Rules for Contests in Nonprofits
There are two sides to the rules for contests in nonprofits. On an operational level, the nonprofit must establish rules for how the contest will be conducted, what the prizes are and other logistical concerns. The other side concerns the potential tax liabilities nonprofits face if their fundraising relies too heavily on contests. Striking the right balance between the two can have a significant effect on any contests repeatability and sustainability.
Nonprofit contests are often associated with fundraising, offering prizes as a means of soliciting contributions. Others may be a way of getting free work done. For example, a nonprofit might hold a logo design contest for an upcoming event and give prizes to the winner. Rules in this case would be tailored to the specific requirements of the event. Specific rules will be different for fundraising contests as opposed to work-based contests.
Most basic rules apply for all kinds of contest. The winner shouldn't be an employee or the relation of an employee. Deadlines should be established and strictly followed. The board of directors should act as judges and their decisions should be final. Additionally, if the contest is a design contest or an essay contest, the nonprofit should establish what rights the creator retains and what rights the creator releases as a condition of winning. The nonprofit's attorney should help to establish this aspect of the rules as well as the indemnifying statements, which lay out the claims of liability the nonprofit will or won't accept as the contest sponsor.
If a nonprofit relies too often on contests as fundraising mechanisms, its status as a nonprofit entity could be compromised. According to the Internal Revenue Service's rules for nonprofit fundraising, if a nonprofit's income relies primarily on recurring or ongoing contests it can raise questions about a group's purpose. Fundraising for its own sake is not an acceptable endeavor for a nonprofit. More than 50 percent of a nonprofit's resources cannot be devoted to fundraising, according to the IRS.
Following the rules for contests in nonprofits both on the operational and on the accounting sides is critical. Because so much is at stake, many nonprofits designate an employee or volunteer to make certain each contest is held both in accordance with state nonprofit rules as well as with IRS regulations. Although there is sometimes an expense involved with this step, nonprofits that depend heavily upon contest revenue treat it as a necessary cost.