Tax Issues of For-Profit/Non-Profit Joint VenturesTax Professionals' Resource
September 27, 2012 — 1,460 views
In the 1990s, the joint venture movement began in the nonprofit arena when the United Way decided that many of its grants would only be available to entities with multiple service providers. Joint ventures came to be used to allow for-profit parties to take advantage of the tax benefits afforded to nonprofit organizations. In the two decades that followed, courts have closed many of the loopholes that existed, and the tax issues that may arise between for-profit and nonprofit joint ventures are now more clearly defined.
Structuring a Joint Venture
Many of the tax issues a joint venture will face depend on how it is structured. The most common vehicles for joint ventures are contractual joint ventures, partnerships, corporations and limited liability companies (LLCs).
Contractual Joint Ventures
In a contractual joint venture, no separate entity is established. The duties and benefits of the venture are defined in a contract, and each party is responsible for the actual profits or losses experienced as a result. Taxes are paid separately according to the money made or lost by each party. The major issue with this type of joint venture is that the contract must be worded so that the joint venture cannot be considered a partnership.
In a partnership, responsibility and liability are shared by each party. However, a limited liability partnership (LLP) can be formed instead of a general partnership. In an LLP, one partner is chosen as the managing partner, and only the managing partner has full liability. The passive partners are only liable for amounts up to their actual investments in the partnership.
Corporations are independent entities that provide protection from liability to each of the parties in a joint venture. Many parties make the mistake of believing that their tax-exempt status will carry over to the corporation. However, this is only true for S-corporations. The board of directors must also be careful when transferring capital assets into the corporation from shareholders. This may initiate a capital gains tax.
Limited Liability Companies
LLCs are an advantageous structure for joint ventures because they have characteristics of partnerships and corporations. In addition, LLCs can be established without much effort. LLCs are flexible and provide several options on how the joint venture is managed and operated. Joint ventures between for-profit and nonprofit parties may be considered tax exempt, but this status depends on the duties of each party and the relationship between the activities of the joint venture and the activities of each party.