Alternative Fundraising Options for Nonprofits
A practical guide to creative, legally compliant fundraising options beyond traditional donations for nonprofit organizations.
Many nonprofits rely heavily on grants and direct donations, yet growing organizations often need new ways to raise money and engage supporters. Alternative fundraising methods such as raffles, games, product sales, and sponsorships can help diversify revenue streams, but they also introduce legal and financial risks that must be managed carefully.
This guide provides an overview of common alternative fundraising options, highlights key legal issues, and offers practical tips to help your board and staff make informed decisions before launching a new revenue idea.
1. Why Nonprofits Look Beyond Traditional Donations
Charitable giving is vital, but it is also unpredictable. Economic downturns, donor fatigue, and competition from other organizations can all reduce contributions. Nonprofits therefore increasingly look to alternative fundraising tools to create more stable, diversified funding.
Alternative fundraising can offer:
- New revenue streams that complement grants and annual appeals.
- Deeper engagement with supporters through events, contests, or special promotions.
- Visibility and branding when partnering with local businesses or offering public-facing activities.
- Opportunities for unrestricted funds, which are often more flexible than grant income.
However, these benefits come with tradeoffs. Certain activities may trigger additional regulation, licensing, or taxes, and can complicate your organization’s compliance duties.
2. Key Legal and Governance Questions to Ask First
Before experimenting with a new fundraising idea, leaders should step back and analyze the legal and practical implications. Core questions include:
- Is this activity legal in our jurisdiction? Some fundraising approaches—especially raffles, bingo, and other games of chance—are considered gambling and are tightly regulated or even prohibited in some states.
- Do we need licenses, permits, or registrations? Charitable gaming, sales taxes, and business registrations may all apply, depending on the activity.
- Could this create unrelated business taxable income (UBTI)? The IRS may tax income that is regularly carried on and not substantially related to your exempt purpose, even for 501(c)(3) organizations.
- How will we track and report revenue? Certain activities require rigorous recordkeeping and financial controls for both legal and audit purposes.
- Does this align with our mission and values? Even if legal, an activity may conflict with the organization’s image or alienate stakeholders.
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Boards should document their analysis in meeting minutes and consider obtaining legal or tax advice, especially when activities may implicate gambling laws or UBIT.
3. Raffles, Lotteries, and Other Charitable Gaming
Raffles, 50/50 drawings, bingo nights, and similar games can be popular and profitable fundraising tools, but they are also among the most heavily regulated.
3.1 What Counts as Charitable Gaming?
Although state definitions vary, many laws treat an activity as gambling if it includes all three of the following elements:
- Prize – Something of value is awarded to winners.
- Chance – The outcome depends on luck rather than skill.
- Consideration – Participants provide something of value (usually money) to enter.
When all three elements are present, the activity may be classified as a lottery or form of gambling under state law, even if the proceeds support a charitable mission.
3.2 Legal Requirements and Restrictions
State rules on charitable gaming differ widely, but may include:
- Requiring licenses or permits for raffles, bingo, or casino nights.
- Limiting the number of events per year or the total value of prizes.
- Restricting which types of organizations qualify (often only 501(c)(3) or similar entities, with a minimum operating history).
- Requiring separate bank accounts and detailed financial reports for gaming revenues.
- Prohibiting certain types of games entirely, or prohibiting online raffles.
Failure to comply can result in fines, loss of gaming privileges, or even jeopardize the organization’s charitable status. Boards should consult state and local guidance on charitable gaming before any tickets are sold.
3.3 Managing Risk in Gaming Events
To reduce legal and reputational risk:
- Develop written policies and procedures for handling cash, ticket sales, and prize distribution.
- Train volunteers and staff on rules for age limits, ticket control, and reporting.
- Use segregated accounting for gaming proceeds to simplify audits.
- Review your insurance coverage for events, liability, and property risks.
4. Contests, Games of Skill, and Sweepstakes
To avoid strict gambling rules, some nonprofits consider contests or sweepstakes that rely on skill or that do not require a purchase. These options can still carry complexity.
4.1 Contests Based on Skill
Skill-based contests (for example, essay, art, or trivia competitions) attempt to remove or reduce the element of chance. Where winners are selected based on objective criteria or judging, the activity may not be treated as gambling. However:
- Rules must clearly explain judging criteria and selection methods.
- Judging should be consistent and documented to avoid disputes.
- If an entry fee is charged, consider whether the contest could still be viewed as a lottery in your jurisdiction.
4.2 Sweepstakes and “No Purchase Necessary” Rules
Some organizations run sweepstakes in which winners are selected at random, but at least one method of entry does not require a payment. By eliminating the consideration element, they attempt to distinguish the promotion from a lottery.
Important considerations include:
- Providing a free, clearly disclosed entry method that is as accessible as paid methods.
- Drafting detailed official rules that address eligibility, deadlines, prize descriptions, and odds of winning.
- Ensuring truthful advertising and avoiding misleading statements about prizes or chances of success.
Because state and federal rules on promotions can be intricate, nonprofits often consult counsel before launching a sweepstakes campaign or partnering with a business to run one.
5. Cause Marketing and Business Partnerships
Partnerships with businesses—such as cause-related marketing campaigns or sponsorships—can raise money and awareness at the same time. Yet they also create contractual, regulatory, and ethical responsibilities.
5.1 Sponsorship vs. Advertising
The IRS distinguishes between qualified sponsorship payments and advertising income. A sponsorship payment that simply acknowledges the sponsor’s support (for example, by listing their name and logo) is generally not taxable as unrelated business income.
By contrast, if the nonprofit provides advertising services—such as promoting the sponsor’s products, offering price information, or including qualitative statements—this may generate unrelated business taxable income (UBTI).
| Feature | Qualified Sponsorship | Advertising |
|---|---|---|
| Content | Name, logo, and neutral description | Promotional, comparative, or call-to-action language |
| Tax Treatment | Generally not UBTI | Often treated as UBTI |
| Risk Level | Lower, if carefully structured | Higher; may require Form 990-T |
5.2 Commercial Co-Ventures and Cause-Related Sales
Some businesses market products by promising that a portion of sales will support a nonprofit. In many states, this is regulated as a commercial co-venture, requiring compliance steps such as written contracts, disclosures, or even state registration.
To protect your organization:
- Insist on a written agreement specifying the amount or percentage donated, timing of payments, and accounting obligations.
- Require the business to use accurate, approved language in marketing materials about your organization and the benefit.
- Monitor sales reports and reconcile expected vs. received contributions.
6. Product Sales, Events, and Earned Income
Many nonprofits earn revenue by selling goods or services, such as merchandise, training, or tickets to special events. Properly structured, these can support your mission and broaden community engagement.
6.1 Mission-Related vs. Unrelated Activities
To determine tax treatment, ask whether the income-generating activity is substantially related to your exempt purpose.
- Mission-related example: A museum charging admission or running an educational gift shop closely tied to its exhibits.
- Potentially unrelated example: A charity running a general retail store with goods unconnected to its mission.
Income from regularly carried-on activities that are not substantially related may be subject to the federal unrelated business income tax (UBIT), generally reported on Form 990-T.
6.2 Special Events and Galas
Fundraising events—galas, auctions, walks, and festivals—often combine donations with ticket sales, sponsorships, and sometimes gaming. When planning events, nonprofits should:
- Separate donation portions of tickets from the fair market value of benefits received, for donor receipting purposes.
- Track and report event income and expenses clearly in accounting records.
- Comply with local rules for permits, alcohol service, and safety.
- Ensure accessible pricing if the event supports a community-focused mission.
6.3 Managing Sales Tax and Local Rules
Even if federal income tax does not apply, state and local sales taxes may be due on merchandise, food, or certain services sold to the public. Exemptions for nonprofits vary by jurisdiction and by the type of item sold.
Nonprofits should confirm:
- Whether they must collect and remit sales tax on specific items.
- Whether short-term sales or occasional events receive special treatment.
- Any registration requirements with state revenue agencies.
7. Practical Risk-Management Checklist for New Fundraising Ideas
Before launching any alternative fundraising program, boards and executive leaders can use a simple checklist to identify and mitigate risk:
- Legal review: Have you checked state and local laws, especially for gaming, sweepstakes, or co-ventures?
- Tax implications: Could the activity generate UBTI or trigger new filing requirements?
- Financial controls: Are procedures in place for handling cash, reconciling accounts, and preventing fraud?
- Reputational impact: How will donors, clients, and regulators view this activity?
- Documentation: Do you have written policies, contracts, and board approval where appropriate?
- Insurance and safety: Are event and liability risks addressed through coverage and planning?
8. Building an Internal Policy on Alternative Fundraising
To avoid ad hoc decisions, many nonprofits benefit from a board-approved policy or guidelines on alternative fundraising. Such a policy might:
- Define which types of activities are allowed, restricted, or prohibited.
- Specify when legal or tax advice is required before proceeding.
- Set approval thresholds (for example, board approval for high-risk or high-revenue initiatives).
- Outline recordkeeping standards for gaming, events, and sponsorships.
- Address ethical considerations, such as avoiding partnerships that conflict with the organization’s mission.
Having a clear framework helps staff respond confidently to fundraising ideas from volunteers, board members, or potential corporate partners.
9. Frequently Asked Questions (FAQs)
Q1: Can our nonprofit hold an online raffle?
A: It depends on state law. Some states restrict or prohibit internet-based raffles even when they allow in-person raffles for charitable organizations. Always confirm rules with state regulators or legal counsel before selling tickets online.
Q2: Are donations from raffles tax-deductible for participants?
A: Usually, the price of a raffle ticket is not tax-deductible for the purchaser, because they receive a chance to win something of value. The nonprofit may still treat the net proceeds as charitable income, but donors generally cannot claim a deduction for ticket purchases.
Q3: Do we have to pay tax on income from a corporate sponsorship?
A: If the payment is a qualified sponsorship—where the sponsor receives only recognition and no substantial advertising—then it is typically excluded from unrelated business income. If you provide advertising or other substantial return benefits, some or all of the income may be subject to unrelated business income tax.
Q4: How do we know if sales from our gift shop are taxable?
A: At the federal level, you must assess whether the activity is substantially related to your exempt purpose to determine UBIT. At the state level, you must also check whether sales tax applies to the items sold. Museums and educational institutions often receive special treatment, but rules vary by jurisdiction.
Q5: When should we seek professional advice?
A: Consulting an attorney or tax professional is wise when you plan any of the following: charitable gaming events, multi-state raffles or sweepstakes, substantial earned income programs, or complex corporate partnerships. Early advice can prevent costly corrections later and supports strong organizational governance.
References
- Charitable Gaming: Legal Issues for Nonprofits — American Bar Association. 2020-11-01. https://www.americanbar.org/groups/business_law/publications/blt/2020/11/charitable-gaming/
- Unrelated Business Income Tax — Internal Revenue Service. 2024-03-15. https://www.irs.gov/charities-non-profits/unrelated-business-income-tax
- Charities and Nonprofits — Internal Revenue Service. 2023-09-19. https://www.irs.gov/charities-non-profits
- Fundraising and Charitable Activities — National Council of Nonprofits. 2023-06-01. https://www.councilofnonprofits.org/tools-resources/fundraising-and-charitable-activities
- State Regulation of Charitable Solicitation — National Association of State Charities Officials. 2022-05-10. https://www.nasconet.org
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