Why Proper Documentation is Vital for Nonprofit Corporate Sponsorships

Corporate sponsorships and underwriting have become key strategies for many nonprofits and associations nationally. These types of non-dues revenue can be an important component of any nonprofit or association bottom line. Corporate sponsorships have transformative power in advancing a nonprofit or association mission and can significantly impact success and sustainability. However, it is important to have proper documentation for corporate sponsorships to protect the tax-exempt status of the non-profit or association as well as mitigate risks associated with the transaction.

Mitigate Legal Risk

Proper documentation of corporate sponsorships provides necessary parties with clarity, certainty, and mitigation of legal risk. Whether the sponsorship takes the form of advertisement at an event or exhibiting at an annual conference, documentation outlines the scope of the sponsorship. This includes details such as the duration of the sponsorship, the monetary or in-kind contributions involved, and any associated promotional or branding rights. It’s important to have documentation on corporate sponsorship transactions so that the rights and obligations of both parties are clear and properly outlined. Having documentation in place also clarifies what the corporate sponsor receives in exchange for its money or in-kind donation.

Having documentation also safeguards the legal interests of both parties, such as mitigation of liability, intellectual property rights, and confidentiality. Documentation should also detail the permitted use of intellectual property, such as trademarks or logos, to prevent unauthorized use or infringement. Further, it should include indemnification clauses and proper termination provisions to protect the nonprofit or association from any liabilities arising out of the sponsor’s activities or representations.

Avoid Unintended Consequences

Documentation should address the issue of endorsement to ensure that lines between sponsorship and endorsement do not get blurred. Nonprofits and associations should avoid endorsements as it can jeopardize the organization’s nonprofit status. Additionally, endorsements can create many unintended consequences that could lead to compliance issues with state and federal reporting requirements.

Documentation of the transaction can help verify that a sponsorship is truly a charitable gift from the corporate sponsor and not a taxable advertising payment. Charitable gifts are tax deductible for the corporate sponsor yet nontaxable income to the non-profit. However, taxable advertisement payments can trigger unrelated business taxable income, referred to as UBTI or UBIT, and this can affect the nonprofit or association’s bottom line. For example, taxable advertising payments would be akin to a corporate sponsor receiving direct advertising for its company, products, or service on the nonprofit’s website, such as banner advertisements or pop-ups. The nonprofit or association would be required to pay tax in the form of UBTI on that money. The documented sponsorship agreement between the parties can ensure that UBTI is not triggered.

Key Takeaways

Proper documentation of a corporate sponsorship should be a key risk management task for every nonprofit and association. Ensuring your nonprofit or association is protected from a potential legal dispute is key to fulfilling its mission and protecting a vital stream of non-dues revenue.

Edward McMurray represents clients in Levin Ginsburg’s Corporate Law Practice and has extensive experience with advising tax-exempt entities at all stages and businesses of all sizes. Should you have any questions about properly documenting a corporate sponsorship for your nonprofit entity, please contact Edward or any Levin Ginsburg attorney at 312-368-0100.

Levin Ginsburg is a full-service law firm that prides itself on being counselors for all types of businesses and individuals. Regardless of your need, our attorneys exercise great care in being thorough, organized, and efficient in serving clients.