Fiscal Sponsorship: An Alternative to Applying for Tax-Exempt Status
With the challenges of forming a new nonprofit, consider a fiscal sponsorBy Doug Mentes, Esq. | Reviewed by Canaan Suitt, J.D. | Last updated on November 10, 2023
Use these links to jump to different sections:
- What Is Fiscal Sponsorship?
- What Are the Common Fiscal Sponsorship Models?
- How Do You Choose a Fiscal Sponsor?
- How Do You Make a Fiscal Sponsorship Arrangement?
Many who consider starting a new nonprofit organization (NPO) initially focus their efforts on their chosen charitable activity or social cause—while paying less attention to the business side of things. That may work for small, grassroots organizations, but a charitable organization is a business, and a business requires funding. And in this case, that funding comes from donations that are tax-deductible to their donors.
Further, obtaining tax-exempt status can be a time-intensive and complex process, and that status must be maintained with annual Internal Revenue Services (IRS) filings. The nonprofit corporation must also dedicate time to budgeting and accounting. Clearly, being a nonprofit is not easy work. In fact, many smaller nonprofits struggle to exist, with some efforts fizzling out soon after start-up.
A solution to these problems could be fiscal sponsorship.
What Is Fiscal Sponsorship?
In a nutshell, fiscal sponsorship is when an established tax-exempt nonprofit organization allows a non-exempt organization to piggyback on its tax-exempt status in order to accomplish its exempt purposes (such as educational or charitable purposes).
The not-yet-exempt organization that receives the benefit of the nonprofit’s tax-exempt status is referred to as “the project.” The fiscal sponsorship relationship between the tax-exempt organization and the project is controlled by a contractual agreement.
Any tax-exempt public charity deemed exempt by the Internal Revenue Code Section 501 (c) (3) can serve as a fiscal sponsor. To ensure the fiscal sponsor does not risk its tax-exempt status, the relationship between the sponsor and non-exempt project or organization must meet the following requirements to satisfy the IRS:
- The sponsor agrees to accept donations and fundraising on behalf of the non-exempt entity;
- The sponsor retains supervision and control of donated funds; and
- The sponsor ensures donated funds are used in a manner that furthers the sponsor’s own mission.
What Are the Common Fiscal Sponsorship Models?
Fiscal sponsorship takes on several different forms or models. The most widely used models are the following:
- Comprehensive fiscal sponsorship (Model A): this involves the least financial independence of the project. The project does not exist on its own but is a part of the sponsor’s organization;
- Pre-approved grant (Model C): this typically involves the sponsor accepting grants or funds for the project and then re-granting those funds to the project. The project retains status as a separate entity.
Due to greater control over funding, Model C may seem more appealing for the non-exempt project. However, this model imposes more risk on the sponsor, as potential mistakes by either the sponsor or project could lead to donors losing their charitable deduction—or, worse, the sponsor losing its tax-exempt status.
How Do You Choose a Fiscal Sponsor?
At the outset, non-exempt organizations should expect to pay a fee towards the services of the fiscal sponsor—usually a percentage of the granted donations. What determines a fair fee will depend on many factors, including the amount of administrative duties handled by the sponsor.
Those searching for a sponsor should first look to sponsors that have a similar mission. They should then contact potential sponsors to find out answers to common questions, including:
- What is the sponsor’s fee?
- When can I begin the project?
- How can I terminate the agreement?
- Can the project seek its own 501(c)(3) status?
- What services are provided?
How Do You Make a Fiscal Sponsorship Arrangement?
It’s best to outline the responsibilities and obligations of both parties in a fiscal sponsorship agreement. This written agreement should specify that the fiscal sponsor is responsible for legal compliance for the charitable donations, as well as describe both entities’ administrative responsibilities. The non-exempt organization will want it made clear how the sponsor treats the project’s funds.
Before anyone considers contracting with a fiscal sponsor, they should seek legal advice for their project from an attorney who can advise them on the advantages and disadvantages of the various models of fiscal sponsorship. For additional information on this area, see our business organizations overview.
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