerships involve two nonprofits collaborating on a specific program by forming a third entity, such as a limited liability company or another nonprofit. This formal arrangement makes each party jointly and severally liable for the program. Joint ventures, typically between nonprofits and for-profit entities, allow nonprofits to raise capital, access expertise, and seize opportunities while for-profits gain access to new capital sources, nonprofit assets, and tax credits. Nonprofits must be cautious, however, about generating unrelated business income, which not only will incur tax but it may also jeopardize their tax-exempt status. They must also make sure they retain control over charitable activities and board appointments in the joint venture. 

In addition to the above, nonprofits can establish affiliated 501(c)(4) organizations to engage in lobbying and political activities, which are limited for 501(c)(3) organizations. These affiliates must operate as separate legal entities with distinct governance and financial structures. A 501(c)(3) organization may accept tax-deductible contributions but is limited when it comes to activities like lobbying. In contrast, 501(c)(4) organizations enjoy more flexibility in their activities but cannot offer tax deductions for donations. To engage in extensive and unlimited lobbying, a 501(c)(3) might set up an affiliated 501(c)(4). This affiliated entity operates independently, with separate legal filings, finances, and governance. While they may share staff and office space, careful accounting is necessary to maintain a separation and to comply with IRS rules. 

Mergers and Other Options 

Mergers represent the ultimate collaboration between two parties, resulting in either one surviving entity and one that ceases to exist legally or one entirely new entity comprised of the other two. Mergers can expand impact or act as a strategic response to financial challenges. It lets two entities pool resources, improve cash flow, and access new funding sources and donor bases. By eliminating competition for donors, merged entities may increase funding to advance their missions. Mergers involve significant costs and legal complexities along with complex negotiations over governance, program continuity, and employee transitions. Undertaking a merger will accrue significant legal fees, extensive due diligence processes, and thorough reviews of organizational documents, financials, staff, and leadership. While mergers may offer cost savings through streamlined operations and enhanced program effectiveness, those benefits may take years to materialize.  

Other collaborative options include structures like single-member LLCs or separate C Corporations for strategic reasons. A single-member LLC can shield a nonprofit from liability related to specific activities, such as property ownership, by isolating risks to the LLC’s assets. It can also potentially provide property tax benefits in certain states like Massachusetts. On the other hand, setting up a separate C Corporation may help manage unrelated business income tax (UBIT) risks. Income generated within the C Corp will be taxed at the 21 percent corporate rate, and dividends distributed to the nonprofit are generally not subject to UBIT, providing potential tax efficiencies when compared to reporting UBIT activities directly on Form 990-T, which can risk their tax-exempt status. 

Nonprofit collaborations, mergers, and affiliations offer significant benefits, from financial stability to expanded program reach. However, they also require careful planning, legal considerations, and clear agreements to ensure success and to protect each party’s interests. AAFCPAs advises that nonprofit leaders gain a solid understanding of various legal structures available before entering into such agreements. They should also evaluate options to determine the best strategies for achieving their mission and maximizing their impact. 

If you have questions, please contact Chris Consoletti, Esq., Director & Consulting Attorney at 774.512.4180 or cconsoletti@nullaafcpa.com, Joshua England, LLM, Esq., Partner & Tax Attorney at 774.512.4109 or jengland@nullaafcpa.com—or your AAFCPAs Partner.