Fiscal Sponsorship: Advantages & Risks for a Nonprofit

Fiscal sponsorship is a specialized way for an individual, group or business to get charitable funding without starting a 501(c)(3) nonprofit organization themselves. It’s considered an alternative to starting a nonprofit, but there are several important areas that you’ll need to be aware of if you want to get involved with fiscal sponsorship.

What Fiscal Sponsorship Is For

Fiscal sponsorship involves making an agreement between an established nonprofit or charity that has a 501(c)(3) status (the sponsor), and an unincorporated organization that wants to accept grants and donations. As a result of this agreement, the unincorporated organization can accept tax-deductible contributions using the sponsor nonprofit's tax-exempt status.

How Fiscal Sponsorship Could Be Used

There are many ways that organizations can take advantage of fiscal sponsorship. For example:

• A sculptor can create work in the public interest that’s funded by a nonprofit
• A social group could solicit donations to fund medical research or treatments provided by nonprofits
• Organizations can get involved in disaster relief with sponsorship from an international aid charity
• Fiscal sponsors may simply work as charitable funds, using their money to pay for nonprofit work from partner organizations

How Fiscal Sponsorship Works

There are a few principles about how a fiscal sponsorship relationship works between a nonprofit and another organization.

Donations to Specific Projects

Any donations to eligible projects are redirected to the nonprofit fiscal sponsor. In most cases, that will be an established 501(c)(3) nonprofit organization. The donations received are deductible for tax purposes for the contributor.

Restricted Funds

Any donations made toward an eligible project are defined as “restricted funds,” which means they must be used to fund that project and the charitable purpose that it was set up for.

Use of Funds

A fiscal sponsor must decide exactly how the funds will be used. They may not give up their control over the funds or transfer that authority to the people managing the project in the partner organization. In some cases, they could delegate fund management to employees, volunteers or other stakeholders under the fiscal sponsor’s control.

Benefits of Fiscal Sponsorship

Fiscal sponsorship does provide some tangible benefits, including:

Greater Efficiencies for Both Organizations

Fiscal sponsorship typically requires both parties to share administration. This can mean less duplication of effort and a closer, more collaborative partnership.

Less Regulatory Oversight

Going through the 501(c)(3) process can be long, complex and resource-intensive. If an unincorporated organization can get fiscal sponsorship from a registered nonprofit, that reduces the need for the unincorporated organization to get nonprofit recognition for themselves, lowering their administrative overhead.

Ability to Start Accepting Donations and Grants Immediately

It can take up to six months to be accepted as a 501(c)(3) organization. If you want to start taking advantage of a nonprofit status immediately, you can partner with a fiscal sponsor.

Efficiency for Certain Services

Many fiscal sponsors will provide administrative and support services. This can be especially useful for a new organization that mainly wants to focus on charitable activities.

Fiscal Sponsorship Areas to Be Aware Of

Here are some of the areas you’ll want to consider when exploring this arrangement.

Responsibility of the Sponsoring Organization

The organization providing fiscal sponsorship agrees to be responsible for and accept donations on behalf of the unincorporated organization.

Legal Status as One Entity

Legally, the fiscal sponsor and the unincorporated organization are considered to be one entity and are responsible for the decisions and actions of the other party.

Lack of Oversight Can Lead to Private Benefits

Without the proper oversight, an individual or standard company may get some sort of profit or benefit from charitable donations or grants. There are significant legal and tax ramifications if this is found to be the case.

The fiscal sponsor must get the right controls and oversight in place to ensure proper understanding of exactly how funds are being generated and used.

Have a Nonprofit Attorney Review Agreements and Contracts

Fiscal sponsors will often have established agreements and contracts for working with other organizations. We would recommend having these documents reviewed in detail by a specialized attorney so you can be aware of the type of relationship you’re getting into. This will also help with understanding rules, regulations and expectations for working together.

Accepting Tax-Exempt Contributions Before Your 501(c)(3) Status Is Finalized

An organization that wants to become a nonprofit and eventually file for a 501(c)(3) designation can work with a fiscal sponsor until their application is approved. They can then be classed as tax-exempt per the fiscal sponsor's status.

A word of caution: The fiscal sponsor must provide the same types of services as your new organization. For example, if you’re operating an animal shelter and applying for nonprofit status, you cannot get sponsorship from a charity that specializes in childhood illnesses.

Fees for Fiscal Sponsorship

Most nonprofit fiscal sponsors will charge fees to partner organizations to operate as a fiscal sponsor for them. These fees will typically be based on gross contributions and can range from zero to 40 or 50 percent. Anecdotal evidence suggests that most fees are in the range of 10 to 15 percent of gross receipts.

Types of Services Provided by Fiscal Sponsors

Fiscal sponsors could provide numerous services to a partner organization, and these will be defined in agreements and contracts. Although there is no standard set of services, a fiscal sponsor may provide some of the following:

• Financial reporting including tax filings, returns, financial statements and updates
• Receiving and reporting on charitable donations and grant funding
• Payroll administration and management for employees
• Auditing of funds received and spent
• HR and general administration
• Permitting and licensing
• Processing and auditing

There are certainly advantages to fiscal sponsorship, and it’s worth knowing what you’re getting into. If you need to get the paperwork filed to start your nonprofit, Bizee can help.