One of the ways nonprofits can tap into new resources and expand their reach is to form joint ventures with other nonprofits. Working together, two organizations can share ideas, leverage the unique talents of their teams, and make their financial resources go further. Because joint ventures involve legal obligations and potentially shared liability, they need to be documented in formal agreements. There are a number of important details that a typical joint venture agreement will address. Here are a few examples:
- Scope. Any nonprofit joint venture needs to have specific goals from the beginning. Unlike business entities in the for-profit world, nonprofits are organized to pursue specific goals, which donors are asked to support. A joint venture’s official purpose needs to fit within the formal mission of each member organization when it is organized and throughout its existence. Among other things, leaders of each member organization need to guard against mission creep that could erode the joint venture’s compatibility with each member’s independent purposes.
- Leadership. Although a joint venture need not be organized as a separate legal entity, it needs to have some features of a legal entity. One of these is a clear governance process that accounts for contingencies. In the nonprofit world one should expect that unanimity is a requirement for major decisions. But there are many other choices to be made. Who will have leadership roles within the joint venture? What process will be followed for making formal decisions?
- Finance. The member organizations presumably will each contribute money to the joint venture. In some situations it is perfectly appropriate for one organization to have more of a financial obligation than other members. It’s typical for such situations to place more control in the hands of the organization providing the bulk of financing.
- Confidentiality. A joint venture can be more effective if the member organizations are able to freely share information within a context of confidentiality. A confidentiality agreement can be a good idea even before a joint venture agreement is formed, to cover the negotiations between the organizations.
- Liability. Some joint ventures will want to form a separate legal entity that will provide each member organization with limited liability for the joint venture’s obligations. But forming a separate legal entity isn’t always practical or desirable, especially at the early stages. Without a separate limited liability entity the members of the joint venture will bear joint and several liability for the obligations of the venture. To avoid serious problems the joint venture agreement should address how the members will allocate liability between them, how much insurance the joint venture should carry, and the process for addressing third party controversies.
The Church Law Center of California assists churches and secular nonprofits with organization, governance, and risk management. If your nonprofit is considering forming a joint venture and you have questions about how to best protect your organization’s interests, reach out to us today to find out how we can be of help. Call us at (949) 689-0437 or reach out to us through our contact page.