Have you been denied a grant because you don’t have the proper 501(c)(3) status and were recommended to have a fiscal sponsor? Are you a nonprofit that would like to partner on a grant with an organization that doesn’t have a 501(c)(3) status? If either of those apply, this blog is for you! We will go through what a fiscal sponsorship is and what some of the pros and cons for each party are. By the end, you should have a basic understanding of fiscal sponsorship and if it is right for you.
Fiscal sponsorship is a financial and legal arrangement where a nonprofit organization (the fiscal sponsor) provides support and oversight to an individual, group, or project that lacks 501(c)(3) tax-exempt status. This arrangement allows the sponsored entity to receive tax-deductible donations and grants, while benefiting from the administrative and managerial expertise of the fiscal sponsor. It is commonly used by emerging nonprofit initiatives, community projects, artists, and social entrepreneurs who may not yet have their own nonprofit status. Additionally, a fiscal sponsorship can be used by other nonprofits that are not categorized as a 501(c)(3). For example, a 506(c)(6) that needs funding for a project, but is not eligible under its current IRS designation.
As you can imagine, it’s a huge responsibility to be a fiscal sponsor. A fiscal sponsor is responsible for providing legal, financial, and administrative support for the project or initiative of the entity that lacks nonprofit status. Additionally, the fiscal sponsor is also responsible for overseeing compliance with laws, managing donations, ensuring tax compliance, offering financial transparency, and potentially guiding programmatic direction, all while helping the sponsored entity develop the capacity to eventually operate independently or transition to its own nonprofit status. Therefore, it is common practice for a fiscal sponsor to take a percentage of the funds awarded as compensation for all of the work they must do. This fee is typically 5-10% of the grant award amount.
A fiscal sponsorship can be mutually beneficial to the organization assuming financial responsibility and the organization seeking the support. However, this is a relationship that should not be entered into lightly. There needs to be a very high level of trust and clear communication. If your organization is seeking a fiscal sponsor, make sure to do your homework. Start by researching nonprofit organizations in your community that have a mission similar to yours and seek recommendations from those whom you have an existing positive relationship with. If at any time you feel uneasy or uncertain about something, remember it’s always ok to ask questions and seek advice from trusted professionals.
When seeking a fiscal sponsor, watch out for signs of potential issues such as reluctance to share financial and operational information, excessive or undisclosed fees, rushed pressure to finalize agreements, inability to provide references or past success stories, unclear plans for transitioning out of the sponsorship, dismissive attitude towards your concerns, inconsistent communication patterns, negative reputation or reviews, inadequate organizational capacity, and promises that seem too good to be true. Addressing these red flags with caution and thorough evaluation will help you make an informed decision and establish a successful partnership.
When you find a nonprofit you think might be a good fit, verify their legal status, financial stability, and examine their track record with their own programming. Engage the nonprofit by meeting with them and approach them about a fiscal sponsorship. If possible, do this in person and always take good notes. Have a frank discussion about what the relationship should entail and set clear expectations for each other. Be clear about fees and any other expenses. If needed, consult legal counsel for advice on how to move forward and how to set up the relationship. At the end of the day, this is a business deal and each party needs to be responsible for their parts. If everything checks out and both organizations legally agree to be in the relationship, the possibilities for new funding opportunities and positive growth of your organization await!
To sum it up, the party that is the fiscal sponsor is the nonprofit and the benefit of being a fiscal sponsor is that you are able to expand your mission and work to what your partner organization does and you also receive a portion of their grant funds. The party that is using a fiscal sponsor to be eligible for grants is able to receive more grant funding while also furthering the mission of your nonprofit partner. There are mostly benefits to this kind of relationship but there can also be significant drawbacks if you don’t pick your partner carefully. So do your research and build relationships before entering into this kind of partnership!