A Guide to Not-for-Profit Sponsorship Agreements
A significant portion of nonprofit funding comes from for-profit organizations seeking to give back to the communities they serve. This relationship often takes the form of sponsorship, where the sponsor supports the nonprofit and receives some recognition for its contribution, such as through a banner at events or on its website. Making this mutually beneficial arrangement official takes the form of a signed document known as a sponsorship agreement.
An agreement like this serves as more than a simple receipt for services provided. It is an acknowledgment that the relationship between the two parties is an official one—that both sides will be held accountable for certain obligations and liabilities . It also codifies the most important aspects of the partnership. Among the items commonly included in sponsorship agreements are:
Any charity looking to enter into a sponsorship program with a for-profit sponsor must have a clear idea of its expectations for the agreement. To do so, it’s essential to understand common elements of sponsorship agreements, including how they are structured and what they include. This will not only help you evaluate a proposal from a corporate sponsor, but ensure that the agreement is clearly structured to accomplish the goals you want, and then followed appropriately on your end.
Essential Components of a Sponsorship Agreement
While nonprofit sponsorship agreements come in all shapes and sizes, there are several basic elements that the vast majority will include. First, they need to identify all the parties involved. This is usually some combination of the nonprofit, its board, those who charge for signs, tents, other advertising, and so on. It is important to know who is charging whom, whether or not the person spending the money is actually the decision maker under the contract, and who the responsible parties are in case there is a dispute.
Second, sponsorship agreements should outline the terms of the agreement clearly, including a timeline for a number of items. These may include:
—The length of the agreement — how many years?
—Renewal terms
—Renewal process
—Termination terms
—Conditions upon termination (including how sponsors will be acknowledged after the agreement ends, and when/if the advertisement needs to be removed)
Third, the obligations of both parties should be described.
These should include:
—The financial commitments of the sponsor (cash, in-kind, services, etc)
—The time commitments of the sponsor (working at the event, volunteering, etc)
—The benefits provided to the sponsor by the nonprofit (ad space, bags, etc)
—The benefits provided to the event (extra votes for balloting, etc)
Fourth and finally, the consequences of a breach must be clear.
This can be anything from a court order, to cancelling the agreement (also laid out in detail), to withholding benefits, to requiring payment for costs associated with a breach.
While these are the essential elements, there are many other items that may be included in a nonprofit sponsorship agreement. If you have specific questions, it is always best to seek the advice of an attorney.
Legal Requirements and Compliance
Nonprofits must be mindful of the legal considerations that come into play when drafting a sponsorship agreement. Foremost among these is the potential tax implications of receiving sponsorship income rather than traditional contributed income. The IRS generally requires that nonprofit sponsorship agreements stipulate that financial support received from a business or individual is in exchange for a substantial return benefit during a specific, concrete timeframe. As such, the sponsor should receive some tangible benefit, such as the placement of the sponsor’s name or logo on promotional materials.
The IRS guidelines governing sponsorship payments (Revenue Ruling 73-416) make it clear that if the sponsor receives recognition beyond that of an impartial beneficiary, the payment will not qualify as a gift, whether or not the recognition is related to a business transaction. In other words, just because a payment is labeled a "gift" in an agreement, the IRS will not consider it to be a gift if the overall terms of the agreement suggest otherwise.
Failure to ensure that a sponsorship agreement meets the requirements of an allowable "irrevocable contribution," as defined by the IRS, can result in unpleasant consequences. Most often, nonprofits are penalized by having to pay a tax on the amount of revenue received through the agreement. At worst, an error could result in having the status of your 501(c)(3) revoked. Should a nonprofit enter into a sponsorship agreement without an independent appraisal, the IRS may challenge the organization’s free use of property in the sponsoring business’ favor.
The nonprofit’s basic compliance needs can often be met with a CSO Agreement Template, but we advise contacting a nonprofit business attorney to review and customize an existing template, or to draft an entirely new sponsorship agreement.
Tailoring Your Sponsorship Agreement Template
Traditionally, a nonprofit sponsorship agreement is a two-party contract between an organization and a business, although it can also occur between two or more nonprofit organizations, or between a nonprofit and a government entity.
Like any contract, sponsorship agreements are subject to negotiation, which is why a generic sponsorship agreement template may not work for every organization. If the agreement spells out vague expectations and does not align with your offerings and those of your sponsoring business, it can lead to unmet expectations on both sides.
A well-written template can be a useful starting point. But to ensure that it meets your specific needs and the demands of the sponsor, tailor the following elements to your organization:
Defining sponsor vs. NPO rights and responsibilities is crucial. For example, some NPOs may be only comfortable with their logo on materials and not ours. Make the role of your logo clear. How will we use it? Where? What purpose will it serve?
With the rise of online sponsorships, NPOs may have to make additional legerdemain with their templates. As the Internet has opened up new ways for NPOs and sponsors to promote and advertise themselves, sponsorships have become less about something visible on a brochure or a sign (although signage still matters) and more about events such as—
• Presence at sponsored events, either print or electronic
• Sponsored online visits or clicks
• Social media postings
• Exposure in e-newsletters or other publications
• Media coverage of the event
• Public relations/branding benefits to the sponsor
Be sure to clearly define a proper marketing plan that includes specific metrics for measuring the success of the campaign . Otherwise, your sponsor may call your agreement into question.
However, remember that commercial advertising and appreciation may be two different beasts. You can refer to fellow NPOs to learn how they approach the issue. Or simply ask your sponsor what elements of promotion it would like.
You don’t want your sponsoring businesses to feel duped by sponsorship agreements, and you want to assure them that their money is respecting the stated value of our benefits.
Sponsor contributions can be monetary or in-kind. Cash donations are easy to calculate, but in-kind may include everything from a room to hold a function to the services of a musician. Be sure to list them in the agreement, and if possible, add a dollar figure next to each item.
Define the time frame of the agreement and any specific deadlines for deliverables (for example, marketing collateral). List them in the agreement. Provide opportunities for renegotiation if the timeframe is too short or there are extenuating circumstances when the agreement might need to be extended.
No matter how much effort you put into marketing your content, not all of it is going to be right for every sponsor. Consider how different types of sponsorships might target different audiences and shape the public’s perception of your nonprofit. For instance, if your NPO offers water-limiting products, a sponsor in the bottled water industry might not be a good fit for content that targets its shoppers.
Sponsorship Agreement Best Practices
Just as the sponsorship agreement template should be carefully drafted, so too should a strategy be developed for ongoing communications with and performance by both parties so as to ensure the success of the overall sponsorship relationship. Some key considerations to keep in mind are:
• Prospective sponsors should be provided with a copy of the template sponsorship agreement you have arrived at militarily adapt to your own specifications. (Repeat cos, repeat!) As the sponsor is more likely to review and understand this form, both party expectations will be better satisfied. As such, this practice can play an integral role in avoiding unnecessary disputes while serving to streamline the execution process.
• Sponsorship success (as defined by the parties’ expectations) relies heavily on the establishment and adherence to a clear timetable for approvals, deliverables, payments, etc. In turn, a clear timetable underscores for the sponsor the level of commitment your non-profit has to meeting its obligations. This serves to establish the necessary precedent for implementation of the timetable by the sponsor.
• The respective deliverables for your non-profit and the sponsor should be outlined in a visually clear manner in the schedule section of your template sponsorship agreement. Requiring the use of a separate attachment is not user friendly, and can ultimately serve as a barrier to achieving a quick and painless execution process.
• Regular and timely communication with respect to each party’s obligations will go a long way to ensuring the success of even the most onerous (e.g., time-wise) sponsorship. The parties should agree to regular check-in meetings, whether in person, by telephone, or via email. These check-ins will help each party to keep the other informed, and enable them to measure the success of the sponsorship relationship.
• Satisfaction of deliverables will likely be aided by the creation of a checklist for each party, detailing each obligation to be met. Whether done on an ongoing or post-implementation basis, each party completing its set of obligations will help ensure a successful sponsorship relationship.
Not-so-obvious Pitfalls
Just about any attorney can tell you about the issues that they have run into when helping a client (or in my case a legal client) with a sponsorship agreement. In fact, one of the most common mistakes that I have seen is clients simply pushing the responsibility of creating their sponsorship agreement to their advertising agency or the advertising agency pushing it off to the customer service representative. This is a major problem because while the advertising agency is there to help draft the document, it should still be legally sound and not put the nonprofit in harm’s way. Advertising agencies are familiar with what the sponsor’s goals and objectives are. They are less familiar with what those goals and objectives mean from a legal perspective. It is this very reason that I try to have regular meetings with my clients and the advertising agency that helps them create the sponsorship agreement so that I can at least keep informed of how the draft agreement is coming along and if there are any issues or pitfalls that I can warn them about.
One of the other issues that can occur when creating a sponsorship agreement is having the sponsor place the burden of liability on the nonprofit. This occurs when the sponsor has the ability to approve the entire quality and substance of an event in which they are sponsoring. While that may not sound like an issue , it can be quite the issue. Approval clauses can tie up the nonprofit who may be required to go back to the sponsor for minor issues that the sponsor believes can be resolved. Even worse, if the sponsor has the power to approve who is approved or disapproved, they could have more power than the nonprofit itself. That is a huge red flag and one that the nonprofit should avoid having.
Another mistake that I have seen is placing automatic renewals under the sponsorship agreement. Nonprofits do not consider what can happen if they need to terminate the agreement or what will happen if they decide they don’t want to continue the sponsorship.