Working with For-Profit Entities

Pursuing Charitable Objectives

Background

Like all private foundations, the Foundation operates exclusively to support charitable activities. This is both a legal requirement and a fundamental tenet motivating our personal commitment to the Foundation's mission. As a result, the Foundation provides the vast majority of its support to public charities, which exist expressly to advance charitable purposes.

 

The Foundation’s vision of building a Culture of Health is an ambitious one, though. Pursuing it will require us to work with all segments of our society – from business (i.e., for-profit entities) to charities and from government to philanthropy. Indeed, in many cases, working with a for-profit may be the most efficient means of achieving a particular charitable objective, and there is no reason the Foundation should not take advantage of these opportunities.

 

Traditionally, we have worked with for-profits solely through grant or contractual relationships. While we may continue to pursue these traditional structures, new relationships may take many different forms, such as collaborating on meetings, reports, evaluations, and other products; sharing expertise and technical assistance; and providing speakers and access to events.

 

When working with for-profits, we must take reasonable steps to ensure that any such collaboration serves a significant charitable purpose[1] – not a profit-earning purpose – and that any benefit flowing to the for-profit as a result of our involvement is merely incidental to the primary charitable purpose. We also want to make sure that the support we provide is no greater than is needed to accomplish the proposed charitable purpose and, if funding is involved, for no more than fair market value. Thus, program staff need to pay particular attention not only to whether the proposed project is worth supporting but also to the level of support necessary.

 

Questions to Consider

As noted above, when we explore any collaboration with a for-profit, our resources – financial and otherwise – must be used solely for charitable purposes and any benefit flowing to the for-profit cannot be more than incidental. Here are some of the key questions we use to help us determine whether this standard is satisfied and how the proposed collaboration should be structured:

1. What is the charitable purpose of the work?
2. Is there a viable non-profit with which we could work to achieve the same charitable objective(s)?
3. Why does the for-profit want to work with us? Why do we want to work with the for-profit?
4. What benefit will the for-profit receive? How significant is that benefit, financially or otherwise?
5. Is there a viable non-profit entity through which the proposed project could be done?
6. What would the Foundation’s resources help accomplish that otherwise would not happen as part of the for-profit’s normal activities?
7. If the project involves funding from the Foundation, are other, more traditional sources of funding available to the for-profit? If not, why not?
8. Does the proposed relationship raise reputational or other concerns, including conflicts of interest?
9. Will any intellectual property be created? If so, can it be made publicly available for free or at low cost?
10. Does the proposed collaboration involve re-granting of Foundation funds to other organizations or individuals or making payments to government officials?

 

Which tool or structure should be used?

If a proposed collaboration with a for-profit is deemed appropriate to pursue after consideration of the questions noted above, the next question to consider is which tool or structure should be used to document the relationship with the for-profit. The relationship between the Foundation and a for-profit can be structured and documented in a number of ways depending upon the purpose of the relationship, the level of involvement the Foundation expects to have, and whether the Foundation will be providing funding:

 

• An administrative contract is used when the Foundation is funding work primarily for its own internal purposes and expects to exercise significant control over the work and/or own the deliverables.
  
  
• A program contract is used when the Foundation is funding work primarily for a public purpose and expects to exercise significant control over the work and/or own the deliverables.
  
  
• An expenditure responsibility is used when the Foundation is funding work primarily for a public purpose and does not expect to exercise significant control over the work and/or own the deliverables.
  
  
• A program-related investment is used when a project has a public purpose and presents a clear opportunity for repayment and/or requires investment capital for its success.
  
  
• A memorandum of understanding (MOU) is often used to memorialize the terms of collaboration where funds are not necessarily exchanged. It may involve the exchange of information or other resources or the agreement of both parties to provide support to specified objectives or activities. When information will be exchanged, the MOU often addresses confidentiality and how such information is to be used.

 

[1] The IRS uses the term “charitable” in its generally accepted legal sense and includes: relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.  

Expenditure Responsibility Grants

What is expenditure responsibility?

Expenditure responsibility (“ER”) refers to the special procedures private foundations must follow under the Internal Revenue Code (the “Code”) and regulations when they make grants to organizations that are not either: (1) recognized as tax-exempt public charities under Sections 501(c)(3) and 509 of the Code or (2) classified as a governmental entity. Grants to for-profit entities, including B Corps and LLCs, as well as nonpublic charity tax-exempt organizations, including private foundations, social welfare organizations described under Section 501(c)(4) of the Code, labor unions described under Section 501 (c)(5), and trade associations described under Section 501(c)(6), are all subject to the ER requirements, and often referred to as “ER grants.”

 

Additional Reporting Requirements for Private Foundations

 

If you are a private foundation within the meaning of Section 509 of the Internal Revenue Code, you are required by the Code to submit one of the following prior to the grant award and with your annual narrative and financial reports:

1. A statement signed by an appropriate officer, director or trustee that the grantee is currently an operating foundation described in Section 4942(j)(3) of the Internal Revenue Code; or
2. If the grantee is not an operating foundation, a full and complete written report signed by an appropriate officer, director or trustee showing that all amounts expended in the fiscal year covered by the financial report were expended as qualifying distributions within the meaning of Section 4942(g)(3) and (h) of the Internal Revenue Code and that all such distributions are treated as distributions out of corpus under Section 4942(g)(3) and (h). Please list 1) the name and address of the recipient(s) of the qualifying distributions and the amounts received by each; or 2) if the qualifying distribution is for administrative expenses incurred in directly conducting a charitable activity, please describe the general purpose for which such expenditure was made.  Please note that any grant funds distributed by the Foundation to the grantee during the fiscal year covered by this report must be distributed by the grantee by the end of its next fiscal year.

 

If you have any questions, please contact the Program Financial Analyst assigned to your grant.
 

What are the expenditure responsibility procedures?

Pre-grant Inquiry

The Foundation must conduct a review of the grantee complete enough to establish reasonable assurance that the grantee will use the grant for its proper purposes, by investigating that identity, prior history, knowledge, and experience of the grantee and its managers, as well as information on the management, activities, and practices of the grantee. The scope of the inquiry can vary based on the size and purpose of the grant, its payment period, and the Foundation’s previous experiences with the grantee.

 

Special Grant Agreement Terms

Expenditure Responsibility (ER) grants can only be made for specific charitable activities, rather than general operating support. The Foundation uses a special form of grant agreement for ER grants that includes specific terms that are required under the IRS rules for ER grants. These include: (1) restricting funds to be used only for the purposes of the grant; (2) requiring repayment of any funds not so used; (3) prohibiting a list of specific activities; (4) requiring grant funds to be segregated from the organization’s other funds; (5) making narrative and financial reports on an annual basis (based on the grantee’s tax reporting at year end), as well as final narrative and financial reports; and (6) requiring recordkeeping with appropriate documentation of expenditures, and making books and records available for the Foundation’s inspection.

 

Grantee Reporting

Use the ER Report provided at the top of this page for reporting purposes. The ER Report must cover expenditures over the life of the grant, as well as the use of income of grant funds and the use of funds to purchase capital equipment. Grant reports are due no more than 60 days after the end of the grant period. The Foundation will withhold all payments to the grantee (even on other grants) that has overdue reports.

 

IRS Reporting

The Foundation is required to disclose on its 990-PF certain information about its ER grants.

 

Strict Compliance and Documentation

Documentation of compliance with all aspects of the ER process is important. The Foundation is also required, in the event of the grantee’s failure to comply with the terms of the grant agreement, to take additional appropriate steps, which may include but are not limited to: requests for additional reports, the auditing of grantee records, and the withholding of payments. For instance, the Foundation will not ordinarily issue payments on any grants if an ER grantee has overdue reports, or other grantee compliance issues have been identified on any single grant. If the Foundation has reason to believe that ER grant funds have been used for any purpose other than the charitable purposes set forth in the grant agreement, the IRS considers it a “diversion” of grant funds. The Foundation is required by IRS rules to take all reasonable and appropriate steps to ensure the recovery and restoration of the funds. Where there is evidence of a diversion, the Foundation is prohibited from making further payments until we have received adequate assurances, reviewed by the Law department, that no future diversions will occur.

 

Outside Resources

These links to third-party resources provide additional information on working with entities that are not public charities or governmental entities.

 

• Learn Foundation Law Expenditure Responsibility