The For-Profit Entity's Guide to Doing Business with Nonprofit Organizations

30-SECOND SUMMARY It may seem logical for certain for-profit organizations to enter into business arrangements with nonprofits. Although both parties can certainly benefit from such an arrangement, the nonprofit must be diligent to structure the deal in such a way that it does not run the risk of losing its tax-exempt status due to too much UBIT-eligible revenue. There are alternatives. It is possible to tailor the partnership arrangement so that it is fully consistent with the nonprofit’s tax-exempt status. Ideally, the two organizations would split the net return from the venture, with the nonprofit enjoying tax exemption. Another approach would be for the for profit company to accept all the profits and donate some of the proceeds to the nonprofit.

You are deputy general counsel of a Fortune 500 children’s entertainment conglomerate. One day, the vice president of marketing comes into your office and says, “We need to form a tight bond with the Fish Are Friends, Not Food Foundation. They are doing amazing work and getting great press for it. We need their brand to promote our new character, ‘Smiley the Shark.’” You’re excited because your best friend from law school is now the general counsel for the Foundation. You assure your VP that you can get the deal done quickly.

So, you call your buddy Jane, and after catching up on her family and recent career moves, you explain what you would like to do with the Fish Are Friends, Not Food Foundation. “First, we are thinking that we will develop a line of stuffed fish toys under our brand that we will offer you wholesale, provided we are the exclusive provider of all toys for your organization. We’ll handle the toy production, and you will sell the product at a mark-up at all of your Foundation events and on your Foundation’s website. We expect that your Foundation will be responsible for handling distribution, sales and taxes on any profit. Of course, we expect that you will email your 2 million members, encouraging them to buy our line of children’s toys, and also tweet about the promotion and post on your Facebook page.

Originally Published in the June 2014 issue of ACC Docket, published by the Association of Corporate Counsel in May 2014.

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Topics:  Contract Drafting, Non-Profits, Partnerships, Tax Exempt, UBIT

Published In: Business Organization Updates, General Business Updates, Nonprofits Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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