In our internet group of "Grant Writers," a question recently came up about writing grants on a commission basis. While most of us believe this is unethical, one person strongly indicated that it is also illegal because you jeopardize the exempt status of the entity by taking a profit from the venture. He said that earning a percentage of the charity's income is private inurement. Would you consider commission-based grant writing to always be illegal?
Commission-based fundraising is considered unethical by the major professional fundraising societies, but it is not illegal and will not cause a charity to lose its exempt status. There are several reported cases holding that commissions on fundraising are permissible so long as they are not unreasonable.
Your colleague is probably thinking about the IRS prohibition on compensation based on a percentage of profit. The IRS thinks that is likely to cause the charity to focus on cutting costs (and therefore charitable services) in order to generate private benefit for those paid a percentage of the profits. The IRS does not have a flat prohibition on percentages of gross income, which is comparable to the percentage of the grant.
Without regard to the formula for payment, I wonder whether any members of your grant writers group are working “illegally” by not registering as fundraising counsel in those states that require charitable solicitation registration. Fundraising counsel are not a notably compliant group, even though the more aggressive state regulators are increasingly cross checking with charity registrations to see which fundraising counsel should also be registered.