What is a Fiscal Sponsorship?
The National Network of Fiscal Sponsors defines fiscal sponsors as “…nonprofits that advance the public benefit by facilitating the development and growth of charitable, mission-driven activities;” from the perspective of the nonprofit, a fiscal sponsor offers an opportunity to have a formal legal home without having to spend significant time and resources to incorporate a new public charity.
In other words, fiscal sponsorship is a way for individuals who want to potentially get into the nonprofit space to explore ideas without having to obtain a tax-exempt status or build out the entirety of their systems/processes or procedures on their own. Your fiscal sponsor can not only help to provide administrative services and oversee the organization but they can also assume some or all of the legal and financial responsibility within the scope of activities of the nonprofit entrepreneur (depending on what's agreed upon). A fiscal sponsor is typically an already existing nonprofit organization with 501(c)(3) status that has agreed to give a legal home and support for currently non-tax-exempt entities.
Example of Fiscal Sponsorship Scenario:
In order to better understand the potential need for fiscal sponsorship, here's an example:
You've just filed for your 501(c)3 designation so the IRS will recognize your group as a tax-deductible nonprofit organization.
You're ready to start fundraising and you want to hit the ground running, but there's a bit of a catch to this: donors typically only want to contribute to an organization once it has received its tax-exempt status, and you're not yet eligible for grants because you aren't officially recognized as a tax-exempt entity. You have a nonprofit fundraiser and you want to get it off the ground, but you're stuck until you hear back from the IRS. However, in the meantime, there is a way you can apply for grants and raise tax-deductible funds...fiscal sponsorship.
How do donations to fiscal sponsorships work?
Donations to fiscally sponsored projects are directed to a tax-exempt fiscal sponsor. As we mentioned above, it's common that the fiscal sponsor is a public charity exempt under Section 501(c)(3) of the Internal Revenue Code and a qualified recipient of charitable contributions that are deductible for the donor. As a tax-exempt public charity, the fiscal sponsor is able to accept the donations directly. One thing to note about the donations is that they have to be treated as “intended to support a particular project and as restricted funds dedicated to furthering that project's charitable purpose.”
The fiscal sponsor can then decide how to use those funds. For example, the fiscal sponsor may distribute the management of the funds to specific employees, contractors, or volunteers of the fiscal sponsor. Alternatively, it may grant the funds to a suitable grantee that it vetted earlier (pre-approved grant relationship fiscal sponsorship). This should also be agreed on ahead of time so that the process is already set up once your nonprofit is ready to receive donations.
How can you get a fiscal sponsorship?
The simplest way to do this is to look for nonprofits whose missions may be similar to yours. You might start with your current affiliations. We recommend making a list of the professional groups, educational associations, institutions, religious organizations, social and recreational clubs, and other groups with which you are already associated, including nonprofit employers.
- The Fiscal Sponsor Directory allows you to search by state, service category, or keyword for nonprofit fiscal sponsors. Each profile includes eligibility requirements, fees, services, and types of projects supported. The site also provides statistics and resources on fiscal sponsorship.
Now that you have your list of potential fiscal sponsorships, it's time to approach them about this potential opportunity. It's important to be ready to give a verbal or written proposal that explains the following:
- Your project: Why it's needed, your goals, objectives, method, evaluation, staffing, and budget. This can sometimes be compared to writing a grant proposal.
- How your project advances or assists the fiscal sponsor's mission
- Other ways the fiscal sponsor can benefit from being associated with your project
Is a Fiscal Sponsorship the Right Choice for My Nonprofit?
- Fiscal sponsorship can be ideal for new projects that want to test out their business model before investing substantial time, money, energy in building an organization and infrastructure to support the project.
- Or maybe you need help tackling some of the challenges of newness that come with becoming a nonprofit.
- Or if you are a brand new organization that needs to immediately begin fundraising but you have not yet received a determination letter confirming your 501(c)(3) status
Benefits of A Fiscal Sponsorship:
Reduced Costs/Administrative Burden
The primary benefit of fiscal sponsorship for the sponsored project is the ability to solicit grants and donations without having to build a tax-exempt organization to support the project. Starting and administering a new nonprofit is expensive and time-consuming. Starting a fiscal sponsorship is relatively fast and typically has no up-front cost.
Your fiscal sponsor may very well be your opportunity to open a multitude of new doors, opportunities, and networks that you may not have been able to reach. There's a lot you can learn, such as:
- Setting up different systems within your nonprofit
- Working with larger teams
- Different project management strategies for fundraising
- Different resources for marketing/advertising within the world of fundraising
& much more!
Risks of A Fiscal Sponsorship:
Loss of Control
When entering into a fiscal sponsorship, there can be some tradeoffs. Sponsored projects should be aware that legally, the funds they raise are under the control of the sponsoring organization and the sponsoring organization has the right to achieve the project goals through other means if the project's leaders aren't getting the job done. It's also important to note that from the perspective of the sponsor, they are accepting a high degree of liability, responsibility, and risk to their reputation. This can likely exercise the sponsor to enact a fair degree of control over the finances and activities of the sponsored project. The optimistic perspective on them taking on more control can be that you have the opportunity to learn from the wisdom and experience of the fiscal sponsor.
It's important to work with a fiscal sponsor that is financially strong. Make sure you do your research and ask the right questions when it comes to funding and financial risk. Unfortunately, there have been examples where fiscal sponsors file for bankruptcy, taking their sponsored projects' funding with them. There are also examples where fiscal sponsors have taken over successful projects as their own, this has typically been found in cases where a charity is serving as a fiscal sponsor not as part of its core mission but as a one-off and fails to document the terms of the arrangement in writing.
Most fiscal sponsors charge an administrative fee for all charitable contributions that they process. These fees vary, but we often see ranges from as little as 3% up to 10% on the higher end. It is entirely reasonable for a fiscal sponsor to charge a fee, as they are shouldering a substantial amount of risk as well as performing a significant administrative role. Just be sure that the fees the fiscal sponsor charges are in line with what others charge.
We know of several organizations in the Kansas City area that serve as fiscal sponsors, with many focusing on specific areas. For community development-type projects, Community Capital Fund may be a great choice. Another great example is Women in Film + Media Kansas City, which provides fiscal sponsorship opportunities for women creatives in film and television.
If you are like many organizations or projects that are just starting out, you may not realize the huge opportunity that a fiscal sponsorship may be able to provide you related to fundraising or other assistance. Of course, a lot of work on both parties' sides goes into a successful fiscal sponsorship relationship, but that's no reason to scare you away from at least considering a fiscal sponsorship as a potential solution. At Mission Counsel, we can make sure not only that you have proper legal counsel every step of the way but also that you are walking away with a fiscal sponsorship agreement that makes you feel confident about moving one step closer to your mission.