The Illinois budget impasse continues in Springfield with no end in sight. As a result, many organizations who depend on state funds are feeling the pinch. They may be working through their credit line or obtaining loans from their local banks. Unfortunately, these are short term fixes. What other possible solutions do you have? One possible solution is to partner with a for profit
It may be possible to partner with a for profit organization that is willing to help your mission. Such a partnership can take many forms, but I will comment only on the situation where you form a new entity with the for-profit (typically an LLC) to operate programs are pay for expenses on a building.
Here are some of the considerations you need to think about and the IRS will scrutinize:
- Make sure the partnership will further your mission. You need to discuss with the for-profit how the partnership will work to make sure you have a similar set of goals. If the partnership will not further your mission, you need to look at other possible organizations or solutions.
- Make sure you have a written agreement with the for-profit laying out operation of the partnership. This includes defining the mission, outlining duties of officers and directors (managers and members in an LLC) and outlining requirements for regular meetings of the governing Board.
- Define who is in charge of the partnership. I listed this separately because it is critical to maintaining your tax exempt status. The IRS is reviewing the issue of control and will likely issue some guidance at a future time. The for-profit will likely want a 50-50 split. This will allow you to veto actions but not necessarily initiate any programs.
- Analyze whether the income from the entity is related or unrelated. It is possible that the partnership could be unrelated business income resulting in tax. You need to provide for distributions from the partnership entity. Be careful about using a subchapter S corporation. Income from a subchapter S corporation will be unrelated business income.
This is a summary of major, but not all considerations in partnering with a for-profit organization. The current Illinois budget mess creates problems for many organizations and has put the survival of some in doubt. You need to seek legal counsel if you are considering this option. If I can assist, please call me.