As a new nonprofit, you may be considering fiscal sponsorship as an option to get you up and running. Or perhaps you have a temporary project with a nonprofit mission needing support for a specified time.
While a fiscal sponsorship arrangement has its benefits, there are certain considerations to keep in mind before committing to it. The following article will help you understand both the benefits and the drawbacks of a fiscal sponsorship so your organization or project can be best prepared.
What is a Fiscal Sponsorship?
A fiscal sponsor is a nonprofit with 501(c)(3) exempt status that provides fiduciary oversight, financial management, and administrative services to support new, temporary, or small charitable initiatives or projects. One common example is seen when a nonprofit moves its project into a fiscal sponsorship arrangement.
Fiscal sponsorships are an alternative to forming a stand-alone nonprofit. And they provide an opportunity for the charitable project to pass its costs through to the fiscal sponsor, while also receiving grants and charitable contributions. The criteria for a fiscal sponsorship arrangement includes:
- The fiscal sponsor must ensure that creating a fiscal sponsorship arrangement is consistent with its own tax-exempt mission.
- The fiscal sponsor will manage the donated funds as, per the IRS, it must maintain complete discretion and control so that it ensures the funds are used for the purpose of the fiscal sponsor’s tax-exempt mission.
- The fiscal sponsor must have financial control and oversight, including review of financial statements on a recurring basis.
- A written fiscal sponsorship agreement is required and should detail the key areas mentioned above.
The Models of Fiscal Sponsorship
There are several models of fiscal sponsorship that can be considered when developing a fiscal sponsorship arrangement. Two of the most common models are the Comprehensive model, where assets, liabilities and exempt activities stay inside the fiscal sponsor, and the Pre-Approved Grant Relationship model, where the project is funded by the fiscal sponsor, but the project is run as a separate entity.
Additionally, the book Fiscal Sponsorship: 6 Ways to Do It Right lays out six specific models that can be used in arranging a fiscal sponsorship agreement.
Why Use a Fiscal Sponsorship?
For organizations seeking sponsorship, the most important benefit is the ability to solicit and receive tax-exempt contributions and grants without the costs and administrative responsibilities of starting a tax-exempt organization.
Starting a new nonprofit can be slow and requires a deep understanding of the IRS rules. A fiscal sponsorship arrangement is typically quick to start, gives the new project time to build infrastructure, and gives a temporary project the support it needs while in existence. It also leverages the nonprofit experience of the sponsor to help with the set-up and maintenance of the project.
This Sounds Amazing, but What Are the Drawbacks?
There are a few things to keep in mind when seeking sponsorship:
- Often, the control will remain with the sponsor, likely resulting in an oversight of its finances and activities. Maintaining accurate reports and financials will aid in providing the sponsor the necessary information to feel that activities are conducted in purposes of the mission and funds are being spent appropriately.
- An administrative fee may be charged by the sponsor, reducing the funds available to use toward the project.
- It can be more difficult to find a sponsor than to apply for tax-exempt status.
When choosing whether or not to use a fiscal sponsor, you should consider the timing of your project, the support that you will need, the expertise that you have in the nonprofit sector, and the ability to fundraise to obtain the contributions necessary to fund your project. Depending on these elements, a fiscal sponsor may or may not be in your best interest.
As a best practice, you should consult legal counsel and your tax adviser when starting down the path of obtaining a fiscal sponsor. Reach out to a Clark Nuber representative if you have any questions.
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