The Secret to Starting Your Nonprofit Quickly: A Fiscal Sponsor
Nonprofit organizations are notorious for being a bit – well let’s say – complicated to get set up.
You need to a mission, programs and a business plan. You need to file with your state to incorporate and prepare your bylaws. You need to raise funds. And you’ll need a board of directors.
And then of course, there’s your application to the IRS for tax-exemption. And there’s no getting around it – this part is a heavy lift.
So how do you lighten your load and speed up your ability start making an impact?
Find a fiscal sponsor!
A what?
A fiscal sponsor is a 501c3 organization that allows other individuals or organizations to “use” its 501c3 status to apply for grants and solicit charitable contributions.
This enables you to raise money during the start-up phase before you’ve gotten your own 501c3 status.
Fiscal sponsor arrangements can be a great way test the waters before leaping into the whole process of applying for 501c3 status.
Having a fiscal sponsor can also be a great way to bridge the gap between the time you start your program and the time it takes for the IRS to approve your 501c3 application.
How does a fiscal sponsor work?
Charitable contributions and grants are given to the fiscal sponsor instead of to you directly. Then the fiscal sponsor grants them to you to support your cause.
Some groups use a fiscal sponsor for a limited period - just until they can get their own 501c3.
Others stick with their fiscal sponsor for a long time if they feel like they can accomplish their goals without creating a new entity.
Keep in mind that there are different types of fiscal sponsors. Some fiscal sponsors are only a financial conduit for your donations and grants.
Other fiscal sponsors provide more services. This may include outsource administrative responsibilities, back-office functions, training, office space, fundraising assistance, etc.
To do: Look for available fiscal sponsors in your community. Consider what they offer and how their offerings meet your goals.
What’s the catch?
Fiscal sponsors usually charge a fee for their services. The fee may be structured as a percentage of your budget or the amount of contributions collected for you (e.g., 5%-10%).
Also, the IRS requires that the fiscal sponsor maintain the right to decide how it will use contributions. So, the fiscal sponsor must maintain control over your contributions and grants.
Finally, your project has to align with the sponsor’s mission in order to be eligible for fiscal sponsorship.
To do: Research the financial health of the fiscal sponsors you’re considering. This is important since your funds will be running through their organization! A good place to start is looking at the fiscal sponsor’s annual tax return – IRS Form 990 – on Guidestar (www.guidestar.org).
Why choose fiscal sponsorship?
Donors can’t claim a tax deduction unless they donate to a 501c3 organization. Using a fiscal sponsor means you donors can take a deduction before you have your own 501c3 status.
Also, foundations and other grantors usually require you to have 501c3 status in order to be eligible to apply for their grants. A fiscal sponsor will generally get you past this hurdle.
Another reason to choose fiscal sponsorship is to “test-drive” your ideas to determine if it’s feasible. It gives you time to see if there’s a market for your services.
It also gives you time to assess your fundraising plan. If you’re new to nonprofits, this may include learning how to fundraise.
It also gives you a chance to test potential funding sources. This allows you to assess if, how and where funding might come from.
Finally, a fiscal sponsor can be a wealth of knowledge, and may be able to share information about the local nonprofit and fundraising community. A good fiscal sponsor will serve as a coach as you get your organization up and running.
A great fiscal sponsor will be your champion and help you operate according to best practices.
To do: Talk to others who have worked with the fiscal sponsor. How helpful is the fiscal sponsor? How quickly do they make funds available? Are they a good coach?
How do you make it legal?
It's best to outline the responsibilities and obligations of both parties in a written agreement.
The agreement should specify that the fiscal sponsor is responsible for all legal compliance relating to receiving, reporting, and acknowledging charitable donations.
It should also make your responsibilities clear. This includes the administrative fee, and any recordkeeping requirements.
Fiscal sponsorship is an option that any new nonprofit founder should consider. It doesn’t matter if you’re working with a small or large budget. And it doesn’t matter if you want a short-term or long term fiscal sponsor.
If your goal is to start making an impact sooner rather than later, then fiscal sponsorship may be a path to get there.
Note: This website does not provide legal or tax advice and Nonprofit Springboard is not a law firm.