Although charitable nonprofit hospitals and health systems commonly own for-profit subsidiary businesses and invest in for-profit joint ventures, determining the appropriate structure for such endeavors can be tricky, according to a recent report by Healthcare Transaction Advisors.
Here are three pieces of advice lawyers Carlene Y. Lowry and Craig R. McPike of the law firm Snell & Wilmer in Phoenix shared with Healthcare Transaction Advisors regarding joint ventures with charitable organizations.
1. Control is key. If a charitable organization invests directly in a joint venture taxed as a partnership, it is vital for the organization to be able to control the activities of the joint venture.
“If a charitable organization enters directly into a partnership joint venture with a for-profit entity, the authorities are clear that the charitable organization must be able to control the joint venture from the perspective of furthering the charitable organization’s tax-exempt mission,” said Ms. Lowry.
2. Majority ownership does not mean control. A nonprofit hospital or health system may have majority ownership in a joint venture, but that does not necessarily mean it has control. Similarly, if a hospital or health system does not have majority ownership, it may still have control. “The operating agreement of a joint venture partnership can carve out absolute powers, controls and authority to a charity even if it does not own 51 percent of the joint venture,” according to the report.
3. Consider using a C-corporation subsidiary. If the activities a joint venture is expected to engage in are unrelated to the charitable organization’s mission, a C-corporation subsidiary may be used as an investment vehicle for the charitable organization, according to Mr. McPike. The subsidiary corporation is typically referred to as a “C-blocker,” as it blocks the joint venture’s non-exempt activities from being attributed to the charitable organization,” said Mr. McPike.
Overall, structuring and negotiating a joint venture between a charitable organization and a for-profit “takes diligence, digging in, asking questions and understanding the facts at each layer,” said Mr. McPike.
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