Should Our Nonprofit Sign a Contract With Corporate Sponsors of Projects or Events?

A charitable organization always feels lucky to find corporate sponsors—so is it really necessary to go through the effort of signing a contract with the business?

Many nonprofits engage with corporate sponsors in order to gain an alternate source of funding from the usual individual donors or foundations. In a corporate sponsorship relationship, a local business, national company or other for-profit entity, provides financial support to a nonprofit. The support can be for a specific project or a specific event.

Corporate sponsors typically engage in sponsorships because of the good the nonprofit does in the community and because the sponsor believes in the nonprofit’s cause. In return, the sponsor expects something, such as recognition through marketing opportunities, from a mention in an event program to a logo display on the nonprofit's website.

The relationship between a nonprofit and a sponsor is an important one, which can help a nonprofit in need of funding. But these relationships can have serious tax and legal implications. If your nonprofit engages with a corporate sponsor, it should use a well-drafted contract to protect itself from misunderstandings and legal difficulty.

Issues to Watch Out for With Corporate Sponsorship

While every nonprofit-business relationship is unique, here are some of the issues that most often arise.

Tax issues. Corporate sponsorship arrangements can have unintended tax consequences for your nonprofit. The Internal Revenue Service (IRS) monitors how funds are received and used by nonprofits, and will step in if it sees an issue. For example, if the IRS determines that your nonprofit is using sponsorship funds for a project that does not align with the nonprofit’s stated purpose, it could revoke your tax-exempt status. Your nonprofit could also be responsible for paying taxes on funds received from the sponsor. Many issues and exemptions are involved in nonprofit tax law, so it’s important to discuss the proposed arrangement with a tax adviser before entering into an agreement.

Legal issues. Whenever there is an exchange of money, legal issues can follow. When entering into a corporate sponsorship relationship, it’s important to be on the same page as to what the sponsor is providing, what the sponsor is receiving, and how the funds will be used and managed. What if, for example, the sponsor decides that your nonprofit is mismanaging funds. It could stop providing funds, and even sue your nonprofit for mismanagement. The easiest way to avoid such a situation is to have a written contract in place from the get-go. Because these contracts can be complex, your nonprofit should consult with a legal adviser before signing one.

What to Include in a Sponsor Contract

Each sponsorship arrangement is different, so there is no one-size-fits-all contract. However, certain provisions should be included in every sponsor contract, including:

Sponsorship information. This section should detail what the sponsor is sponsoring. If it's a fundraising gala, for example, the contract should specify the gala's name, date, and purpose. If the sponsor is sponsoring a specific project, the contract should include specific information about it, such as its name, purpose, and any activities associated with it.

Use of funds. A sponsor may want its funds to be used a certain way and for a certain purpose. For example, if your nonprofit hosts an afterschool program for at-risk youths, a corporate sponsor may want to have its funds used for the purchase of school supplies. Any specific use of funds should be clearly stated in the contract, and using the funds for any other purpose should not be allowed.

Responsibilities. In a corporate sponsorship relationship, both the sponsor and the nonprofit will have specific responsibilities. For example, the sponsor may agree to deliver funds on a set schedule, while your nonprofit may agree to keep records on how the funds are used. Each responsibility should be specifically stated in the contract to avoid confusion.

Term and termination. Each contract should state the date the relationship begins. This could be the date of an event or the date the sponsor agrees to disburse funds. Either the contract can state a specific end date, or it can include a statement that the term will continue until terminated by both parties. If the contract does not state an end date, be sure to also include a termination provision. For example, a contract can terminate automatically when a project ends, or it could terminate with 30 days’ written notice by either party.

Control. A sponsor may want to exert control over an event or project, based on the fact that the sponsor is donating money. If a sponsor wants to have input, your nonprofit could invite a representative from the company to sit on a project or event committee and can take their ideas into consideration. However, to avoid disputes or feeling micromanaged, it’s worth stating in your contract that your nonprofit’s board will have the final say on all matters relating to the event or project.

Accounting and reports. If your nonprofit accepts financial sponsorship, it will need to keep records of the amounts received and how the funds were used. The sponsor may want updates on your use of those funds. Your nonprofit will want to come up with an agreement on how often your nonprofit will provide these reports to the sponsor and what kind of access the sponsor will have to records.

Intellectual property. A big part of corporate sponsorships is normally the ability to take advantage of marketing opportunities, putting the company's name in the public eye in a positive light. For example, if a sponsor is sponsoring a fundraising gala, the sponsor will expect its name and logo to be included on flyers, the program, and other marketing materials, and the sponsor may want to approve the marketing materials before your nonprofit distributes them.

Liability. A sponsor may want to include a liability provision in a sponsorship contract. If a corporate entity is sponsoring an event that your nonprofit is hosting, the sponsor will not want to be legally on the hook for any injuries that may occur there. Having this provision in the contract will help give the sponsor peace of mind.

Corporate sponsorship can be a great way for your nonprofit to access funds in order to advance its programs and events. The sponsorship relationship can, however, have many tax and legal implications, so it’s important to protect your nonprofit by drafting and signing a written contract with the sponsor, and discussing the corporate sponsorship relationship with a tax and legal adviser.

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