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If you’re simply interested in providing a service, maybe you don’t want to waste your time with the bureaucratic and legal matters that can complicate a new nonprofit startup. 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.

FISCAL SPONSORSHIP AS A FIRST STEP

Using fiscal sponsorship as a temporary solution while establishing a new nonprofit corporation and acquiring a tax exemption can be an effective approach for the following reasons:

• You have an opportunity to test the viability of raising funds for your idea.

• You have time to establish an organizational infrastructure and to create a board of directors in a more leisurely manner.

• You can pay more attention to building your program services in the crucial beginning stages of your project.

• Your fiscal sponsor can provide bookkeeping, human resources, and other types of expertise, enabling you to focus primarily on developing your programs and activities.

• You have time to determine if your program is effectively meeting the needs you intend and can develop benchmarks to support the organization if and when you pursue your own 501(c)(3) entity.

Examining common details of a fiscal sponsorship relationship

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 should approve the sponsorship arrangements or delegate the responsibility to a key executive of the organization. The sponsoring organization’s board and leadership are, after all, ultimately responsible.

❯❯ Both parties should agree to and sign a contract or memorandum of understanding, detailing the responsibilities of each. See File 2-2 at www.dummies.com/go/nonprofitkitfd5e for a sample fiscal sponsorship agreement.

❯❯ 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, bookkeeping, 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. You can read much more about foundations and grant proposals in Chapters 16 and 17.

Finding a fiscal sponsor

You may be able to find a fiscal sponsor near you by using the Fiscal Sponsor Directory (www.fiscalsponsordirectory.org). Another place to search is at your local community foundation. Community foundations have wide connections in the areas they serve and likely are aware of qualified fiscal sponsors.

If your area doesn’t have a community foundation nearby, find another nonprofit in your area that provides referrals and ask for help in finding the right agency to sponsor your project.

You don’t want to go with just any fiscal sponsor. You have to do your homework to find one that fits your needs. First determine whether the sponsor’s mission covers the type of program you’ll be offering. Then do a little research to find out whether the sponsor is trustworthy and financially healthy. For example, you can perform an Internet search for the fiscal sponsor’s name. Does its name appear in news stories detailing nonprofit misconduct or other skullduggery? Ask others in your community, including individuals who are knowledgeable about nonprofit activities in your town. While you’re at it, read its 990 tax form posted on GuideStar (www.guidestar.org) to see if it’s financially sound.

When you’re vetting a fiscal sponsor, ask the sponsor these questions to determine whether it’s a good fit for your project:

❯❯ Do your board of directors and accounting and legal advisors approve of each fiscal sponsorship?

❯❯ Do you charge for specific services, such as access to insurance programs, over and above your basic sponsorship fees? What additional services do you offer?

❯❯ Do you allow sponsored projects to hire salaried employees, and do you provide payroll services and access to health insurance?

❯❯ Do you provide coaching and mentoring in nonprofit management and fundraising?

❯❯ How frequently do you write checks to pay bills? What’s the frequency and format of financial reporting for the sponsored program?

❯❯ Do you require projects to maintain a minimum annual income?

❯❯ Do you formally acknowledge gifts and donations?

❯❯ Do you help sponsored projects raise funds through your website?

The National Network of Fiscal Sponsors (www.fiscalsponsors.org) has developed guidelines for best practices in fiscal sponsorship. If you’re considering using a fiscal sponsor, we suggest reviewing these guidelines to help you make a choice about which fiscal sponsor is best for your project.