Q&A #6 – Are there legal restrictions on my company’s ability to raise money for charity?

Question:  My for-profit business would like to help during this difficult time by raising donations from our customers to give to a local food bank (and the business will match these donations). Are there any legal restrictions I need to be aware of?

Answer: The main issue to consider is compliance with State “charitable solicitation registration” laws.” These laws, which have been enacted in about 40 States, are basically consumer protection laws aimed at protecting the public against being scammed by fraudulent fundraisers or illegitimate charities. These laws generally apply to anyone raising money for charitable purposes (with a few exceptions).

There are variations from State to State on how broadly these laws apply and the applicability of any exceptions (these laws are not uniform across the country in the way that federal laws are). You will need to look at the laws of any State in which you are “soliciting” contributions from your customers or anybody else, such as where you are running a fundraising event or where you are sending promotional emails or mailings. Raising money through the internet is a complex topic that will be addressed in a future post, but you can do a search for the “Charleston Principles” to get a sense of how some State regulators have approached this issue. 

You probably want to avoid having to register your business under State charitable solicitation registration laws if at all possible. You can generally get this result by not having your company handle any charitable funds raised from the public. If the funds go directly to a named charity without first being handled by the company, the charity itself would generally be the only entity required to register. If the company is the first recipient of the funds, you may be able to get the same result by entering into a “fundraising agent” with the charity, obligating the company to turn over all funds raised for the charity in a timely manner. However, this approach is more complex and should not be done without consulting legal counsel.

Planning Tip – When raising money for charity, reach out to a particular charity and work with them to arrange a donation link that goes straight to the charity’s account. The company can always donate additional amounts or add matching funds. There will be fewer restrictions to navigate if your company does not touch the money raised for charitable purposes.

If you decide to raise the funds through your for-profit business, there are more risks and restrictions if your company retains for itself any portion of the money raised for charity. This could end up requiring the business to register as a “professional solicitor” under State charitable solicitation registration law. Similarly, donating a portion of the revenue from products or services that your business sells also raises complex issues. This is called a “commercial co-venture” or “charitable sales promotion,” and some States have special rules regarding these arrangements.

Lastly, consult your tax advisors about how to treat the money raised and how to deduct the money disbursed. If your company receives charitable funds raised from your customers, it’s likely that this will be taxable revenue to your company that must be deducted by using the charitable deduction (though there may be other options, depending on the facts and circumstances).

If you have a question you would like to submit to SE4N, send it to us using the contact form and we will consider answering it in a future post. Please do not send confidential information.