Grow Your Nonprofit Through Fiscal Sponsorship
Nonprofit leaders know that starting a new charitable organization is not simple. From incorporation and state regulations, to writing bylaws, developing policies and procedures, and submitting a Form 1023 application to the IRS, the list of start-up tasks can be overwhelming, not to mention expensive. But there is a decades-old strategy that you can deploy to help newcomers get up and running, while at the same time enhancing your own capabilities and reach.
“Fiscal sponsorship is a modern, efficient, economic solution for getting things done. After all, shared services are really the wave of the future.” Tyson W. Garith, Strong City Baltimore
Fiscal sponsorship allows an established 501(c)(3) to “share” its tax exempt status, financial resources, experience, and personnel with other groups or projects that wish to engage in charitable activities. Some groups seek a fiscal sponsor so they can conduct program activities and provide services without the stresses of a start-up charity, while others are seeking funding for the start-up phase prior to receiving their own tax-exempt recognition from the IRS.
Quite the opposite of a philanthropic spin-off, which gives a specific program or effort its independence from the parent organization, fiscal sponsorship brings entrepreneurial groups under the umbrella of a larger organization to strengthen the sponsor, while providing financial resources, credibility, and other benefits to the sponsored project.
Benefits of fiscal sponsorshipEstablished nonprofits can benefit from sponsorship relationships in several ways:
- Additional revenue growth, because donations are made directly to the fiscal sponsor and not the sponsored project
- The ability to reach additional potential donors it otherwise could not reach
- Additional program support through volunteers or staff of the sponsored project
- Expansion of community impact
“The thing I love most about fiscal sponsorship is that it lowers barriers to the implementation of community-led programming,” says Tyson W. Garith, director of partnerships and business services for Strong City Baltimore, a nonprofit with a focus on fiscal sponsorships. “It’s a relief for a sponsored project to be able to rely on the expertise of trained professionals to manage their money, so they can spend their time doing the work they are passionate about.”
Fiscal sponsor risks
Temporary and long-term sponsorships are often possible, but be sure to consider the risks. First and foremost, sponsorship relationships must be built on compatible missions. Not doing so could jeopardize your own tax exempt status.
Generally, fiscal sponsors become completely responsible for the activities of the sponsored project, including any liabilities, whether or not the sponsored project was aware of these liabilities. Based on this risk alone, you should vet any potential sponsored project in order to determine its qualifications, ability, and integrity.
In addition, a fiscal sponsorship agreement must be executed by both parties. The document should outline procedures and policies to follow, demonstrate an understanding of the division of roles and responsibilities, and include any indemnification provisions. Take steps to ensure the sponsored project understands the core values, principles, procedures, and policies it will be required to follow under the sponsorship agreement.
Beware of mission drift
Mission drift ― the gradual and generally unintentional expansion or diversion away from an organization’s original purpose ― can jeopardize the sponsor’s tax-exempt status. It can occur when there is not proper oversight on every project that has come under the umbrella of the fiscal sponsor.
To help ensure that the sponsored project is operating within the grounds of its governing documents, the fiscal sponsor must perform site visits, have regular discussions and interactions with each sponsored project, and review documentation to understand the projects being undertaken. There may be reputational risk should the sponsored project ever act outside of the fiscal sponsor’s agreement, governing documents, or policies and procedures.
Fiscal sponsor compliance requirements
It is important to note that each state has varying regulations surrounding charitable organizations that may raise costs for the fiscal sponsor. Ongoing compliance monitoring requirements can spike operational costs; therefore, it is not uncommon for fiscal sponsors to charge an administration fee. Requirements like a review or audit, higher fees for state registrations that are dependent on various thresholds (such as revenue), and obtaining a paid preparer with an understanding of the Form 990, may become costly for a fiscal sponsor. Even more costly may be the internal resources pulled to ensure proper compliance monitoring. The operations of a sponsored project typically lie outside the physical location of the fiscal sponsor; therefore, more questions may arise surrounding policy from these projects than with those who are well acquainted with the sponsor’s policies and procedures.
“Fiscal sponsorship is a modern, efficient, economic solution for getting things done,” says Garith. “After all, shared services are really the wave of the future.”
How we can help
When a new charitable project is formed through fiscal sponsorship, the value added to our society becomes more plausible. Should your organization wish to engage in a sponsorship role, make sure you and your board of directors understand your fiduciary responsibilities. CLA's nonprofit industry professionals have the knowledge and capability to help you understand and get started.