Nonprofit organizations offer an array of services and expertise, including consulting services and content creation for other nonprofits or companies. Examples of this work include assessing the efficacy of programs, conducting research and analyses of social issues, advising on corporate conservation practices, developing decision-making tools to help improve public outcomes, providing leadership development on diversity and inclusion, and acting as expert consultants to a government agency.
Many factors come into play when forming a statement of work (SOW) for the provision of consultation services. Below are 8 key considerations for nonprofit organizations to consider when negotiating contracts for such services:
- Evaluate the SOW and document in the contract how the organization's provision of services to the other party is substantially related to its tax-exempt purpose.
- Determine what intellectual property (IP) owned by the nonprofit will be used during the provision of services and take steps to ensure its protection in the contract.
- Clarify in the IP clause(s) who will own any new IP created during the term of the contract: (1) will the nonprofit own new IP and license to the client, or (2) will the client own these deliverables and license them back to the nonprofit in service of tax-exempt purpose?
- Examine any third-party licenses held by the nonprofit for datasets or other intellectual property that are necessary to fulfill the SOW, and confirm that such licenses permit use in connection with commercial services.
- Evaluate if any additional insurance will be necessary, such as professional liability insurance or increased cyber security insurance, based on who the client is or the nature of the services that will be provided.
- Determine if any privacy laws (beyond what is normally applicable to the nonprofit's activities) will now apply as a result of the services being provided (e.g., requirements as a data processor).
- Assess if the warranties and indemnification required by the client are reasonable vis-à-vis the nonprofit's expected revenue and its overall risk tolerance.
- Confirm where the services will be performed and determine if legal registration, short-term in loco employment tax payment, or other statutory requirements apply.
When offering services to a government entity, additional considerations are likely to apply given the fact that regulatory procurement standards apply to all government contractors, including nonprofit organizations. Moreover, since standard government contracts often omit these legal requirements, nonprofit service providers are expected to know these rules, which include:
- Mandatory pricing methodologies for fee setting (which may result in unrecovered costs).
- Ownership of deliverables by the government unless the nonprofit organization negotiates language to protect its pre-existing content and rights to use new deliverables.
- Government-mandated employment practices such as expanded classes of protected parties under equal employment, local hiring preferences, staff pay practices, and drug free workplace policies.
- Obligatory fraud reporting notices.
Consulting services provided outside the U.S. may raise additional questions for a nonprofit, especially if the organization does not ordinarily offer cross border services. In this situation, the organization will need to assess the country's legal requirements relating to registering to do business, VAT, IP licensing, and payment of income taxes. Likewise, if nonprofit staff will be traveling to the country, requirements for work visas, staff security, or employment taxes may apply.
Finally, it is important to note that revenue derived from consultancy services is exempt from U.S. income tax as long as such services are substantially related to the tax-exempt purpose. When booking the revenue, therefore, it is important to classify it as an exchange transaction. A well-written contract will document both of these aspects.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
