Fiscal sponsorship is an agreement between an established 501(c)(3) charity and a relatively new, unincorporated organization that lacks its own tax exempt status but is interested in soliciting donations and grants. Under this arrangement, a tax-deductible contribution can be given using the sponsoring agent’s exempt status. The fiscal agent for an organization then agrees to accept and be responsible for monies on your behalf. Under the law, the sponsoring agent and the new start-up nonprofit are considered one legal entity, and likewise both can be held responsible for each others’ actions.
To learn more, you may want to visit fiscalsponsordirectory.org, a website created by the San Francisco Study Center to be used as a tool to help connect community projects with fiscal sponsors; it is also a forum for fostering understanding of that relationship and its impact on the nonprofit sector.
One organization interested in forming a sponsorship relationship with nonprofits is the Edward Charles Foundation for Nonprofits. To receive additional information concerning fiscal sponsorship opportunities, click here.
FREE E-Book: 9 Facts Every Nonprofit Should Know About Donor-Advised Funds
Millions of dollars are currently in donor-advised funds just waiting to be donated to nonprofits like yours. This E-Book from DonorPerfect gives you the facts you need to leverage them.
What You Need to Know About Fiscal Sponsorships
In addition, the video presentation (below) given by Rachel Epps Spears, entitled What You Need to Know About Fiscal Sponsorships, shares the pros and cons of a fiscal sponsor and details what organizations can do to avoid problems when entering into a fiscal sponsorship agreement.
We would also recommend taking the time to review the Foundation Center’s website, which features tutorials on fiscal sponsorship and affiliation.
For more information, consult the following list of frequently asked questions found on CompassPoint the Nonprofit Genie on the topic of fiscal sponsorship. These questions and answers were provided on January 2006 by David Barlow:
Are there organizations that are “in the business” of fiscal sponsorship?
Yes. Some 501(c)(3)s have received permission from the IRS to support “a very wide variety of charitable and educational activities”. Fees and services can vary widely so it is important to understand each sponsor’s “personality”.
Do we need an attorney to work out a fiscal sponsorship agreement?
When a project sets up a relationship where it voluntarily gives up some control over its activities, it is always a good idea to have a written contract. Often a sponsor will have a standard contract that it uses with new projects. A good contract will have a procedure outlined in it as to how to terminate the relationship if for some reason either side becomes uncomfortable. Read the contract carefully and don’t be afraid to ask the sponsor questions. The sponsorship agreement is a legally enforceable document so unless the group has experience in this area, a review of the document by an attorney paid to represent your interests is a good idea. Make sure you know what you are getting yourself into.
Do you have an example of a fiscal sponsorship agreement between a professional fiscal sponsor and its projects?
This is the standard fiscal sponsorship agreement that sponsored projects sign with the San Francisco Foundation Community Initiative Funds, a fiscal sponsorship organization affiliated with the San Francisco Foundation. Based on the specifics, needs and circumstances of a sponsored project, this standard agreement is modified in many different ways.
Do you have an example of a fiscal sponsorship agreement between two nonprofits?
Here is a modified version of the standard agreement used by one arts organization when it acts as the fiscal sponsor for independent filmmakers.
How can a new nonprofit get started right away without waiting to file all its papers and obtain tax-exempt status?
Individuals or groups in a hurry to begin operations and accept tax-deductible donations can become sponsored by an organization that already has 501(c)(3) status. By doing so, the group can apply for and accept grants, accept tax-deductible donations, and carry on other activities under the tax-exempt status of their sponsor. However, the activities of the sponsored group must be consistent with those of the sponsor. For example, a group that intends to provide services to homeless people cannot be sponsored by a 501(c)(3) that is tax-exempt for the purposes of providing classical music concerts.
How do I go about looking for a fiscal sponsor?
Some of the places to inquire about fiscal sponsorship services are: a local technical assistance provider such as the members of the California Management Assistance Partnership (C-MAP), a local community foundation, legal firms that specialize in nonprofits, prospective funders, the internet under “fiscal sponsorship”.
How much do fiscal sponsors charge?
There are almost as many fee arrangements as there are fiscal sponsors. Some charge nothing, some charge up to forty percent. Some sponsors pay projects interest on the money the project has on deposit, some don’t. A full-service professional sponsor will probably cost a group between five and twelve percent of gross receipts. Large projects may be able to negotiate a lower fee.
If my group is operating under a fiscal sponsor, and we’ve decided to become an independent nonprofit, what are the steps we should take?
If you have decided to separate from your current sponsor and don’t want to affiliate with another the process to become independent begins with informing your current sponsor of your decision. Most often you will next create public benefit corporation that will file applications with both the IRS and state taxing authority asking to be exempt from income tax. From the time the applications are submitted it usually takes four to six months to receive your determination letters (notice that exemption has been granted). When you receive your notice it is retroactive to the date of your original application. While you are waiting for your letter you will need to do all those things that any new business does (open bank accounts, hire employees obtain insurance, etc.). The final step is arranging to have your sponsor transfer the project’s assets and liabilities to the new nonprofit.
In what situations do groups use fiscal sponsors? What types of groups find them the most useful?
There are many situations where using a fiscal sponsor could make sense. New groups that aren’t sure if they are really viable can test the waters before committing money and time setting-up an independent 501(c)(3). Groups who only intend to operate for a limited period of time may benefit from fiscal sponsorship, as they do not have to first establish and then dismantle a nonprofit corporation. If a group is a coalition of several groups, or even 501(c)(3)’s working together on a common issue, a fiscal sponsor may be seen as neutral territory for accepting funds. If the group is committed to its mission but just has no interest, or experience, in managing all the administrative functions of a business, a fiscal sponsor could be a good option. Finally, individuals who are unaffiliated with any group or nonprofit (such as independent filmmakers) seeking grants and donations may find it convenient to work under a fiscal sponsor.
Example: In the hours immediately following the shootings in San Francisco at the 101 California office building, many people wanted to donate funds to help the families of the victims (many of whom worked for a law firm) and to educate the public about gun violence and gun control. A group of attorneys contacted a fiscal sponsor and were able immediately to begin collecting donations and conducting an educational campaign on the subject. Later, the group decided to become permanent and incorporated separately as the Legal Community Against Violence.
What are some of the services typically provided by fiscal sponsors?
There is really no such thing as a “typical” bundle of services provided by a sponsor. The services available from sponsors vary from nothing to those listed below that are often provided by a professional sponsor.
- Federal, state and local tax & informational returns
- Receipt and acknowledgment of tax-deductible donations and grants
- Payroll tax remittance and filings
- Monthly financial statements
- Financial record-keeping
- Independent Audit
- Check processing and issuance for expenses, I-9s, 1099s
- Directors’ & Officers Insurance
- Volunteer Insurance
- General Liability
- Commercial Automobile
- Human Resources Administration
- Payroll processing, W-2s
- Personnel policies in compliance with federal, state and local laws
- Comprehensive benefits package
- Benefits administration
- Technical assistance on personnel issues
- General Administration
- Bulk rate postal permit
- Resale permit
- Sales tax reports
- Legal advice
- Grant progress reports
What are the benefits of using a fiscal sponsor?
Groups may decide that using a fiscal sponsor makes sense for a variety of reasons;
- Speed– It normally takes four to six months from the time an application for tax exemption is filed with the IRS to receive notice that tax-exempt status has been granted, and that is IF the IRS has no questions about information contained in the application. Theoretically one could make arrangements to be fiscally sponsored in a day or less, although a couple of weeks is more typical.
- Efficiency– Especially for small groups, having someone else provide most of your administrative, or infrastructure functions may be cheaper than doing it yourself. This is especially true if you are a group that is only expecting to be in existence for a short period of time.
- Convenience– Most groups, start-up or otherwise, want to focus their energy on their charitable activities. Having to create and maintain an infrastructure can be distracting from the mission of the group.
- Necessity– There are some funding sources that will not fund brand-new groups. One way around this restriction is to become part of a group that has some history.
What are the disadvantages?
As a sponsored project of an already existing 501(c)(3), your “parent organization” is legally responsible for everything you do. This includes the responsibility to comply with the terms of the grants you have been awarded and how you operate. If you and your sponsor disagree, you may be forced to “do it their way”.
Some foundations have policies that do not permit them to make grants through fiscal sponsors.
What are the reasons to provide fiscal sponsorship to another organization?
The most common reason a 501(c)(3) would agree to provide sponsorship to another group is because the other group wants to engage in an activity that is substantially similar or complementary to the activities of the 501(c)(3). By acting a fiscal sponsor, an organization can nurture a new, complementary effort, manage funds for a temporary project, etc.
What are the risks of being a fiscal sponsor for others?
Often the sponsored project operates from a different physical location than the sponsor so the sponsor may forget to provide proper oversight and support. Conversely, the sponsored project needs to remember that it is part of a larger organization and the sponsee has agreed to give up some of its autonomy. Frequent, open communication is the key to making the relationship work for both sides.
Since the law considers the project and the sponsor to be one legal entity, each can be held responsible for the actions of the other.
What can a fiscal sponsor provide us that we couldn’t do on our own?
A fiscal sponsor can often provide useful advice and help point you in the right direction. Hopefully the sponsor will also have solid experience in the areas where they are providing services to you. But the bottom line is, except for groups needing to get around being new with funders, if you wanted to put in the resources necessary to do everything on your own, you could do it all yourself.
What happens if we want to leave a fiscal sponsor?
It is important to both you and the sponsor that the terms of the relationship are in writing before the relationship begins. If you don’t and later decide you want to leave you may find that the sponsor wants to keep the project but not you. Any good sponsorship agreement will have a mechanism to deal with how to terminate the relationship. There are certain legal restrictions on how the project’s activities and assets are severed from the sponsor but that should be disclosed in the sponsorship agreement.
What is a “fiscal agent”? Is a fiscal sponsor different from a fiscal agent?
Legally, the term “fiscal agent” does not exist. When people use the term “fiscal agent” what they really mean is “fiscal sponsor.” If a group wants to be covered by a 501(c)(3) designation they must be part of, not merely affiliated with, a 501(c)(3) organization.
- How to Start a Nonprofit Organization
- Best CRM and Online Fundraising Platform for Nonprofits
- Fiscal Agency Versus Fiscal Sponsorship by Jane C. Nober (PDF)
- Frequently Asked Questions about Fiscal Agents – From The NEA Foundation
- Not a nonprofit? Get a fiscal sponsor!
- Fiscal Sponsor by Joanne Fritz, About.com Guide
- Can We Use a Fiscal Sponsor to Get Grants? by Joanne Fritz, About.com Guide
- Fractured Atlas Fiscal Sponsorship for Independent Artists