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A Beginner’s Guide to Fiscal Sponsorship

 Introduction 

            Starting a nonprofit can be daunting. You may want to become a charitable organization exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code (the “Code”) so that your new nonprofit can bypass paying federal income taxes and attract contributions from donors, whose donations will be tax deductible. The various forms and fees that this process requires can be overwhelming, however, and can take a long time. In some cases, it might be a good idea to explore other options for your nonprofit project, such as a fiscal sponsorship. 

What is Fiscal Sponsorship? 

A fiscal sponsor is an existing nonprofit organization (usually a Code Section 501(c)(3)) charitable organization) that shares the benefits of its tax-exempt status with a person or entity whose mission is aligned with theirs.[1] The projects that they sponsor receive the benefit of having a tax-exempt organization without having to apply for tax-exempt status themselves. If you are engaged in a charitable activity and do not want to jump through the hoops necessary to become tax-exempt, fiscal sponsorship may be a viable alternative. In exchange for an administrative fee,[2] a fiscal sponsor will accept tax deductible grants and donations on behalf of the sponsored project. In order for the sponsored entity to satisfy IRS requirements for tax-exemption, however, the fiscal sponsor must maintain complete discretion and control over use of the funds.[3] The sponsor must ensure that the funds are being used only for the sponsored entity’s intended charitable purpose. This rule is to ensure that the fiscal sponsor is not simply acting as a pipeline through which a project receives funds.[4] 

Sponsored Project

Fiscal Sponsor

Pays administrative fee to and receives funds from its sponsor

Retains both control and discretion over funds for sponsored project

Builds and maintains relationships with its donors

Receives charitable contributions on behalf of sponsored project

Discloses to its donors the fact that it uses fiscal sponsor’s tax-exempt status

Shares its tax-exempt status with sponsored project

Complies with recordkeeping, reporting, and any other obligations for sponsor

 Provides fiduciary oversight to and completes various administrative tasks for sponsored project

Why Should I Pursue a Fiscal Sponsorship? 

            Pursuing a fiscal sponsorship can be a great option for a person or group who has started a project with a charitable purpose, but does not want to go through all of the red tape that is required to create a nonprofit and be recognized as tax-exempt from the IRS. Going through the process of tax-exemption can be lengthy and tedious, and it may be more attractive for some to bypass that entire process, yet still be able to carry out its charitable mission. Additionally, a nonprofit may want to pursue a fiscal sponsorship while they are still waiting for the IRS to recognize their tax-exempt status.[5]

Fiscal sponsorship can be an especially attractive option for someone with a short-term project. For example, if your goal is to raise funds to clean up a public park in your community or host a one-time educational summit, you may find that going through the process of setting up an organization and pursuing tax-exemption is too much of a hassle, as your project is very short-term. Alternatively, perhaps your project is more long-term but you’d like to test drive the car before you buy it. It can be a good way to test out the viability of your project, see if it is something that may attract donors and be feasible long term before you later start your own 501(c)(3) organization.

            In addition to the tax-exempt status itself, fiscal sponsors also provide expertise and helpful oversight. Fiscal sponsors can share many administrative duties, to be negotiated in a Fiscal Sponsorship Agreement. They may provide fiduciary oversight, human resources management, financial management, auditing, tax reporting, legal services, accounting services, computer IT services, and more.[6] Their ability to provide fiduciary and regulatory oversight, complete back-end administrative tasks, and lend their own knowledge, skills, and organizational expertise in guiding the sponsored project toward success may make pursuing a fiscal sponsorship a much more efficient and rewarding option for many.[7] Additionally, a sponsored project’s relationship with the fiscal sponsor itself may do wonders in attracting more donations and grants from funders who are familiar with the name and reputation of the fiscal sponsor.

 How Do I Create a Fiscal Sponsorship?

            Creating a fiscal sponsorship relationship is quite simple. Once you have identified a willing sponsor who is aligned with your mission, all that is needed to formalize the relationship is a Fiscal Sponsorship Agreement.[8] Having a written and signed Fiscal Sponsorship Agreement is a critical part of the relationship, as it will outline the expectations and duties of each of the parties. The Agreement should address all aspects of the relationship, including explaining the nature of the relationship, outlining the various tasks that the fiscal sponsor has agreed to take on, include an “out clause,” outlining how and when either party may end the relationship, and listing administrative fees.[9] Most importantly, your Agreement should describe how funds are to be received and disbursed, making clear that the fiscal sponsor has complete control over use of the funds.[10] Since this document is the cornerstone of the relationship, it is a good idea to have an attorney draft and review the Agreement before both sides sign it.

 Conclusion 

            Fiscal sponsorship is a lesser known but increasingly popular tool to create charitable impact for projects. It can be a good way to bypass the red tape of achieving tax-exemption, find funds while nonprofits await their own tax-exempt status, test drive a new idea, or make large impacts for short-term projects. If you think that pursuing fiscal sponsorship is a viable option for your project, make sure your Fiscal Sponsorship Agreement contains all of the necessary elements for a successful relationship.

By Emily K. Olsen

[2] Administrative fees generally range from 5-10% of the funds held by the sponsored project, but fees may vary and can be negotiated between sponsor and sponsored: https://www.propelnonprofits.org/resources/a-boards-guide-to-fiscasponsorship/#:~:text=Generally%2C%20that%20fee%20is%20somewhere,behalf%20of%20the%20sponsored%20group.



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