Fiscal Sponsorship Explained: How it Helps Nonprofits

Nonprofits exist and continue to do great work around the world through the help of donors, donations, and other forms of financial contribution. One of the best funding options for a nonprofit, especially a newer nonprofit, is to find and enter an agreement with a fiscal sponsor. Through fiscal sponsorship, a nonprofit can receive the help they need to continue to operate and enact change.

What is a Fiscal Sponsorship?

The people at Trust for Conservation Innovation perhaps wrote it best: according to their definition, a fiscal sponsorship is “a nonprofit organization that provides fiduciary services, including governance, funds management and other administrative ‘backbone’ supports to projects with social impacts.” This form of sponsorship can be especially beneficial for younger nonprofits – like those who have not yet been recognized as tax-exempt by the IRS as a 501(c)(3). The sponsor allows a nonprofit to still attract donors, raise funds, and help set them up for future financial success.

Overall, the roles and responsibilities of a fiscal sponsor can vary – based on the agreement – but typically their main purpose is to provide financial support. One of the main roles of a fiscal sponsor is to receive donations on the behalf of a nonprofit, soon-to-be nonprofit, organization, or cause. The sponsor receives them because they are already a tax-exempt entity. Most often, a fiscal sponsor will be a public charity themselves, which receives tax exemption under Section 501(c)(3) of the Internal Revenue Code. Because of this, donations are treated as restricted funds which have been dedicated to furthering a charitable purpose.

Once donations have been received, the sponsor then decides how to best utilize the funds. A fiscal sponsor cannot simply turn them over to the nonprofit, soon-to-be nonprofit, organization, or cause leader(s). The sponsor can consult with the leader or leaders, but the sponsor retains the ultimate decision-making authority over the funds. However, a fiscal sponsor can delegate management of the funds to specific employees, contractors, or even volunteers who work for the fiscal sponsor itself.

The Two Models of Fiscal Sponsorship:

Basics of a Comprehensive Fiscal Sponsorship:

1. The organization entering a fiscal sponsorship agreement generally gives up all ownership and control to the sponsor. The organization/nonprofit does however retain the right to enforce, amend, or terminate the agreement.
2. The organization/nonprofit looking for a fiscal sponsor must not be a tax-exempt entity.
3. Employees and volunteers of the organization/nonprofit are subsequently employees or volunteers for the fiscal sponsor. In this way, these individuals are agents of the fiscal sponsor, which can provide them with protection through the sponsor’s insurance.
4. In this model, the assets and liabilities of the organization/nonprofit are those of the fiscal sponsor. Essentially, the fiscal sponsor is responsible for the organization/nonprofit, including any risks.
5. In being responsible for the organization/nonprofit and its operations, the fiscal sponsor often charges an administrative fee.
6. Overall, this model can serve as an optimal situation for incubating or testing a project, idea, or program, especially for those who may be unfamiliar with nonprofit operations.

Basics of a Pre-Approved Grant Relationship:

1. In this relationship, the organization/nonprofit is the fiscal sponsor’s grantee. In this scenario, the grantee owns the project/nonprofit, not the fiscal sponsor. This means the organization/nonprofit is responsible for its assets, liabilities, taxes, and tax filing.
2. Any employees or volunteers are agents for the organization/nonprofit, not the fiscal sponsor.
3. Any fundraising must be done through the fiscal sponsor because the grantee lacks the proper tax status, which allows for contributions to be deductible.
4. Notably, in this relationship, the fiscal sponsor is not just a third-party to fundraise for the nonprofit. The fiscal sponsor still has the ultimate authority over any and all funds and donations. The sponsor chooses whether to use contributions and grants or potentially grant them to another entity, not necessarily the grantee who used the fiscal sponsor for fundraising.
5. Any potential grantee is vetted in this relationship, and as long as the organization/nonprofit does not breach the sponsorship agreement, they will be granted the funds raised for their cause.

Why Should a Nonprofit Choose Fiscal Sponsorship?

As previously mentioned, a fiscal sponsorship provides newly formed nonprofits with the opportunity to raise money, even if they are still in a sort of start-up phase. Receiving a 501(c)(3) tax exemption can take time, but to pursue change, funds are necessary. The fiscal sponsorship system allows people to essentially test drive their nonprofits, to pursue a cause or an idea, and eventually discover whether or not there is a market or desire for their nonprofit to be funded – all while benefitting from the sponsor’s tax status.

However, fiscal sponsorships are not just for new nonprofits. Some nonprofits opt to remain in fiscal sponsorships as a way of maintaining the status quo. Without a fiscal sponsor, a nonprofit must create and maintain their own administrative systems, which require time, money, and careful planning to ensure success. If the relationship with the fiscal sponsor is favorable, the nonprofit can keep them in charge of administrative duties indefinitely without an awkward transition period.

Fiscal Sponsors are There to Help:

Starting a nonprofit is challenging enough without having to worry about fundraising, financing, and tax statuses. A fiscal sponsorship allows a nonprofit or soon-to-be nonprofit to start working sooner. The sponsor can fundraise, monitor funding, and serve as an administrative supporter for the nonprofit, which can make initial or even daily operations simpler. While either model of sponsorship can be fruitful, a comprehensive is the most common because of how much easier it makes operations for a nonprofit. For anyone considering starting a nonprofit, a fiscal sponsorship should also be considered – as it is a promising option for test driving a nonprofit.

For more tips, tricks, advice, and guides on how to make the most of your nonprofit, check out the rest of our articles. At Nonprofit Megaphone our mission is to make your mission a success.

By Richard Morris