What is a Fiscal Sponsorship?
Should You Consider This Relationship to Jump Start Your Nonprofit Goals?
DEFINITION:
A Fiscal Sponsor is an existing 501(c)(3) nonprofit organization that can provide fiduciary services and support to another group, usually a charitable project that aligns with the Sponsors mission and values. In other words, the Sponsor is extending the benefits of its legal nonprofit status to a Project which allows said Project to accept tax-exempt contributions while it focuses on its mission and/or works on the process of incorporation. This relationship allows Project leaders to keep costs low while focusing on generating effective programs.
“People ask whether they should create a new 501(c)(3) organization or find a fiscal sponsor. Or do both — incorporate now but “incubate,” using a fiscal sponsor to receive and spend donated income until they receive their IRS recognition letter.”
DECIDING WHETHER TO FORM A NEW NONPROFIT OR USE A FISCAL SPONSOR
HOW IT WORKS:
There are several models of fiscal sponsorship but the two most frequently used are the Pre-Approved Grant Relationship Sponsorship, known as Model C, and the Comprehensive Fiscal Sponsorship, known as Model A. relationship. The main difference in the two models is if the project belongs to the sponsor or remains a separate entity.
In the Pre-Approved Grant Relationship, the project does not belongs to an independent entity, usually a LLC, corporation or sole proprietor, the sponsor and is responsible for managing its own tax reporting and liability issues. In addition, the sponsor does not have ownership of the results of the project's work and is simply in place to ensure grant funds are used as described in the grant proposal.
In the Comprehensive Model, the project is fully integrated into the sponsors program, becoming the legal and fiduciary responsibility of the sponsor. The employees and volunteers of the project become employees and volunteers of the sponsor for the duration of the project.
In both models, the project must apply for sponsorship and be approved by the sponsors board, where alignment with the sponsor's mission and values are assessed. Once approved, a contract is generated, and a fee structure is established. The fee is usually a sliding scale percentage of funds raised, often based on a project's size. Other services can be provided for predetermined fees between the two entities.
The most comprehensive description of these can be found in the book Fiscal Sponsorship: 6 Ways to Do It Right (Study Center Press, 1993, 2005, 3rd edition recently released in 2019) by attorney Gregory L. Colvin.
WHY USE A FISCAL SPONSOR:
There are many reasons to use a fiscal sponsor, but each should be weighed carefully. Here are a few reasons to explore fiscal sponsorship as a viable option for your project:
A project can immediately and legally raise funds for a charitable cause.
Your donors can make tax-exempt contributions to your project.
Sponsors can often consult on issues like fundraising and obtaining incorporation.
You can apply for and receive grants legally through the nonprofit status of your sponsor.
Make a difference in your community without the burdensome and lengthy paperwork required to incorporate.
A sponsor can help you gain credibility with your donors.
The fees for sponsorship can often be lower than the overhead required to run a project.
CONCLUSION:
If done properly, a fiscal sponsorship can be an efficient and effective way to start making a difference in your community. This relationship can be an alternative way to organize when the task of starting a nonprofit project seems overwhelming, you need time to apply for legal tax-exempt status, or the length of the project may not warrant independent establishment at all. There are many potential scenarios and models to fit each, so do your research. Find a sponsor that aligns with your geography and mission. The reality is that this relationship you make in the beginning of your project may be the difference between you getting lost in all the details, or you achieving your nonprofit goals.
