Operating a nonprofit in today’s environment is challenging; increasingly, organizations are finding solutions through collaboration. More and more often, nonprofit organizations are joining forces to better serve their client populations and cut costs. The form and function of collaborative arrangements may vary greatly and result in a variety of benefits.
There are several examples of collaboration and discussions currently taking place around Nashville. If you are considering ways your organization can benefit from collaboration with another nonprofit, you’ll want to make sure your management team and your board have a clear understanding of the reporting and contractual requirements.
Shared services or cost arrangements
One of the most common and straightforward examples of collaborative arrangements is the sharing of back-office administration and support, which may also involve shared office space. The cost savings derived from this type of arrangement are easy to quantify. When entering an arrangement like this one, it’s typical to have one organization serve as the principal organization with the other organization becoming a partner pursuant to a contract to pay their share of the related costs.
Payments between participants are presented in financial statements according to their nature (following accounting guidance for the type of revenue or expense the transaction involves). Participants in collaborative arrangements must make certain financial statement disclosures, such as the nature and purpose of the arrangement and each organization’s rights and obligations.
Other benefits of collaboration
There are many other reasons to consider collaborative activities. There are great minds at work in the nonprofit community, and putting them together for the greater good makes perfect sense. Partnering with others can bring increased strength to your program. Working with other like-minded organizations can bring greater public awareness and a larger voice to your project. Partner organizations can also bring greater perspective in solving a community problem.
In some cases, combining forces can bring forth the possibility of an acquisition or a merger.
Mergers
In some circumstances, two organizations may determine that the best route forward is to form a new legal entity. A merger takes place when the boards of directors of both nonprofits cede control of themselves to the new entity. The assets and liabilities of the organizations are combined as of the merger date.
Ceded control without creation of a new legal entity
Another option is for the board of one organization to cede control of its operations to another entity (for example, by allowing the other organization to appoint the majority of its board) as part of its decision to engage in the cooperative activity — but without creating a new legal entity. In this case, an acquisition has taken place, with the remaining organization considered the acquirer.
Considering any of these arrangements requires a great deal of planning and buy-in from organizations and their boards. It is not always the right thing to do. Outside consultants can be a worthy investment during this process. Ensuring your organization carefully assesses the legal and financial reporting complexities is another important step in the process. If you are considering the impact a collaborative activity would have on your organization, please contact a member of our nonprofit services team. We will be glad to assist.