So you want to start a nonprofit. That’s an exciting decision full of different steps and responsibilities, not the least of which is managing donations and donors. You’ll need to start your nonprofit to get donations, but you also need donations to start your nonprofit’s work—so which one comes first?
A partnership with a fiscal sponsor can help jump-start your new nonprofit by lending you their credibility and legal nonprofit status. Acquiring 501(c)(3) tax-exempt status takes time and work. It’s also incredibly important to earn credibility with donors. Getting a fiscal sponsor provides you with a bridge during that process to keep you moving forward.
Follow along this guide for all the pros, cons, and best practices for fiscal sponsor partnerships your nonprofit needs to know.
A fiscal sponsor is an existing nonprofit which can extend the benefits of its charitable status to your nonprofit. Essentially, people donate directly to the fiscal sponsor, who funnels the funds down to you. They assume some of the risk and work involved with the financials and often take a percentage of each donation for this reason.
There are six different types of fiscal sponsors, each with different structures, benefits, and risks. Those different types of sponsors are:
Direct projectIndependent contractor projectPre-approved grant relationshipGroup exemptionSupporting organizationTechnical assistance
Take the time to decide the right type of sponsor that fits your situation. A fiscal sponsor provides you with a shortcut to accepting donations while you are starting a new organization.
Like fiscal sponsors, fiscal agents are nonprofit partners that can benefit smaller organizations. However, you must be aware of an important distinction between these arrangements.
Fiscal agencies do not retain any financial discretion or control as a fiscal sponsor does. This is a major benefit to a smaller nonprofit because it can retain a sense of independence. Unfortunately, this also means you require your own 501(c)(3) status to enter this kind of agreement.
A fiscal agent can still provide some financial stability or access to some organizational infrastructure. What’s important to note is that they can’t share their 501(c)(3) status with your nonprofit.
Most qualifying nonprofits can qualify to serve as fiscal sponsors for other organizations. However, certain steps must be taken to form this partnership. Any organization looking to serve as a fiscal sponsor must meet the requirements, as set by the IRS:
The sponsor must have active 501(c)(3) statusThe receiving organization (your nonprofit) controls the use of all fundsThe activities must be for charitable purposesThe sponsor organization must provide tax receipts to all donorsThe sponsor is responsible for the actions of the receiving organization
In other words, becoming a fiscal sponsor is committing to help oversee a nonprofit. Think of it like co-signing a loan. The sponsor provides organizational credibility to the fledgling charity. Therefore, there’s an inherent investment and risk required.
There are several potential benefits for a nonprofit seeking out support from a fiscal sponsor. Here are four of the most immediate pros when considering this arrangement.
Fiscal sponsors help new nonprofits get off the ground more quickly: New organizations are the best and most logical candidates to seek fiscal sponsors. These are the cases when a nonprofit hasn’t earned tax-exempt status yet, but they still need donations to get started.Sponsors provide a level of protection and stability: Starting a new nonprofit can be overwhelming with all of the steps to take. Offloading some of these administrative tasks to a trusted partner helps you focus on your mission and build donor relationships.They can provide some resources and infrastructure: In addition to donations, some fiscal sponsors can offer even more services. They have a vested interest in your organization thriving so they might support you with some of these resources.They can be a strategic partner and advisor: Since they must be tax-exempt, they’ve likely been through the same situation you’re in or are helping other small nonprofits. This could likely offer some insight and advice to guide you in the right direction.
Balance these benefits with a few potential drawbacks of joining a fiscal sponsorship. Consider these four downsides before leaping into this legal contract.
Fiscal sponsors take a percentage of your donations: This is a common and acceptable practice since they’re providing value to your organization. However, this means that you’re not receiving 100% of the funds.The giving experience might not be seamless: Because your fiscal sponsor handles donation logistics, it might be a confusing experience for your donors. They’ll essentially be linked out to give to this other organization—and most probably won’t know much about fiscal sponsors.It’s a complicated situation that’s not easy to explain to donors: Most of your donors likely haven’t heard about fiscal sponsors. So the responsibility of explaining falls to you. Otherwise, you risk losing donors who aren’t certain why they’re giving directly to an organization other than yours.You’re legally tied to their organization: For better or worse, you’re connecting your organization to this fiscal sponsor. There’s the risk that they earn a negative reputation or your missions don’t align. That’s why it’s important to enter into the relationship carefully and manage potential liabilities.
As you can see, there are clear benefits and drawbacks to signing on with a fiscal sponsor. Only you can make that decision. But follow these four tips to help guide your new nonprofit in the right direction.
Pick the right sponsor for your organization: A partnership of this proximity requires a relationship based on trust. The fiscal sponsor will have access to your donors and their funds, so this must be an organization you have faith in. Otherwise, the situation could quickly become problematic.Have a written agreement: Fiscal sponsorship is a serious business partnership. Don’t enter into one of these deals with just a handshake. Unless you have a written and signed agreement, nothing stops the fiscal sponsor from taking your donations (hopefully not). Protect your fledgling organization by getting everything in writing.Make sure your team is on board: This isn’t a relationship you should enter into on your own. Clear this agreement with your internal staff and board of directors. They can help advise you of the details before anything is signed.Know when you should branch out on your own: Having a fiscal sponsor is ideally a short-term solution while you figure out how to run your organization. That may take months or years, but your goal should be to move out independently. Revisit the conversation quarterly to determine the timeline of when that should happen.
Fiscal sponsors are valuable organizational partnerships that can help new nonprofits get off the ground faster than they would on their own. However, because of potential liabilities, these partnerships must be entered into with care.
Do your homework about the various types of fiscal sponsorships and find an organization that’s the right fit. Take the time and ask the right questions before you sign any contracts. The future of your new nonprofit depends heavily on making smart decisions upfront.