Providing speed, tax benefits and administrative support
The challenges that come with starting your own nonprofit are myriad. Fundraising, paperwork, hiring, logistics — it can quickly become overwhelming. In recent years, an appealing alternative called fiscal sponsorship has gained in popularity in the U.S. When done right, fiscal sponsorship can be beneficial to both parties.
What is fiscal sponsorship?
Fiscal sponsorship is a formal partnership between an established nonprofit and an individual or group that wants to carry out a new charitable project, but hasn't yet received 501(c)(3) status. The sponsor supports the new project, allowing it to fundraise and to benefit from the sponsor's oversight, management and administrative resources.
In many — but not all — cases, fiscal sponsorship is a first step on the road to becoming an independent 501(c)(3).
What are the advantages?
Fiscal sponsorship provides:
- Speed. Are you raring to put your idea into practice as soon as possible? Fiscal sponsorship is often faster than starting a separate nonprofit. It can take four to six months or longer for the IRS to grant 501(c)(3) status, while you could set up a fiscal sponsorship much more quickly.
- Tax-exempt status. Fiscal sponsorship allows you to accept donations under the tax-exempt status of your sponsor. Keep in mind that the activities of the sponsored project must align with those of the sponsor. For example, an organization focused on environmental work can't be sponsored by a homelessness nonprofit.
- Administrative support. While the terms of a fiscal sponsorship agreement may vary widely, often the nascent project can benefit substantially from the administrative infrastructure of its sponsor. The sponsor may provide help with oversight and management, financial record-keeping, filing taxes, payroll, benefits and human resources, and even legal advice.
What are the risks?
Fiscal sponsorship involves:
- Cost. Usually, the sponsoring organization charges a fee to cover their costs. The fee may be a portion of the initiative's expenses or revenue, typically ranging from 9 to 15 percent.
- Decreased autonomy. If you want to have the final say over your project's vision, proceed with caution. Your sponsor holds legal responsibility for everything you do — and in the event of a disagreement, your sponsor could overrule your decisions.
- Shared liability. For better or worse, the two partners in a fiscal sponsorship are tied together. Any liability, debt or risk for one party could affect the other. Before signing an agreement, screen the sponsoring organization carefully to ensure that it's in good financial health and has strong leadership. In turn, the sponsor should also thoroughly evaluate you and your project before moving forward.
Finding a sponsor
If you're ready to find a fiscal sponsor to help you shepherd your project into the world, where should you start?
- Your network. You already know colleagues in your service area and in your community. Reach out to your contacts to let them know what you're looking for in a sponsor and ask if they know anyone. Even if you don't find your sponsor this way, you're likely to expand your network.
- Directories. Online resources offer a wealth of resources for both funders and those seeking sponsorship, as well as the option to search by location, service area or keyword. Check out the National Network of Fiscal Sponsors and the Fiscal Sponsor Directory.
- Referrals. Contact the funding organizations from whom you plan to seek grants and tell them you're looking for a sponsor. These funders are likely well-acquainted with key players in the field.
Maintaining the relationship
Like any healthy relationship, a good fiscal sponsorship should involve planning for possible contingencies. In your written agreement — which is an absolute must — include provisions for who's responsible for what during the sponsorship, as well as what happens if one party wants to exit.
Once you've signed the paperwork, the process of creating and maintaining a strong fiscal sponsorship has only just begun. As you move forward, keep these strategies to keep in mind:
- Communication is key. You can't over-communicate with your fiscal sponsor. At a minimum, schedule weekly check-ins to provide updates on your progress and challenges.
- Focus on impact. While keeping the details in mind, remember to focus on the big picture. Most likely, you chose a fiscal sponsorship so you could start making a difference right away — and your sponsor shares that goal. Measure your impact and celebrate how far you've come.
- Be kind. By supporting your fledgling project, your sponsor is sharing valuable time and expertise. Show gratitude and respect — and pay it forward however you can.
BTW Informing Change: More than the money: Fiscal sponsorship's unrealized potential by Jill Blair and Tina Cheplick (2007)
Fiscal Sponsorship: Presentation on fiscal sponsorship by Gregory Colvin (2006)
Nonprofit Law Blog: Fiscal sponsorship: Six ways to do it wrong by Gene Takagi (2009)