How a Nonprofit Can Legally Share Revenue & Compliance Risks

What Rules Limit How a Minnesota Nonprofit Shares Revenue?

A nonprofit may pay a fair price for what it receives, but its net earnings may not flow to insiders, and it must serve a public rather than a private interest. Minnesota also bars dividends or other pecuniary remuneration to members, other than members that are nonprofit organizations or government units, and holds each director to a duty of good faith and care.

The federal limit starts with the exemption itself. A charity qualifies under 26 U.S.C. § 501(c)(3) only if “no part of the net earnings of which inures to the benefit of any private shareholder or individual.” Treasury regulations define that phrase: “The words private shareholder or individual in section 501 refer to persons having a personal and private interest in the activities of the organization” (26 C.F.R. § 1.501(a)-1(c)).

A second rule, called private benefit, is broader, and it appears in 26 C.F.R. § 1.501(c)(3)-1(d)(1)(ii). Under it, an organization does not operate exclusively for an exempt purpose “unless it serves a public rather than a private interest.” The regulation describes private interests “such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests.” Because the list begins with “such as,” the rule is not limited to insiders, and a lopsided deal with an outside vendor can raise it. Fair pay alone does not settle the private-benefit question. In one example in 26 C.F.R. § 1.501(c)(3)-1(d)(1)(iii), a museum whose board was unrelated to the artists violated the private-benefit restriction because it “gives 90 percent of the proceeds from its sole activity to the individual artists,” a benefit “more than incidental to its other purposes and activities.”

Minnesota adds two rules of its own. Under Minn. Stat. § 317A.011, subdivision 6, a Minnesota nonprofit corporation may not “pay dividends or other pecuniary remuneration, directly or indirectly, to its members, other than to members that are nonprofit organizations or subdivisions, units, or agencies of the United States or a state or local government.” And under Minn. Stat. § 317A.251, subdivision 1, “A director shall discharge the duties of the position of director in good faith, in a manner the director reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.”

I suggest the board ask two questions about any revenue-sharing proposal: what does the nonprofit receive for the share it pays, and does anyone on the other side have a personal connection to the nonprofit? Those two answers decide which of the rules below apply. For how inurement plays out inside a nonprofit-owned business, see private inurement in a nonprofit-owned venture.

How Can a Nonprofit Pay a Vendor or Fundraiser a Share of Revenue?

A nonprofit may pay an outside vendor or fundraiser a percentage of revenue if the total pay is reasonable for the work and the vendor’s benefit stays incidental to the nonprofit’s charitable activity. A paid fundraiser must register with the Minnesota Attorney General and sign a written contract, which must state the charity’s share if the fundraiser or anyone it engages solicits in Minnesota.

Minnesota’s definition of a professional fundraiser is wide. Under Minn. Stat. § 309.50, subdivision 6, it includes a paid solicitor and also “any person who for compensation or profit plans, manages, advises, consults, or prepares material for, or with respect to, the solicitation in this state of contributions for a charitable organization.” A consultant paid a percentage of a capital campaign fits that definition. The same subdivision provides: “A bona fide salaried officer, employee, or volunteer of a charitable organization is not a professional fundraiser.”

Five Minnesota rules follow when a professional fundraiser is involved:

1. The fundraiser registers. Minn. Stat. § 309.531, subdivision 1, provides: “No person shall act as a professional fundraiser unless registered with the attorney general.”
2. The contract states the charity’s share. Under subdivision 2, the contract must be in writing and, when the fundraiser or anyone it employs, procures, or engages solicits in Minnesota, must “disclose the percentage or a reasonable estimate of the percentage of the total amount solicited from each person which shall be received by the charitable organization for charitable purposes.” The contract must also “contain information as will enable the attorney general to identify the services the professional fundraiser is to provide, including whether the professional fundraiser will at any time have custody of contributions.” That percentage is net: “The stated percentages required by this section and section 309.556, subdivision 2, shall exclude any amount which the charitable organization is to pay as expenses of the solicitation campaign, including the cost of merchandise or services sold or events staged.”
3. The charity files the contract. The charity’s registration under Minn. Stat. § 309.52, subdivision 1, includes “Copies of contracts between charitable organization and professional fundraisers relating to financial compensation or profit to be derived by the professional fundraisers.” A contract signed after the charity registers has its own deadline: “Where any such contract is executed after filing of the registration statement, a copy thereof shall be filed within seven days of the date of execution.” I suggest checking the current text of that deadline before relying on it. A small, all-volunteer charity that is otherwise exempt from registering loses that exemption under Minn. Stat. § 309.515, subdivision 2, when it “employs a professional fundraiser to solicit or assist in the solicitation of contributions.” It must then file a registration statement under section 309.52 and an annual report under Minn. Stat. § 309.53.
4. Donors are told. Under Minn. Stat. § 309.556, subdivision 2, a professional fundraiser soliciting in Minnesota must disclose its name as on file with the attorney general “and that the solicitation is being conducted by a” professional fundraiser. Subdivision 1 applies to every solicitation: “Prior to orally requesting a contribution or contemporaneously with a written request for a contribution,” the charity’s name and location, “the tax deductibility of the contribution,” and a description of the charitable program “shall be clearly disclosed.” When the campaign’s program differs from the organization’s, the disclosure also includes “a description of the programs and activities of the organization on whose behalf the solicitation campaign is being carried out.” If the solicitation is made by direct personal contact, “the required information shall also be disclosed prominently on a written document which shall be exhibited to the person solicited.”
5. The charity signs off. Under Minn. Stat. § 309.531, subdivision 3, “No professional fundraiser shall use the name of or solicit on behalf of any charitable organization unless such solicitor has written authorization from two officers of such organization, a copy of which shall be filed with the attorney general.” When the fundraiser files a solicitation notice, subdivision 2 provides that “The charitable organization on whose behalf the professional fundraiser is acting shall certify that the solicitation notice and accompanying material are true and complete to the best of its knowledge.” The fundraiser’s campaign financial report under subdivision 4 “shall be signed by an authorized official of the professional fundraiser and an authorized official from the charitable organization and they shall certify, under oath, that it is true to the best of their knowledge.”

Whether a vendor is a professional fundraiser turns on the subdivision 6 text. I suggest checking an event company or online platform that handles donation appeals against that text before signing, because the registration and contract rules follow from the answer. The private-benefit rule applies to every vendor. A vendor paid a share of revenue can itself become an insider. Under 26 C.F.R. § 53.4958-3(e)(2), facts tending to show substantial influence include that “The person’s compensation is primarily based on revenues derived from activities of the organization, or of a particular department or function of the organization, that the person controls” and that “The person manages a discrete segment or activity of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole,” among other facts. The regulation’s Example 5 treats as a disqualified person a company that runs a charity’s bingo games for a share of the revenue, where the games bring in more than half of the charity’s revenue. The insider rules in the next section can then apply to such a vendor. I suggest a cap on any vendor’s percentage, because a cap keeps the payment tied to the value of the work when revenue grows faster than the work does. Federal regulations treat a cap the same way for insiders: “The fact that a compensation arrangement is subject to a cap is a relevant factor in determining the reasonableness of compensation” (26 C.F.R. § 53.4958-4(b)(1)(ii)(A)). For contract terms, see revenue-sharing agreements with vendors.

What Changes When the Revenue Share Goes to an Insider?

When an insider receives a revenue share from a nonprofit that is not a private foundation, federal excise taxes apply to any amount above fair value (or, for some supporting-organization payments, the whole amount), and Minnesota’s director-conflict procedure governs whether the contract can be challenged. Insiders include directors, officers, others with substantial influence, their family members, and certain companies they control.

The federal rule is 26 U.S.C. § 4958. It reaches a “disqualified person,” which includes a person “in a position to exercise substantial influence over the affairs of the organization,” along with family members and certain controlled entities, over a lookback period the statute sets. An excess benefit transaction is “any transaction in which an economic benefit is provided by an applicable tax-exempt organization directly or indirectly to or for the use of any disqualified person if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit.”

Section 4958 does not reach a private foundation. Its definition of an applicable tax-exempt organization provides: “Such term shall not include a private foundation (as defined in section 509(a)).” For a private foundation, 26 U.S.C. § 4941(a)(1) imposes a tax “on each act of self-dealing between a disqualified person and a private foundation” at a rate “equal to 10 percent of the amount involved with respect to the act of self-dealing for each year (or part thereof) in the taxable period.” The tax “shall be paid by any disqualified person (other than a foundation manager acting only as such) who participates in the act of self-dealing,” under the same paragraph. Paragraph (2) separately taxes “the participation of any foundation manager in an act of self-dealing between a disqualified person and a private foundation, knowing that it is such an act.” That tax is “equal to 5 percent of the amount involved with respect to the act of self-dealing for each year (or part thereof) in the taxable period, unless such participation is not willful and is due to reasonable cause.” I suggest a private foundation check the federal private-foundation rules before any insider revenue share, because the section 4958 taxes and safe harbors on this page do not govern it. For a supporting organization, section 4958(c)(3) treats “any grant, loan, compensation, or other similar payment provided by such organization” to a substantial contributor, a member of the contributor’s family, or a “35-percent controlled entity” as an excess benefit transaction. In that case the excess benefit “includes, with respect to any transaction described in clause (i), the amount of any such grant, loan, compensation, or other similar payment.”

A percentage formula gets no special treatment. Under 26 C.F.R. § 53.4958-4(a)(1), “The rules of this section apply to all transactions with disqualified persons, regardless of whether the amount of the benefit provided is determined, in whole or in part, by the revenues of one or more activities of the organization.”

The section 4958 taxes fall on the insider and on the managers who approve the deal:

• On the insider. “There is hereby imposed on each excess benefit transaction a tax equal to 25 percent of the excess benefit.”
• On managers who approve it. A manager who participates knowing it is an excess benefit transaction owes “a tax equal to 10 percent of the excess benefit, unless such participation is not willful and is due to reasonable cause.”
• If it is not corrected. When the excess is not corrected within the taxable period, “there is hereby imposed a tax equal to 200 percent of the excess benefit involved.”

Under 26 C.F.R. § 53.4958-4(a)(3), “section 4958 does not apply to any fixed payment made to a person pursuant to an initial contract.” A fixed formula can use revenue, “provided that no person exercises discretion when calculating the amount of a payment or deciding whether to make a payment (such as a bonus)”: “A specified event or contingency may include the amount of revenues generated by (or other objective measure of) one or more activities of the applicable tax-exempt organization.” The exception covers a binding written contract with a person who was not already a disqualified person, and it has its own conditions, including substantial performance. Under paragraph (a)(3)(v), a written binding contract the nonprofit may terminate or cancel, other than for the other party’s lack of substantial performance, “without the other party’s consent and without substantial penalty to the organization is treated as a new contract as of the earliest date that any such termination or cancellation, if made, would be effective.” Also, “if the parties make a material change to a contract, it is treated as a new contract as of the date the material change is effective.” A material change “includes an extension or renewal of the contract,” other than one that results from the other party “unilaterally exercising an option expressly granted by the contract,” and it includes “a more than incidental change to any amount payable under the contract.” The new contract “is tested under paragraph (a)(3)(iii) of this section to determine whether it is an initial contract for purposes of this section.”

The board can earn a presumption that the pay is reasonable. Under 26 C.F.R. § 53.4958-6(a), the arrangement must be “approved in advance by an authorized body of the applicable tax-exempt organization” whose members have no conflict; “The authorized body obtained and relied upon appropriate data as to comparability prior to making its determination”; and “The authorized body adequately documented the basis for its determination concurrently with making that determination.”

Minnesota’s procedure is Minn. Stat. § 317A.255. It covers a contract with a director, a director’s family member, “a director of a related organization, or a member of the family of a director of a related organization,” or an organization in which the director or a family member serves or has a material financial interest. Under subdivision 4, family means “a spouse, parent, child, spouse of a child, brother, sister, or spouse of a brother or sister.” Under subdivision 1, the contract is not void or voidable if it was fair, or if it was approved in good faith after full disclosure of the material facts. Under subdivision 3, the procedures in clauses (1) to (3) are not required between related organizations, as the subsidiary section explains. Subdivision 1 also covers the case where “the contract or transaction is a merger or consolidation described in section 317A.601.” The other three routes are:

1. It was “fair and reasonable as to the corporation when it was authorized, approved, or ratified,” and the person defending it carries that burden.
2. After full disclosure, “the board or committee authorizes, approves, or ratifies the contract or transaction in good faith by a majority of the directors or committee members currently holding office, provided that the interested director or directors may not vote and are not considered present for purposes of a quorum.”
3. After full disclosure, it was “approved in good faith by two-thirds of the members entitled to vote, not counting any vote that the interested director might otherwise have, or the unanimous affirmative vote of all members, whether or not entitled to vote.”

A Minnesota approval vote and the federal presumption are separate tests, so I suggest one board process that meets both. For how these conflicts arise, see conflicts of interest in dual board roles.

How Does Revenue Move Between a Nonprofit and Its For-Profit Subsidiary?

A nonprofit can own a for-profit subsidiary and receive its profits as dividends, or charge it royalties, rent, interest, or fees, though a private foundation faces a separate tax on excess business holdings. Royalties, rent, interest, and annuities from a subsidiary the nonprofit controls can be taxable unrelated business income, and insider pay through the subsidiary still counts under the federal excess benefit rules.

The tax rule is 26 U.S.C. § 512(b)(13). Ordinarily, subsection (b)(1) provides “There shall be excluded all dividends, interest, payments with respect to securities loans.” Subsection (b)(2) excludes “all royalties.” Paragraph (13) overrides those exclusions for a “specified payment,” meaning “any interest, annuity, royalty, or rent,” from a controlled entity: “the controlling organization shall include such payment as an item of gross income derived from an unrelated trade or business to the extent such payment reduces the net unrelated income of the controlled entity (or increases any net unrelated loss of the controlled entity).” For a corporation, control means “ownership (by vote or value) of more than 50 percent of the stock in such corporation.” For a partnership, control means “ownership of more than 50 percent of the profits interests or capital interests in such partnership,” and in any other case “ownership of more than 50 percent of the beneficial interests in the entity.” Dividends are not on the specified-payment list.

A private foundation faces an added limit. Under 26 U.S.C. § 4943(a)(1), a tax is imposed “on the excess business holdings of any private foundation in a business enterprise,” equal “to 10 percent of the value of such holdings.” In general, a foundation’s permitted holdings in a corporation are “20 percent of the voting stock, reduced by . . . the percentage of the voting stock owned by all disqualified persons,” with further rules in the statute for nonvoting stock and other cases. The term “business enterprise” does not include “a functionally related business” or “a trade or business at least 95 percent of the gross income of which is derived from passive sources.” The same tax reaches “a type III supporting organization (other than a functionally integrated type III supporting organization),” which section 4943(f) treats as a private foundation.

Federal regulations test insider pay across the whole group. Under 26 C.F.R. § 53.4958-4(a)(1), benefits exchanged with the nonprofit “and all entities the organization controls” are taken into account. A director’s salary from the subsidiary and fees from the parent are weighed together.

Minnesota treats the parent and subsidiary as related. Under Minn. Stat. § 317A.011, subdivision 18, control exists in any of three cases. The first is when an organization “owns, directly or indirectly, at least 50 percent of the stock ownership or membership interests of another organization.” The second is when it “has the right, directly or indirectly, to elect, appoint, or remove 50 percent or more of the members with voting rights of the governing body of another organization.” The third is when it “has the power, directly or indirectly, to direct or cause the direction of the management and policies of another organization, whether through the ownership of voting interests, by contract, or otherwise.” Under Minn. Stat. § 317A.255, subdivision 3, “The procedures described under subdivision 1, clauses (1) to (3), are not required if the contract or other transaction is between related organizations.” The federal inurement and private-benefit rules still apply to those contracts.

Transferring all or substantially all of the nonprofit’s assets into a subsidiary adds steps. Under Minn. Stat. § 317A.811, subdivision 1, a 501(c)(3) corporation “shall notify the attorney general of their intent to dissolve, merge, consolidate, or convert, or to transfer all or substantially all of their assets.” Subdivision 1(b) lists what the notice must include, among them “a list of assets owned or held by the corporation for charitable purposes” and “the terms, conditions, or restrictions, if any, to be imposed on the transferred or converted assets,” and “The notice must be signed on behalf of the corporation by an authorized person.” Subdivision 2 provides that it “may not transfer or convey assets as part of a dissolution, merger, consolidation, or transfer of assets under section 317A.661, and it may not convert until 45 days after it has given written notice to the attorney general, unless the attorney general waives all or part of the waiting period.” Subdivision 6 removes that notice and waiting period for a “transfer of assets to an organization exempt under section 501(c)(3),” which a for-profit subsidiary is not. Under subdivision 3, “The attorney general may extend the waiting period under subdivision 2 for one additional 30-day period by notifying the corporation in writing of the extension.” I suggest checking the current text of that waiting period and extension before relying on them. After the transfer, subdivision 4 provides that “the board shall deliver to the attorney general a list of persons to whom the assets were transferred or conveyed.” For a transfer “not in the usual and regular course of its activities,” Minn. Stat. § 317A.661, subdivision 2(a), requires board action “by the affirmative vote of a majority of all directors,” and adds a member vote: “If there are members with voting rights, the sale, lease, transfer, or disposition must be submitted to the members under paragraph (b).”

I suggest pricing intercompany royalties, rent, and services at what unrelated parties would pay, because both the tax rule and the inurement rule measure against fair value. See transfer pricing between a nonprofit and a business it controls and moving assets between a nonprofit and its for-profit affiliate.

How Do Sponsorships and Cause-Marketing Promotions Share Revenue?

Outside periodicals and trade shows, a sponsor’s payment that buys only acknowledgment of its name or logo is not unrelated business income, but a payment tied to attendance or ratings is not protected. A business promotion that tells customers part of the price goes to the charity is a charitable solicitation under Minnesota law.

Under 26 U.S.C. § 513(i), “The term "unrelated trade or business" does not include the activity of soliciting and receiving qualified sponsorship payments.” A qualified payment is one with no arrangement or expectation of “any substantial return benefit other than the use or acknowledgement of the name or logo (or product lines) of such person’s trade or business in connection with the activities of the organization that receives such payment.” Acknowledgment does not include advertising, such as price information or an endorsement. The term also excludes “any payment which entitles the payor to the use or acknowledgement of the name or logo (or product lines) of the payor’s trade or business in regularly scheduled and printed material published by or on behalf of the payee organization that is not related to and primarily distributed in connection with a specific event conducted by the payee organization,” and “any payment made in connection with any qualified convention or trade show activity.” Exclusivity and license rights can change the result. Under 26 C.F.R. § 1.513-4(c)(2)(vi)(B), “An arrangement that limits the sale, distribution, availability, or use of competing products, services, or facilities in connection with an exempt organization’s activity generally results in a substantial return benefit,” though naming the payor the exclusive sponsor “generally does not, by itself, result in a substantial return benefit.” Paragraph (c)(2)(iii) also lists, among the benefits a payor may receive, “Exclusive or nonexclusive rights to use an intangible asset” of the organization, such as its trademark or logo.

A revenue-style sponsorship formula can fail that test. The term does not include a payment whose amount is “contingent upon the level of attendance at one or more events, broadcast ratings, or other factors indicating the degree of public exposure to one or more events.” Under 26 C.F.R. § 1.513-4(e)(2), “The fact that a payment is contingent upon sponsored events or activities actually being conducted does not, by itself, cause the payment to fail to be a qualified sponsorship payment.”

Cause marketing runs the other direction: a business shares its revenue with the charity. Minnesota’s Charitable Solicitation Act does not use the term commercial co-venturer, but its definitions reach these promotions. Under Minn. Stat. § 309.50, subdivision 5, a contribution includes “payment for merchandise or rights of any other description when representation is made by or on behalf of the seller or solicitor that the whole or any part of the price will be applied to a charitable purpose.” Subdivision 10 makes a sale a solicitation when the seller states “that the whole or any part of the proceeds from any such sale will be used for any charitable purpose.”

The business’s own status also turns on text. Subdivision 6 includes in the definition of a professional fundraiser “any person who for financial compensation or profit performs for a charitable organization any service in connection with which contributions are, or will be, solicited in this state by the compensated person or by any compensated person the person employs, procures, or engages to solicit.” I suggest checking the business’s role against that text before the promotion runs, because a professional fundraiser must register under section 309.531.

Two consequences follow for the charity. I suggest confirming that the charity’s registration under Minn. Stat. § 309.52, subdivision 1, is current before the promotion runs, because the money it raises is a contribution under subdivision 5. And Minn. Stat. § 309.55, subdivision 5, provides that “No charitable organization and no person acting on behalf of a charitable organization shall use or employ any fraud, false pretense, false promise, misrepresentation, misleading statement, misleading name, mark or identification, or deceptive practice, method or device, with the intent that others should rely thereon in connection with any charitable solicitation.” I suggest a written agreement that states the amount per sale, any cap, and the campaign dates, and approval of the advertising language, because the promotion’s statements to customers are what the statute measures. The advertising may also be a written request for a contribution. If it is, Minn. Stat. § 309.556, subdivision 1, lists disclosures due “contemporaneously with a written request for a contribution,” including “the tax deductibility of the contribution.” Under subdivision 1 of section 309.55, the charity may not use another person’s name in public solicitation literature “without the written consent of such other person,” so the agreement should include the business’s consent to the charity’s use of its name. For sponsor terms, see this nonprofit sponsorship agreement guide.

How Do Referral Fees and Affinity Royalties Work for a Nonprofit?

A nonprofit that licenses its name or logo to a partner for a royalty can exclude the royalty from unrelated business income, but income from services the nonprofit performs for the partner is tested under the general rule. Selling access to a donor list requires each contributor’s consent in Minnesota.

Under 26 U.S.C. § 512(b)(2), “There shall be excluded all royalties (including overriding royalties) whether measured by production or by gross or taxable income from the property, and all deductions directly connected with such income.” The paragraph excludes royalties only. I suggest limiting the nonprofit’s role in an affinity deal to licensing its name, because income for marketing or servicing the partner’s product falls outside that exclusion and is tested under the general rule in 26 U.S.C. § 513(a).

Donor lists carry a Minnesota rule. Under Minn. Stat. § 309.55, subdivision 6, “No person shall, either as an individual or as agent, officer or employee of a charitable organization sell or otherwise furnish for a consideration to any other person any list of contributors unless the contributor has consented to the transaction.” A referral partner that pays a share of its sales for access to the list is paying consideration for it.

A referral deal involving items or services a federal health care program may pay for faces one more rule, whatever the nonprofit’s own field. The federal anti-kickback statute, 42 U.S.C. § 1320a-7b(b), makes it a felony for “Whoever knowingly and willfully solicits or receives any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind” either “in return for referring an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program,” or for arranging or recommending certain purchases. The paying side is covered too: subsection (b)(2) reaches “Whoever knowingly and willfully offers or pays any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person” to make such a referral or purchase. The statute lists exceptions. Minnesota extends those restrictions: under Minn. Stat. § 62J.23, subdivision 2, “until rules are adopted by the commissioner under this section, the restrictions in the federal Medicare antikickback statutes in section 1128B(b) of the Social Security Act, United States Code, title 42, section 1320a-7b(b), and rules adopted under the federal statutes, apply to all persons in the state, regardless of whether the person participates in any state health care program.” I suggest checking any referral deal that steers people to a seller of items or services a federal health care program may pay for against both statutes and the federal exceptions before signing.

When Does Shared Revenue Become Taxable Unrelated Business Income?

Revenue a nonprofit earns from a trade or business it regularly carries on, which is not substantially related to its exempt purpose, is unrelated business income taxed at corporate rates, after statutory exclusions such as those for dividends, interest, and royalties. Minnesota taxes that income too, with its own adjustments, to the extent it is assignable to Minnesota.

The federal tax is in 26 U.S.C. § 511. Unrelated business taxable income is “the gross income derived by any organization from any unrelated trade or business (as defined in section 513) regularly carried on by it, less the deductions allowed by this chapter which are directly connected with the carrying on of such trade or business, both computed with the modifications provided in subsection (b)” (26 U.S.C. § 512(a)(1)). An unrelated trade or business is “any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501” (26 U.S.C. § 513(a)). Section 513(a) also excepts certain activities, including one “in which substantially all the work in carrying on such trade or business is performed for the organization without compensation,” so a volunteer-run activity can fall outside the tax. Subsection (b) of section 512 holds the exclusions for dividends, interest, and royalties covered in the subsidiary and referral sections.

The parenthetical in the definition applies directly to revenue sharing. Using the profits for the mission does not make the activity related; the activity itself must advance the mission. A revenue share from a vendor that sells to the nonprofit’s members is tested on what the nonprofit does to earn it.

Tax is not the only risk. Under 26 C.F.R. § 1.501(c)(3)-1(e)(1), “An organization which is organized and operated for the primary purpose of carrying on an unrelated trade or business is not exempt under section 501(c)(3),” and in deciding that question “all the circumstances must be considered, including the size and extent of the trade or business and the size and extent of the activities which are in furtherance of one or more exempt purposes.”

Minnesota starts from the federal definition. Under Minn. Stat. § 290.05, subdivision 3, an exempt organization is subject to Minnesota tax “to the extent provided in the following provisions of the Internal Revenue Code,” which include “sections 511 to 515”. “The tax shall be at the corporate rates,” and “The tax shall only be imposed on income and deductions assignable to this state under sections 290.17 to 290.20.” The same subdivision makes adjustments. The tax is not imposed on “revenues from lawful gambling authorized under chapter 349 that are expended for purposes that qualify for the deduction for charitable contributions under section 170 of the Internal Revenue Code, disregarding the limitation under section 170(b)(2), but only to the extent the contributions are not deductible in computing federal taxable income.” And in computing unrelated business taxable income, “the amount of any net operating loss deduction claimed under section 172 of the Internal Revenue Code is an addition,” but the organization “may deduct a net operating loss for the taxable year in the same manner as a corporation under section 290.095.” A CPA who prepares exempt-organization returns can model this tax before the board signs a deal, which may cost less than a legal analysis of the same question.

What Must a Minnesota Nonprofit Report About Shared Revenue?

A Minnesota charity that solicits contributions must register with the Attorney General before soliciting, unless exempt, and file an annual report that attaches its IRS returns and names its professional fundraisers and their pay. The Attorney General can enforce those duties in district court.

Under Minn. Stat. § 309.52, subdivision 1, “No charitable organization, except as otherwise provided in section 309.515, shall solicit contributions from persons in this state by any means whatsoever unless, prior to any solicitation, there shall be on file with the attorney general” a registration statement. The main exemption in Minn. Stat. § 309.515, subdivision 1, covers a charity “which did not receive total contributions in excess of $25,000,” with no plan to exceed that, “whose functions and activities, including fundraising, are performed wholly by persons who are unpaid for their services, and” whose assets and income do not benefit any officer. A charity that crosses the threshold during the year has its own deadline: under subdivision 1a of section 309.52, a charity whose contributions exceed that amount “shall file a registration statement with the attorney general within 30 days after the date on which the organization’s total contributions exceeded $25,000,” and I suggest checking the current text of that deadline before relying on it.

The annual report under Minn. Stat. § 309.53 puts revenue-sharing deals in front of the Attorney General:

• IRS returns. Under subdivision 2, “the annual report shall also include a copy of all tax or information returns, including all schedules and amendments, submitted by the charitable organization to the Internal Revenue Service for the period covered by the annual report except any schedules of contributors to the organization.”
• Fundraiser pay. Under subdivision 3, the financial statement discloses the “names of professional fundraisers used during the accounting year and the financial compensation and profit resulting to each professional fundraiser”.
• Top pay across the group. Subdivision 3 also requires “a list of the five highest paid directors, officers, and employees of the organization and its related organizations, as that term is defined by section 317A.011, subdivision 18, that receive total compensation of more than $100,000, together with the compensation paid to each.”
• Audit. “A financial statement of a charitable organization which has received total revenue in excess of $750,000 for the 12 months of operation covered by the statement shall be accompanied by an audited financial statement” by an independent CPA.

Records must be kept. Under Minn. Stat. § 309.54, subdivision 2, “Every person subject to sections 309.50 to 309.61 shall maintain, for not less than three years from the date of preparation, accurate and detailed books and records to provide the information required by sections 309.50 to 309.61,” and “All such books and records shall be open to inspection at all reasonable times by the attorney general.” I suggest checking the current text of that period before relying on it, and keeping each revenue-sharing contract and its payment records at least that long.

Enforcement runs through the courts. Under Minn. Stat. § 309.57, subdivision 1, “Upon the application of the attorney general the district court is vested with jurisdiction to restrain, enjoin, and redress violations of sections 309.50 to 309.61.” The court may order restitution, appoint a receiver, suspend registration, and “may award to the state civil penalties up to $25,000 for each violation of sections 309.50 to 309.61.” For the board’s wider duties, see Minnesota charity law for nonprofit boards.

How Should a Board Choose Among Its Revenue-Sharing Options?

A board should weigh the deal’s structure, not only its price: a fixed fee, a capped percentage, in-house staff, a sponsorship, a subsidiary, a renegotiation, or walking away. Each fits a different situation and carries a different compliance risk.

• A flat or hourly fee. It fits predictable work, such as event production or grant writing. The risk is that the nonprofit pays the full fee even if the campaign underperforms.
• A capped percentage. It fits work whose value tracks revenue, such as an online sales platform. The risk is overpayment when revenue spikes, which a cap answers.
• Staff instead of a firm. A salaried employee is not a professional fundraiser under Minn. Stat. § 309.50, subdivision 6, so the registration and contract-filing rules do not reach that role. The risk is a fixed payroll cost.
• A sponsorship instead of advertising. Limiting a business partner to acknowledgment keeps its payment within the sponsorship rule, unless the acknowledgment runs in regularly scheduled printed material not tied to a specific event or the payment is tied to a convention or trade show. The amount also may not depend on attendance, ratings, or other measures of public exposure, and a promise to limit competing products or a right to use the nonprofit’s logo can be a substantial return benefit. The risk is a smaller payment, because the partner gets less.
• A subsidiary for a commercial line. It separates a business that is not substantially related to the mission. The risk is the controlled-entity tax rule, the cost of a second entity, and Attorney General notice if all or substantially all assets move. For a private foundation, the section 4943 tax on excess business holdings can also apply.
• A direct conversation with the partner. When an existing share looks lopsided, a call from the board chair or executive director to the partner’s owner can reset the terms before the next renewal. The risk is that the partner declines, leaving the nonprofit to choose between the current terms and ending the deal.
• Walking away. It fits a deal whose only value depends on a donor list, an insider, or a promotion the nonprofit cannot control. The risk is the lost revenue.

Whatever the structure, I suggest the same board record, because it serves both the Minnesota conflict statute and, for a nonprofit that is not a private foundation, the federal presumption. That record should include each director’s disclosure of any interest and pay or price data for comparable arrangements. It should also show approval in good faith by a majority of the directors currently holding office, in a vote in which any interested director does not take part, and minutes written at that meeting that state the data and the reasons. Directors may rely on “counsel, public accountants, or other persons as to matters that the director reasonably believes are within the person’s professional or expert competence” under Minn. Stat. § 317A.251, subdivision 2. Subdivision 2(b) removes that protection for “a director who has actual knowledge concerning the matter in question that makes the reliance otherwise permitted by paragraph (a) unwarranted.”

Next Steps for a Board Weighing a Revenue-Sharing Deal

A Minnesota nonprofit can share revenue with vendors, fundraisers, a subsidiary, sponsors, and referral partners. Among the conditions are that each payment reflects fair value, no insider takes the nonprofit’s earnings, and the deal meets the Minnesota registration, donor-consent, and member-payment rules that apply to it. The deal’s structure decides which rules apply. Among them are Minnesota’s fundraiser registration and contract rules, the conflict procedure in chapter 317A, the federal excess benefit taxes, the unrelated business income tax, and, for a referral deal involving items or services a federal health care program may pay for, the anti-kickback statutes.

If your board is weighing a revenue-sharing proposal and wants to know how these rules apply to it, email [email protected] with a brief description, and I can start an intake and conflict check before you send any confidential documents. More on how I help organizations with these questions is on my Minnesota business compliance page.