What Is a Fiscal Sponsor? Start Your New Nonprofit Today
Starting a nonprofit organization is an exciting decision—one that comes with many steps and responsibilities. While you’ll need to start your nonprofit to get donations, you also need donations to start your nonprofit. So which one comes first?
A partnership with a fiscal sponsor can help jump-start your new nonprofit by lending you its credibility and legal nonprofit status. However, acquiring 501(c)(3) tax-exempt status takes time and work. It’s also crucial in earning donors’ trust. Simply put, a fiscal sponsor propels you forward during your initial stages.
Explore this comprehensive breakdown to discover the pros, cons, and best practices for landing successful fiscal sponsor partnerships and learn how your nonprofit can put these actions into practice today.
What Is a Nonprofit Fiscal Sponsor?
A fiscal sponsor is an existing nonprofit that extends the benefits of its charitable status to your organization. Essentially, people donate directly to the fiscal sponsor, who then funnels the funds to you. The sponsor assumes some of the risk and work involved with the financial management and often takes a percentage of each donation for this reason.
If we think of a new nonprofit as a startup, the fiscal sponsor is like an incubator. It’s a protective environment that allows the organization to grow in stability and structure before becoming fully independent. The goal is for them to be a short-term solution rather than a permanent fixture.
A comprehensive fiscal sponsorship provides you with a shortcut to accepting tax-deductible donations while starting a new charitable project. This is why deciding which type of sponsor best fits your situation is such a critical step in the process.
There are six models of fiscal sponsorship, each with different structures, benefits, and risks. These include:
- Direct project
- Independent contractor project
- Preapproved grant relationship
- Group exemption
- Supporting organization
- Technical assistance
Fiscal Agent vs. Fiscal Sponsor
Like fiscal sponsors, fiscal agents are charitable partners who can assist smaller organizations. However, there’s a critical distinction between these models of fiscal sponsorship.
Fiscal agencies don’t retain financial discretion or control, but a fiscal sponsor does. This is a major benefit to small nonprofits, as it allows them to retain a sense of independence. Unfortunately, this also means you must secure a 501(c)(3) status to enter this agreement.
However, a fiscal agent can provide some financial stability, administrative services, or access to organizational infrastructure. What’s also crucial to note is that the fiscal agent can’t share its 501(c)(3) status with your nonprofit.
Who Can Serve as a Fiscal Sponsor?
Most qualifying tax-exempt organizations can serve as fiscal sponsors for other organizations. However, you must take certain steps to form this partnership. Any organization looking to serve as a fiscal sponsor must meet the following requirements as set by the IRS:
- The sponsor must have active 501(c)(3) status with the IRS
- The receiving organization (your nonprofit) controls all the funds
- The activities must be for charitable purposes
- The sponsor organization must provide tax receipts to all funders
- The sponsor is responsible for the actions of the receiving organization
In other words, becoming a fiscal sponsor is a commitment to help oversee a nonprofit. Think of it like cosigning a loan. The sponsor provides organizational credibility to the unestablished charity. Therefore, there’s an inherent investment and risk involved.
What Are the Benefits of a Fiscal Sponsorship Agreement?
There are several potential benefits of seeking support from a fiscal sponsor. Here are five of the pros when considering this arrangement:
- Immediate financial support: New organizations are the best and most logical candidates to seek fiscal sponsors. For example, when a nonprofit hasn’t earned tax-exempt status yet but still needs donations to get started.
- Protection and stability: Offloading some of the administrative tasks of a new nonprofit to a trusted partner helps you focus on your mission, build a community, and grow your fundraising efforts.
- Resources and infrastructure: In addition to tax-deductible donations, some fiscal sponsors offer administrative services like helping with financial management or human resources. After all, these organizations have a vested interest in your organization, which could potentially lead to them offering other resources to help you succeed.
- Mentorship: Since the sponsors must be tax-exempt to qualify, your sponsor has likely been through the same situation and can provide insight and advice to guide you in the right direction.
- Grant writing assistance: Grants are an effective way to launch new nonprofits. However, writing effective grant proposals takes time and expertise. Having a fiscal sponsorship increases the likelihood that you can apply for and win grant funds.
What Are the Downsides of a Fiscal Sponsor?
Balance the above benefits with these four potential cons of entering into a fiscal sponsorship:
- Sharing a percentage of your charitable contributions: This is a common and acceptable practice since your sponsor provides a service and clear value. However, this means you don’t receive 100% of your fundraising. You may also owe administrative fees for certain services the sponsor provides.
- Disjointed giving experience: Because your fiscal sponsor handles donation logistics, it may confuse donors. For example, they’ll get linked out to give to another organization, which may surprise them.
- Donor confusion: Most of your donors likely haven’t heard about fiscal sponsorship agreements. That means the responsibility of explaining it falls to you. Otherwise, you risk losing donors who aren’t certain why they’re giving to an organization other than yours.
- Legal ties: For better or worse, you’re connecting your organization to this sponsoring organization. The sponsor could earn a negative reputation, or your missions could misalign. Enter into the relationship carefully and manage potential liabilities.
Getting Started With a Fiscal Sponsorship
As mentioned, there are clear pros and cons to signing on with a fiscal sponsor. However, only you can decide what’s best for your nonprofit. If you pursue a fiscal sponsorship agreement, follow these steps to do it right.
- Do your research: Take a look at the potential sponsor options available to your nonprofit. This might mean looking into the National Network of Fiscal Sponsors (NNFS) to see the options. You’ll also want to talk to other local organizations that have used fiscal sponsors before to learn from them.
- Pick the right sponsor for your organization: A partnership of this proximity requires a relationship based on trust. After all, your sponsoring organization will have access to your donors, so this must be a partner you have faith in, or the situation could become problematic. Ensuring your mission aligns with your sponsor’s mission is a major part of ensuring that this will be an effective partnership.
- Have a written agreement: Fiscal sponsorship is a serious business partnership that requires more than just a handshake. Unless you have a written and signed agreement, nothing stops the fiscal sponsor from taking your donations. Protect your new organization by getting everything in writing.
- Get buy-in from your team: This isn’t a relationship you should enter into without council. Review this agreement with your internal staff and board of directors, as they can help advise you of the details before you sign anything. Even informing your volunteers can help them to understand this agreement and inform potential donors better.
- Know when to branch out: Having a fiscal sponsorship relationship is ideally a short-term solution while you establish your charitable organization. That may take months or years, but your goal should be toward independence. Revisit the conversation quarterly to determine the timeline of when that should happen.
Is a Fiscal Sponsor Right for Your Nonprofit?
Fiscal sponsorship arrangements are valuable organizational partnerships that can help new nonprofits get off the ground faster. However, because of potential liabilities, you must enter these partnerships with care.
Do your homework about the various fiscal sponsorships and find an organization that’s the right fit for your nonprofit. Then, take the time to ask the right questions before you sign any contracts. The future of your new nonprofit depends on your smart decisions upfront.
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