Post By: Sarah Besson
Fiscal sponsorship can be one of the most valuable tools to community development, and yet it is relatively unknown to the average person venturing to start a non-profit. Fiscal sponsorship allows a “project” (any non-profit venture that would qualify for its own 501(c)(3) tax exemption) to take on the tax-exempt status of a “fiscal sponsor” (any entity that already has 501(c)(3) tax-exempt status that agrees to fiscally sponsor the project). Through fiscal sponsorship, a project can save the time, money, and headaches that come with incorporating as a nonprofit and filing for tax-exempt status and instead put those resources into the project itself. The fiscal sponsor will generally take a portion (typically 5-15%) of the funds raised for the project to go towards the cost of administration of the project.
Why consider fiscal sponsorship? The benefits of fiscal sponsorship are seemingly endless. Incorporating and obtaining 501(c)(3) status can be costly and time-consuming. Filing the IRS Form 1023 currently costs $600 and can take an average of 11 months to receive a determination letter. Even for projects eligible to file the IRS’s short-form application, Form 1023-EZ, the fee is still $275. When those costs are added to the $75 fee to incorporate as a not-for-profit in New York state, a project is looking at a $350-$675 bill before it has conducted any charitable activities. For short-term projects, going through the long process of incorporating and obtaining independent 501(c)(3) status may not be realistic. For other projects that are just starting out, the money to file with the Department of State and IRS is often better used for furthering the project’s charitable activities. Fiscal sponsorship also provides an opportunity for a new project to test its viability without bureaucratic hurdles. If a fiscally sponsored project does not work out, it is much easier and faster to phase out a project than it is to dissolve a not-for-profit corporation. If things do work out for a project, there will be greater resources available if the project decides to seek its own tax-exempt status down the road.
But fiscal sponsorship is not only for short-term or new projects. There are some projects that have remained in fiscal sponsorship arrangements for years. These long-term projects have found that the benefits of less administration and reporting requirements allow them to focus more energy and resources on the charitable purposes of the project.
Types of fiscal sponsorship arrangements. There are several ways to arrange the fiscal sponsorship relationship. Some arrangements involve the fiscal sponsor taking the project “in-house” and administering it using employees, volunteers, and agents of the fiscal sponsor. For other types of arrangements, the project remains with a separate entity (typically either an unincorporated association or a not-for-profit corporation that has not yet obtained its own tax-exempt status) but is funded by the fiscal sponsor through a series of grants. There are benefits and drawbacks to each type of arrangement, but having different options can give the project and fiscal sponsor flexibility to consider the needs of the project and plan accordingly.
In any type of valid fiscal sponsorship arrangement, the sponsor is legally required to retain complete discretion and control over any funds raised. This is known as the sponsor’s “variance power” and variance power prevents the fiscal sponsorship relationship from being a mere conduit prohibited under the Internal Revenue Code.
What to look for in a fiscal sponsor. If your project decides that fiscal sponsorship could be a good fit for its goals and needs, you will want to reach out and begin communications with potential fiscal sponsors. Practically speaking, any 501(c)(3) can provide fiscal sponsorship, but there are some key traits to look for to increase the likelihood of a successful partnership:
- Financial and organizational health. You will be trusting this organization to collect donations to later be used for your project. Poor financial or organizational health is a red flag signaling that this organization may not be a good choice for a fiscal sponsor.
- Exempt purposes aligned with the purposes of the project. In order for an organization to provide fiscal sponsorship to a project, the mission of the project must further the mission of the fiscal sponsor, as determined by the fiscal sponsor’s organizing documents. In many cases, the mission of a potential fiscal sponsor will be broad enough to encompass many potential projects.
- Experience as a fiscal sponsor. While this is not a requirement, it can be beneficial if your fiscal sponsor is familiar with the mechanics of the relationship. At a minimum, you will want to verify that a potential fiscal sponsor is aware of and ready to comply with its legal responsibilities as a fiscal sponsor.
- Key personnel. A great fiscal sponsorship relationship can provide the project and its staff with mentorship as it enters the non-profit sector. Evaluate whether potential fiscal sponsors’ contact persons are likely to provide the support your project may need.
Creating a fiscal sponsorship agreement. Once you have found the right match who is willing to be a fiscal sponsor to your project, you will want to reduce the arrangement to a contract. At a minimum, the contract should outline fees, the variance power of the fiscal sponsor, and an exit provision where the project can be moved to another 501(c)(3) organization (whether that be to a different fiscal sponsor, or to an organization of the project’s founders who subsequently attain 501(c)(3) status).
For 501(c)(3) organizations. For firmly established and stable organizations in the Capital Region that already have 501(c)(3) status, fiscal sponsorship presents a great opportunity to broaden their impact and diversify their activities by becoming fiscal sponsors for local projects. There are far fewer visible fiscal sponsors in the Capital Region than, for example, in New York City. Greater visibility of fiscal sponsors could lead to development of more nonprofit projects as project founders are able to see more financially realistic ways of getting their project off the ground.
Capital Region Fiscal Sponsors. The following organizations provide fiscal sponsorship in the greater Capital Region area:
- Innovative Charitable Initiatives, Inc., a subsidiary of the New York Council of Nonprofits (NYCON) (Albany, NY): http://www.nycon.org
- Center for Transformative Action (Ithaca, NY): http://www.centerfortransformativeaction.org
