Our business was approached by a local nonprofit to become a corporate sponsor of an event. We think that a sponsorship arrangement would be a great way for us to give back to our local community and support a cause that we believe in. The nonprofit has asked us to sign a contract to solidify the relationship. What issues should we be aware of with signing a contract with the nonprofit? Are there any other risks we should know about?
As a corporate sponsor, your company might agree to donate money, goods, or services to a nonprofit. Being a corporate sponsor is a wonderful opportunity to support its community, while also receiving some brand recognition. However, it’s important to be aware of the risks of being a corporate sponsor.
Corporate sponsorship is popular among for-profit businesses because it allows the business to give to a good cause and develop a positive image with consumers. If your company sponsors a local nonprofit’s event, your company’s name and logo will be associated with the nonprofit and will appear on event materials--a valuable marketing tool. An association with a nonprofit such as this could even directly increase your company’s revenue.
While corporate sponsorship offers many benefits, it also has its fair share of legal and tax issues. These can be complex, so it’s important to discuss the proposed arrangement with a legal and tax adviser. Below are some of the main issues to consider.
Corporate sponsorship arrangements can have unintended tax consequences for your company. As a corporate sponsor, your company may donate funds, goods, or services to a nonprofit. The donation should be treated as a nontaxable contribution to a charitable organization. However, the Internal Revenue Service (IRS) may scrutinize the nonprofit as well as your company’s relationship with the nonprofit. If the IRS finds something amiss, your company could lose its charitable deduction.
For this reason, it’s important to conduct a bit of due diligence. Before agreeing to a sponsorship, make sure to verify that the nonprofit is, in fact, a recognized 501(c)(3) organization by the IRS and that it handles its funds appropriately.
In addition, your company will need to review the sponsorship details. Something as simple as an advertising agreement between your company and the nonprofit could raise red flags with the IRS, causing your donation to be treated as taxable income.
Because of the many complexities in this area, your company should discuss the possibility of a corporate sponsorship with a tax adviser before entering into an arrangement.
Your company will want to avoid legal issues that can arise during a corporate sponsorship arrangement. When engaging in a corporate sponsorship relationship, it’s important that your company and the nonprofit are on the same page as to what your company is providing to the nonprofit, what your company is receiving in return, and how funds are used and managed.
In addition, if your company is sponsoring a specific event or program, it will need to shield itself from liability claims. For example, if your company is sponsoring a fundraising gala, and an attendee is injured on site, your company would not want to be held responsible for those injuries.
The easiest way to avoid becoming entangled in legal issues is to have a well-drafted written contract. Each sponsorship arrangement is different, so there is no one-size-fits-all contract. However, each contract should contain some common provisions, such as:
Sponsorship information. This section should include details on what your company is sponsoring. If sponsoring a specific event, such as a fundraising dinner, the contract should include specific information about the dinner, including its name, date, and purpose. If your company is sponsoring a specific project, the contract should include details about it, such as its name, purpose, and any activities associated with it.
Use of funds. Your company may want its funds to be used in a certain way and for a certain purpose. For example, if your company will be sponsoring a program, such as a job skills’ class, it may want its funds used to buy computers. Any specific use of funds such as this 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, your company may agree to deliver funds on a set schedule, while the 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. Your contract should state the date the relationship begins. This could be the date of an event or the date your company agrees to disburse funds. 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 at the end of an event or program, or it could terminate with 30 days’ written notice by any party.
Control. As a sponsor, your company may wish to exert some control over an event or project; for example, have a voice in who receives community awards, or who the keynote speaker is. However, a nonprofit has to retain ultimate control for legal and tax purposes. If your company wants to have input, perhaps it could send a representative to sit on a project or event committee. This is a great way for your company to contribute ideas, while allowing the nonprofit to retain control.
Accounting and reports. Any nonprofit that your company sponsors will need to keep detailed records of funds received and how the funds were used. Your company will likely want updates on such matters. Therefore, it’s necessary to include a provision in the contract for the nonprofit to provide your company with reports, as well as to give your company access to the relevant records.
Intellectual property. As a corporate sponsor, your company will be able to have its name and logo on marketing materials. For example, if sponsoring a 5k marathon, your company’s name and logo will be included on materials such as brochures, a website, and T-shirts. Because the name and logo belong to your company, a representative from your company should approve all marketing materials before the nonprofit distributes them. This will allow your company to retain control over its intellectual property.
Liability. Your company will want to include a liability provision in any sponsorship contract. If an attendee is injured at an event that your company is sponsoring, that attendee could try to hold your company liable for the injury simply because of the sponsorship arrangement. In order to avoid liability, it’s important to include a provision requiring the nonprofit to defend your company in a lawsuit should it be sued.
Corporate sponsorship is a wonderful way to give back to your local community, and it allows your company to gain notoriety through marketing opportunities. However, having a written contract between your company and the nonprofit, as well as discussing the corporate sponsorship relationship with a tax and legal adviser, will help protect your company from any unintended consequences.