In not-for-profit boardrooms across the nation, plans are being made to join resources with other nonprofits to stretch budgets just a bit farther. Picture this: Two established organizations, both mission-driven and community-focused, decide to share a building. One board member describes the opportunity as perfect. They’ll co-locate, cross-refer services, and reduce overhead costs. Both boards are enthusiastic about the partnership.
Sometimes the hard financial questions are missed.
This scenario reflects a growing trend in the sector. According to the 2025 Nonprofit Standards Benchmarking Report by BDO, 37 percent of not-for-profit organizations have consolidated operations in response to federal policy changes and funding cuts. Collaboration sounds smart when budgets are tight, and when structured properly, it can be transformative. Organizations that share resources strategically can redirect savings toward mission-critical programs, access expertise they couldn’t afford independently, and increase their community impact.
The challenge? Most organizations skip financial due diligence. They discover cost allocation disputes, unrelated business income tax (UBIT) issues at tax time, or realize their projected savings evaporated because they didn’t properly structure the arrangement from the start.
Five Financial Questions Every Board Should Answer Before Collaborating
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How will shared costs be allocated, and who decides?
Real cost allocation requires identifying cost drivers. If you’re sharing office space, allocate by square footage. Shared information technology (IT) services? Calculate by user count or system usage. A shared chief financial officer (CFO)? Determine allocation by transaction volume, hours logged, or full-time equivalent (FTE) percentages.
Create a cost allocation policy before you start sharing resources. The good news? Proper planning prevents the conflicts that derail partnerships six months in. Organizations that document their allocation methodology upfront build trust and transparency between boards.
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What are the UBIT implications of this arrangement?
If your not-for-profit subleases space to another organization, you may be creating taxable income. If you’re billing another nonprofit for shared services, the Internal Revenue Service (IRS) cares about how that transaction is structured.
Improper structuring of shared arrangements can trigger UBIT, which means filing Form 990-T and potentially paying taxes on income your board assumed was exempt. The positive approach? Working with experienced not-for-profit advisors during the planning phase helps you structure arrangements that comply with IRS requirements and avoid surprises at tax time.
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How do we maintain financial transparency for both boards?
Each board has a fiduciary responsibility for their own organization. That means both boards need clear, separate reporting on shared costs.
Build reporting requirements into your collaboration agreement upfront. Who produces the shared cost reports? How often? What level of detail? Which board approves changes to the cost allocation methodology? Organizations that establish this governance structure at the beginning create partnerships built on mutual accountability and trust.
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What’s our exit strategy, and what does it cost?
Most collaboration conversations assume success, and many partnerships do succeed long-term. But responsible planning includes understanding the financial implications if circumstances change.
Think of it as a prenuptial agreement for nonprofits. It’s not pessimistic. It’s professional financial management.
- Who owns jointly purchased equipment?
- Who’s responsible for the remaining lease term?
- How do you unwind shared staff arrangements?
Answer these questions in writing before you sign anything.
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Does this collaboration actually advance our mission, or does it just sound efficient?
Run the actual numbers on cost savings versus coordination costs. Model three years out, not just year one. Account for the staff time required to manage the shared arrangement.
The best collaborations free up resources that get redirected to programs and services. If your financial modeling shows genuine savings and your partnership truly complements both missions, collaboration can be the strategic move that takes both organizations to the next level.
Building the Financial Framework
As you finalize your yearly budget, collaboration might be the key to stretching limited resources while increasing impact. The difference between collaboration that strengthens your mission and collaboration that becomes a costly distraction is financial planning.
Before your board votes on that partnership, get the financial framework right. Model collaboration scenarios. Ensure tax compliance. Build the infrastructure that makes partnerships work. Rea’s not-for-profit specialists help organizations evaluate whether collaboration makes financial sense, structure arrangements to avoid UBIT pitfalls, and create cost allocation frameworks that maintain board confidence.
Collaboration should free up resources for mission-critical work, not create administrative headaches. The organizations that get this right start with financial due diligence, not only good intentions.
Contact us to discuss how Rea can help your organization evaluate collaboration opportunities.
