Q: A large charitable organization has approached my agency to arrange group tours for its members. The organization would like a commission of some kind; is it legal to share my commission or profit with a charity? If so, how should the agreement be structured? What role should the charity have in marketing the trips, handling sign-ups, taking payments and escorting the trips? Must all this be in a written contract, or can I rely on a handshake with the executive director of the organization?
A: There are no legal restrictions on the ability of charities and other nonprofit organizations to be in the travel business, receive commissions or share your commissions. While federally tax-exempt organizations should pay income taxes on certain business profits, there is no prohibition on the entities' ability to earn such income in the first place.
So it is perfectly legal for you to agree to pay the charity a percentage of your commission or a fee per participant. It is even legal for you to agree to reimburse the group's out-of-pocket expenses, such as the group leader's travel costs.
Sometimes the group requests that your payment to the organization be labeled as a charitable contribution, either for appearance' sake or to avoid the income tax consequences referred to above. Here you need to beware, as C corporations can deduct no more than 10% of their net income for charitable contributions, and S corporations' contributions are passed through to shareholders, who may not be able to deduct them. Therefore, it is usually more advantageous for you to cast the payments as a selling or promotional expense.
Besides paying a commission split or a flat fee per participant, there are other ways to structure compensation. You could guarantee to reimburse the organization's costs and then perhaps add a small fee. You could also price the trips by mutual agreement, adding in a different compensation formula depending on the type of trip.
Another, less popular but still viable method of compensating the group is by creating a joint venture, under which you and the group will split the profits after all approved expenses are deducted. The typical split is 50/50, but there is no reason why it cannot be a different split, such as 80% for you and 20% for the group.
The agreement should list each party's duties in detail. Typically, the organization provides its membership lists and sends the solicitation materials, and the agency collects the money, pay suppliers, handles rooming lists and takes charge of the trip's operations. The agreement should also include joint duties, such as deciding on dates and destinations that both parties think will sell well.
Your agency may decide to use off-the-shelf tours offered by major tour operators specializing in all-inclusive escorted tours. Even if you do nothing more than serve as the sales agent for one of those operators, you still need an agreement with the organization specifying the arrangements between you and the group.
While it is legally permissible to deal with the group only on a handshake basis if the arrangement will last less than one year, it is quite risky to do so. Oral understandings differ, memories fade and key personnel get replaced, so putting everything in writing is certainly prudent.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at [email protected].