Nonprofit Fiscal Sponsorship
What it is
Fiscal sponsorship really began in 2012, when the IRS was inundated with requests for tax exempt statuses by newly formed nonprofits. A fiscal sponsor (sponsor) is a non-profit organization that shares its corporate and 501c3 tax-exempt status with another charitable group (project). The sponsor accepts all financial and legal liabilities for the project.
How it works
1. An already-established 501c3 nonprofit agrees to sponsor a project.
2. The sponsor receives contributions and disburses funds at their discretion to the project.
a. The sponsor maintains control and financial oversight over the funds, thus responsible for reporting, and can request spending reports from the project for transparency.
b. The sponsored project piggybacks off the status of the sponsor, can use the infrastructure to build relationships with its own donors in working towards applying for its own tax-exempt status.
3. The project pays an administrative fee to the sponsor, and provides spending reports to the sponsor. Both Sponsor and Project must be in communication with one another to maintain the relationship.
Why it works
As a new project with intentions to become tax-exempt, a fiscal sponsor can help you raise funds during your start-up phase. As The Council of Nonprofits points out, this “offers a way for a cause to attract donors even when it is not yet recognized as tax-exempt under Internal Revenue Code Section 501(c)(3).”
Choosing a fiscal sponsor can also be a means to test-drive ideas that work best to support your cause, determine the market available for public support, and structure the organization in the most efficient and effective manner. A fiscal sponsor can serve as a backbone for administrative and technical support without the higher cost or risk of going it alone.
Fiscal Sponsor (ship) does not seem to be an official legal term, and the IRS doesn’t require any direct reporting on them on the 990 form. However, the sponsor would keep separate detail on its books for funds disbursed to and received from the project. This is especially important in the case of an audit of the 501c3 organization. The Colorado Nonprofit Development Center recommends that organizations providing fiscal sponsorship adhere to the following:
1. Account for and report on the projects’ funds separately and provide regular and timely financials to project leaders;
2. Maintain adequate insurance to assume financial and legal responsibility for the project;
3. Never use funds dedicated for project purposes for any other purpose;
4. Disclose to the project in advance any charges, such as insurance premiums or legal fees, for which the project is liable;
5. Establish and maintain sound policies, systems, procedures, and internal controls that extend to the project;
6. Review, approve, and sign all contracts, leases and other legally binding project commitments; and
7. Have a written fiscal sponsorship agreement detailing the terms and expectations of the relationship.
They also make an excellent point by stating that “outlining expectations and responsibilities on both sides of the fiscal sponsor relationship and keeping lines of communication open, a fiscal sponsorship arrangement can be mutually beneficial for both sides.” Like any relationship, communication is the key to success.
- Colorado NONPROFIT Association
- National Council of Nonprofits
- Fiscal Sponsorship – San Francisco Study Center
Jeremy Cork, Senior Accountant for Jitasa