It is legal for a 501(c)(3) charitable organization to pay a professional fundraiser on a percentage basis so long as the percentage is reasonable.  The Association of Fundraising Professionals and other professional fundraising organizations, however, say it is unethical for their members to do so.  So you can judge whether you think it is advisable.

Reporting on Form 990 raises more interesting questions.  A lot of public relation firms argue that they are not fundraising professionals, but the instructions to Form 990 say that professional fundraising expenses must be reported in the aggregate on line 11(e) and on Schedule G if they aggregate more than $15,000 during the year.  The instructions define professional fundraising services as those “requiring the exercise of professional judgment or discretion consisting of planning, management, preparation of materials (such as direct mail solicitation packages), provision of advice and consulting regarding solicitation of contributions, and direct solicitation of contributions.” It specifically excludes ministerial tasks such as printing, mailing services, or depositing checks.  If they are advising you on the planning, management or solicitation of contributions they are probably fundraising professionals —and they certainly are if they are directly asking for contributions. If total fees for all professionals exceed $15,000 during the year, the top ten professionals receiving more than $5000 have to be specifically named on the Schedule G to the Form 990.  (There are slightly different rules for 990-EZ filers.)

The public relations firm will also have to consider registering as professional fundraising counsel in any of the 39 states and the District of Columbia that require registration before an organization can solicit charitable contributions in the state.  And if they are being paid on a percentage basis, they will be classified as professional solicitors in many of those states and may be required to post a bond to assure compliance with the rules.  (See Ready Reference Page: “Compliance Assessments Protect Charities – Part I”) You should be aware that the state charitable solicitation registration offices look at Schedule G and will sometimes bounce a charity’s registration if any of the fundraising counsel listed on its Schedule G is not registered with the state.