Marketing is an integral part of business for nearly all companies in the modern market. Many companies have merged philanthropic efforts to promote sales. However, the legal nuances of such arrangements can be complex at times. Not all states require nonprofits to register their fundraising efforts, and commercial co-venture laws require much less documentation than what is typically required for charitable solicitors.
Commercial co-venture arrangements allow companies to blend their philanthropy and commercial activities. Still, the parties in each arrangement should understand the rules in different states that govern commercial co-venture arrangements.
What Are Commercial Company Ventures?
Commercial co-ventures are often also referred to as charitable sales promotions. For instance, if your nonprofit makes an arrangement with a company to receive a portion of sales or a company offers a deal to your nonprofit, this would be considered a commercial co-venture. These arrangements require special registration in many states as they are regulated activities.
A co-venturer is any person or firm who for profit regularly conducts a charitable sales promotion or underwrites, arranges, or sponsors a sale, performance, or event of any kind which is advertised to benefit a charitable organization. Commercial co-ventures are a popular way for consumer companies to support charitable causes while generating goodwill for their brand. These for-profit businesses benefit when consumers are motivated to patronize their company by the thought that they are making a donation to a charitable nonprofit or making a positive difference in the world.
Regulations Impacting Commercial Company Ventures
This type of marketing is a regulated activity in multiple states. In these states, the nonprofit usually must file a copy of the contract governing the arrangement before any sales take place. However, state laws vary, so you will want to be familiar with all laws governing charitable solicitation registration, especially those regulating commercial co-ventures. Non-compliance with applicable regulations can result in fines and criminal penalties in some instances or commercial litigation. If you are uncertain about the regulations in your state, you can check with the state association of nonprofits to help you identify relevant fundraising laws.
What States Have Commercial Co-Venture Laws?
Over thirty states have laws governing commercial co-ventures. Six of these states have additional registration requirements, and two also require bonding. Many of the states have contractual, recordkeeping, and advertising requirements. Additionally, consumer protection laws apply to commercial co-ventures, the IRS may perform an investigation if the charity’s involvement resulted in an unrelated business income tax, and private class-action lawsuits or other commercial litigation may be a threat if all regulations are not followed.
The reality is that you will want to follow all applicable laws before entering into a commercial co-venture to limit risk in these business endeavors. Generally, co-ventures require:
- Registration isnecessary for applicable states, except within a generally exempt category, such as religious or accredited educational institutions. Registration is required in Alaska, Hawaii, Illinois, Massachusetts, Mississippi, and South Carolina.
- Alaska and Massachusetts also require bonding.
- Files must be retained for a minimum of three years.
- There must be a written contract between the charity and the commercial co-venturer. Required contract provisions include:
- Descriptions of goods and services
- Estimate of the number of goods sold or the total donation
- Geography of the promotion
- Start and end dates of promotion
- How the name of the charity will be used
- Per unit or dollar amount to be donated
- Any maximum or minimum donation
- Date and manner in which charity will receive donations. Some states have time requirements. For instance, California requires a distribution every ninety days.
- A statement where applicable laws may apply. In New York, the contract must be cancelable within fifteen days.
- Signature of a designated official from the co-venture and the charity executing the contract. Two officers must sign for the charity in California, Massachusetts, Pennsylvania, and Virginia.
Co-venture agreements can have profound benefits for both the commercial entity and the charity involved. And consumers often appreciate these efforts in the market. However, both the company and the charity must be transparent in the process and the scope of the expected benefit.
Although they are great for many reasons, these arrangements may present some legal complexities. Unfortunately, a poorly executed contract may result in commercial litigation. For this reason, it is often a great idea to include legal advisors who specialize in co-venture agreements. These experts can help you craft a solid contract, comply with state regulations, and avoid commercial litigation. For more information about co-venture agreements, contact Grellas Shah today.