A Denver business attorney at The McGuire Law Firm can counsel and assist tax exempt organizations on a number of matters and issues. One question commonly asked of a business attorney is the ability of a tax exempt organization to form a joint venture with a for profit entity. Furthermore, these clients will often inquire as to the joint venture being formed as a limited liability company (LLC). The article below was drafted by one of our business attorneys in an attempt to educate those tax exempt organizations and non-profit entities
The Internal Revenue Service has recognized legitimate reasons for non-profit and tax exempt organizations & entities to enter into joint ventures with for profit businesses. A joint venture can effectively allow partners to raise needed capital, provide new and specialized services to a community and distribute the economic risks of a new venture. The Internal Revenue Service has allowed contributors to create the venture in a variety of forms, most often through a separate legal entity, but the IRS has also allowed the relationship to exist at a contractual level.
In certain private letter rulings, the Internal Revenue Service has ruled favorably in regards to a non-profit organization participating in a limited liability company. Although, a private letter ruling is only binding on the specific taxpayer requesting the ruling, these rulings shed light on the IRS’ general position.
In addition to private letter rulings, the Internal Revenue Service has issued Revenue Ruling 98-15 in the context of non-profit hospitals, identifying factors to determine whether a non-profit or exempt organization will maintain its exempt status after entering into a joint venture. In Revenue Ruling 98-15 the IRS stated that the following factors would favor continued exemption status by the entity:
1) The non-profit maintains a majority vote on the board or within the LLC;
2) The facility or business is operated by a management company that is not related to the for profit business partner, owner or member.
3) Language in the organizing document, such as the operating agreement requires the LLC to operate for a charitable purpose or purposes.
The Internal Revenue Service also stated factors that would weigh against the entities continued exemption. These factors are:
1) Equal control of the limited liability company by the for profit partner and tax exempt partner;
2) Management of the hospital by a corporation and executives that are related to the for profit partner;
3) Failure to require the limited liability company to operate for a charitable purpose.
In general it seems majority control by the non-profit or exempt entity remains the most favorable factor to show that profit motives cannot subvert a non-profit’s charitable mission and goals.
If you operate a tax exempt entity or are considering requesting tax exempt status, our Denver business attorneys and tax attorneys would welcome the opportunity to discuss any questions or issues you may have. Our attorneys always find joy and satisfaction in working with organizations and helping them obtain their charitable goals.
You can contact a Denver business attorney at The McGuire Law Firm to schedule your free consultation. 720-833-7705 or John@jmtaxlaw.com