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I intend to eventually run a contest as a promo. Specifically, I'd like to do a random drawing of a pool of registered users that meet certain criteria.

What legal and tax related concerns do I need to be aware of before attempting this?

Also, I have not yet set up my business as a legal entity. I plan on doing this sort of promo every few months. Is there a classification of business that is better suited to the task?

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Agreed with both Gabe and Alex below, +1 – Jason Oct 20 '09 at 3:45

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We ran a contest a few years back and were surprised to learn about the complexity.

Online contests, done to the letter of the law, are a complete nightmare. There are state laws (yours and theirs) plus a litany of federal laws with the FTC, the Postal Service, and probably other agencies. And then there are privacy laws. And so on.

Our solution? Find a contest put on by people with real money, model yours off of theirs, lift their contest rules, and then run a fair contest. Just to be extra safe, we used UPS or FedEx for the prize.

The whole point of all these laws are to (1) protect the consumer from deceitful practices and (2) prevent lotteries/raffles. With a small, bona fide contest, who's going to complain to the authorities? And, since any complaint would be baseless on the surface, what agency will dedicated needed resources to your little contest?

As for taxes... the recipient is responsible to pay, and you should 1099 them.

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My model is something like what Slickdeals.net does around the holidays where posting in a specific thread and having certain reputation gives you a number of entires in the drawing. Newegg.com does some thing similar for their summer give away. Thanks for the tip. – Rob Allen Oct 20 '09 at 1:43
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Laws governing contests vary by state.

In general, the regulations require certain disclosures regarding odds of winning, and bar purchase-to-enter style contests (hence the ubiquitous "No Purchase Necessary").

Incorporation will have more to do with your specific tax needs than with your contests.

Doing a random drawing from a pool of registered users should be a fairly safe contest to run, though.

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