Fiscal Sponsorships and Your Non-Profit Organization
Having a philanthropic mission is a laudable goal. However, establishing a non-profit organization to fulfill that mission can be much more difficult. A fiscal sponsorship may be a way that you can accomplish your goal in less time. The knowledgeable attorneys at the Jennifer V. Abelaj Law Firm can discuss fiscal sponsorships and your non-profit organization during a confidential consultation.
What Is a Fiscal Sponsorship?
To receive tax-exempt status from the Internal Revenue Service, a charitable organization must be considered a 501(c)(3) organization. The organization must meet various requirements, including:
- It must be organized and operated exclusively for Internal Revenue Service (IRS) tax exempt purposes
- Its earnings cannot inure to private shareholders or individuals
- It cannot attempt to secure legislative influence as a significant portion of its activities or participate in any campaign activity for or against a political candidate
Some people may want to advance charitable goals but may not want to create their own 501(c)(3) nonprofit organization. A fiscal sponsorship can serve as a viable alternative to creating a nonprofit organization. Through a fiscal sponsorship, an existing nonprofit organization can extend its tax-exempt status to others related to the organization’s mission. The fiscal sponsor agrees to accept tax-deductible donations and grants on behalf of the sponsored organization. To meet IRS guidelines, the sponsor must have full discretion and control over the donated funds, according to the American Bar Association. The sponsor is responsible for ensuring the funds are used for charitable purposes and comply with any additional donor restrictions. In exchange for providing its services, the fiscal sponsor charges a fee, usually around five to fifteen percent of the donated funds it helped raise.
What Do Fiscal Sponsors Do?
The specific responsibilities of a fiscal sponsor depend on the agreement between the sponsor and the sponsored organization. Some of the more common functions of fiscal sponsors include:
- Receiving and acknowledge charitable donations from third parties
- Retaining discretion and control over donated funds
- Overseeing the use of funds to ensure compliance
- Performing back-office functions
The Jennifer V. Abelaj Law Firm can help create an agreement regarding fiscal sponsorships and your nonprofit organization that clearly delineates your responsibilities and that of the fiscal sponsor.
Reasons to Use a Fiscal Sponsorship
There are many common reasons for using fiscal sponsorships, including:
- A newly formed nonprofit needs to raise funds during their start-up phase before the IRS recognizes them as tax-exempt
- The need to attract funding that is tax-deductible to donors
- A philanthropist anticipates that the project will only have a short lifespan, so they do not want to go through the extra work of establishing a separate 501(c)(3) organization
- To receive grants from a private foundation that explicitly requires the grantee to be recognized by the IRS as tax-exempt
- The need to test out ideas to determine if there is an available market for projects
- To take advantage of an established nonprofit organization’s existing network of donors and improved access to funding
- The ability to leverage an established nonprofit organization’s credibility
- To concentrate on core functions while outsourcing administrative functions
- To gain access to low-cost financial and administrative services
Benefits of Fiscal Sponsorships
A significant benefit of fiscal sponsorships is the ability for a charitable project to use the sponsor’s 501(c)(3) status to advance its mission. The project can receive tax-deductible donations from donors, which attracts more funding for the mission. Additionally, the sponsored project may have access to better fundraising options by leveraging the network and expertise of the fiscal sponsor. Some fiscal sponsors are well-established charitable organizations that have a large network of donors and solid experience with raising funds for philanthropic purposes.
Another benefit of using a fiscal sponsor is that it allows a charitable group to start up and begin advancing their mission more quickly than they would if they had to establish a separate 501(c)(3) organization. The group is not required to incorporate or obtain its own charitable group status simply to use a fiscal sponsor. It is also much more affordable for the group to get started. Fiscal sponsorship can benefit the fiscal sponsor as well because the organizations are managed from a common administrative platform. The fee they receive can also enable them to have a greater reach than if they had to do everything singularly.
Possible Services from a Fiscal Sponsor
The fiscal sponsor may provide numerous services to the sponsored organization in exchange for their fee. This may include:
- Administrative support
- Accounting
- Grant writing
- Payroll
- Employee benefits
- Fundraising assistance
- Publicity
- Marketing
- Training services
Some fiscal sponsors also provide office space and logistical support. A fiscal sponsor may be able to purchase a blanket liability insurance policy to make insurance more affordable for both entities than it would be if the entities purchased insurance separately.
How Fiscal Sponsorships Work
Donations to projects that have a fiscal sponsor are directed to the sponsor, who typically has 501(c)(3) exempt status. The donations for this project are considered to be restricted funds by the fiscal sponsor. The fiscal sponsor decides how to use the funds. It cannot give control or decision-making authority regarding the funds to the organization, or the pass-through option can be lost.
However, the fiscal sponsor can delegate the management of the project’s funds to specific employees, contractors, or volunteers, if they set up the arrangement in this manner. This approach is known as a “comprehensive fiscal sponsorship.” As an alternative, the fiscal sponsor may be able to grant funds to a pre-selected grantee to administer. This type of arrangement is called a pre-approved grant relationship fiscal sponsorship.
Contact Us for Help with Fiscal Sponsorships and Your Nonprofit Organization
If you would like more information about fiscal sponsorship and your nonprofit organization, contact a knowledgeable attorney at the Jennifer V. Abelaj Law Firm. We work closely with nonprofit organizations on legal matters such as acquiring 501(c)(3) status, forming agreements with fiscal sponsors, and crafting customized legal solutions. Contact us today by calling 212-328-9568.