The economic climate of the last few years has caused tax exempt organizations to deliver their services and manage their expenses with greater creativity and efficiency. One way to keep costs down is to share employees, office space, or administrative resources with another organization, whether nonprofit or for-profit. Obviously, if the other organization is for-profit, the issue of private benefit arises (and possibly the issue of private inurement if the for-profit organization is in any way related to the tax exempt organization). In any event, the tax exempt organization should document the arrangement clearly so that (a) each party understands its rights and benefits in the arrangement, (b) there is a clear contractual relationship established to rebut a claim of a partnership between the parties and to avoid liability of the tax exempt organization for the actions of the other party, (c) there is a clear allocation of risk between the parties with respect to potential liability issues, and (d) the arm’s-length relationship between the parties is established from the outset of the arrangement.
Practical Tips
If the organization is not sharing resources, assess whether such an arrangement might make sense.
Times change. There may be newly-useful opportunities for a tax exempt organization to share personnel or space. Or perhaps a party that was previously unwilling to share resources has become more favorably disposed to such an arrangement with the tax exempt organization.
If the organization is sharing resources, properly document the arrangement in writing.
Any sharing of resources should be clearly documented in detail in writing to avoid confusion by the parties and establish the terms of the arrangement in the event they are ever questioned by a third party.
Take care to structure the arrangement at arm’s-length and avoid any private benefit or private inurement.
The terms of the sharing arrangement should be arm’s-length, negotiated between disinterested parties, with any potential conflicts of interest fully disclosed. In the event the directors of the tax exempt organization approve a sharing arrangement where there is a conflict of interest, the decision process and conflict disclosure should be fully documented in the minutes of the organization, and any applicable federal income tax ramifications, e.g., excess benefit transaction or self-dealing restrictions, should be considered prior to approving any such arrangement.
