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What Is a Nonprofit Fiscal Sponsor?

If you're simply interested in providing a service, maybe you don't want to waste time with the bureaucratic and legal matters that complicate new nonprofit start-ups. Or maybe you have a project that will end after a year or two, or you simply want to test the viability of an idea. Why bother to establish a new organization if it's going to close when you finish your project?

You may not need to start a nonprofit to carry out the program you're thinking of starting. Instead, fiscal sponsorship may be the best route for you to take. In this approach, your new project becomes a sponsored program of an existing 501(c)(3) nonprofit organization. Contributions earmarked for your project are tax-deductible because they're made to the sponsoring agency.

A fiscal sponsor is sometimes called a fiscal agent, but this term doesn't accurately describe the relationship between a fiscal sponsor and the sponsored project. The term agent implies that the sponsoring organization is acting on behalf on the project, when really the project is acting on behalf of the organization. After all, the project is technically a program of the sponsoring nonprofit.

This distinction may seem nitpicky, but it's an important one to keep in mind because you must satisfy the IRS requirements for this type of relationship. The 501(c)(3) sponsoring organization is responsible to both the funders and the IRS to see that the money is spent as intended and that charitable goals are met.

Here are some important points to keep in mind if you decide to go the fiscal sponsor route:

  • The mission of the fiscal sponsor must be in alignment with the project. In other words, if you have a project to provide free food to the homeless, don't approach your local philharmonic orchestra as a potential sponsor. Find a nonprofit that has similar goals in its mission statement.

  • The board of directors of the sponsoring organization must approve the sponsorship arrangements. They are, after all, ultimately responsible.

  • Both parties should outline a contract or memorandum of understanding, detailing the responsibilities of each.

  • The fiscal sponsor customarily charges a fee for sponsoring a project — usually between 5 percent and 15 percent of the project's annual revenues, depending on the services it provides to the project.

  • Some fiscal sponsors provide payroll services, office space, group insurance coverage, and even management support, if needed. Be sure to ask if these additional services are included in the fiscal sponsor's fee.

  • Contributions to the sponsored project should be written to the sponsor, with a note that instructs that they be used for the project.

Some foundations are reluctant to award grants to fiscally sponsored projects, even announcing in their guidelines that they won't do it. One reason for this reluctance is their concern that the board of the sponsoring organization exercises less oversight toward fiscally sponsored projects than it does toward their agency's other programs.

Those foundations also may be concerned that the sponsoring nonprofit is providing convenient access to 501(c)(3) status to entities engaged in activities that don't qualify for that tax status from the IRS. Not all foundations share these prohibitions, however. In fact, some are proponents of fiscal sponsorship as a way of supporting new ideas and timely programs.

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