Fiscal sponsorships have gained a significant amount of popularity as it can offer individuals, groups, and businesses many benefits without having to create a nonprofit. Understanding the pros and cons of fiscal sponsorship will make it easier to determine if it’s the path that’s right for you and your goals.
What is Fiscal Sponsorship?
Typically, if a person, group, or business wants to conduct activities that are tax-exempt, it requires creating a nonprofit organization. This can take both time and money. The solution, in some instances, is to obtain fiscal sponsorship.
There are quite a few models of fiscal sponsorship that can be used to operate charitable projects. Two of the most common include “Comprehensive” and “Pre-Approved Grant Relationship”.
Comprehensive is a model where the assets, liabilities, and exempt activities are all housed inside of the fiscal sponsor (already established as a nonprofit organization).
The Pre-approved grant relationship is a model where the project is able to run as a separate entity that is funded by the fiscal sponsor.
Regardless of the model chosen, donations can be made to a fiscally sponsored project. It is all done at the direction of a tax-exempt fiscal sponsor – most commonly one that is operating under Section 501(c)(3) of the Internal Revenue Code. The donations are restricted funds so that they are dedicated specifically to the project.
Running a nonprofit can be a challenge because of the changing IRS rules. You have to look at how to give receipts to donors, how to manage a fundraising event, and how to accept in-kind donations. It can all be overwhelming for someone with no experience running a nonprofit – and that’s ultimately why fiscal sponsorship is sought after.
The Pros of Fiscal Sponsorship
There are quite a few pros of fiscal sponsorship – and it often comes down to the ease of getting a charitable event up and running as quickly as possible.
In the event that there is a cause near and dear to your heart, such as someone dying of a particular disease or the desire to help a particular group of people, you can fundraise and solicit tax-deductible contributions. Your choice is to set up a nonprofit corporation or use fiscal sponsorship.
When you set up fiscal sponsorship, it can be done a lot faster.
Fiscal sponsorship provides you with a few basics:
- Administrative services
- Fundraising capabilities
- Legal services
This frees up both time and money from having to do these things on your own.
You’ll have the ability to seek tax-deductible contributions, too. This means that it will be easier for you to get people who will donate – and more businesses may donate more money knowing that it is tax-deductible.
The pros will also depend on whether you have a comprehensive sponsorship or one that involves a pre-approved grant relationship. In the instance of the latter, you’ll be able to maintain control of the project instead of handing it over to the sponsor. The fiscal sponsor would be funding the grant(s) that you’ve agreed upon – and if you choose to do any fundraising, you do so as an agent of the fiscal sponsor.
The Cons of Fiscal Sponsorship
You’ll need to understand the various cons involved with fiscal sponsorship. While some of the cons can be negotiated, others are simply a part of obtaining a sponsor – and the risks associated with it.
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One of the first things that you have to realize is that you’ll often have to give up control of the project. Particularly with a comprehensive fiscal sponsorship arrangement, your project will now be handled by the nonprofit organization.
If you don’t want to give full control, you may want to find out if the nonprofit would be willing to consider a pre-approved grant relationship model. You can gain some control, but it won’t provide you with nearly as many benefits.
Another con that you’ll have to deal with is finding a sponsor. This can be a lengthy process. Many nonprofits are unfamiliar with being a fiscal sponsor, so they’re not willing to take on that kind of risk. Many sponsors have enough trouble finding volunteers to run their own projects, so they may not be willing to manage your project.
Another big con that you’ll have to consider is that no nonprofit is going to do this out of the kindness of their heart. Fiscal sponsorship comes with a fee – usually an agreed upon percentage of what you’re able to fundraise. The average fee is 10 percent, though it can be as high as 25%. Depending on how much you fundraise, this can be a substantial amount of money to give away.
Discuss Whether Obtaining a Fiscal Sponsor is the Right Model for You
Fiscal sponsorship can make your life easier – if you have a fiscal sponsor who is prepared to help you and make the right deal with you.
You’ll want to explore the options in terms of whether fiscal sponsorship will provide you with the benefits that you need. Often, small nonprofits can get started in a matter of weeks because of a simplified application (Form 1023 EZ). If you have people who are willing to handle the administrative, accounting, and legal aspects of a nonprofit for you, it might be the easier way to go.
Finding a fiscal sponsor, completing the sponsorship application, and agreeing on the model and details that you’ll use can be challenging and time-consuming.
Since there are so many options, it’s important to address why it is that you want fiscal sponsorship. Think about a few different aspects:
- The comprehensiveness of your project
- How much you hope to fundraise
- How many people you have supporting your project
Once you’ve established these details, you can weigh out whether it’s worth handing over a percentage of your fees to a fiscal sponsor for them taking on your project.
Discuss your options with a legal team. It can make it easier for you to overcome any risks and ensure that you’re getting the nonprofit coverage needed so that you can move forward with your cause.
Matt Casadona has a Bachelor of Science in Business Administration, with a concentration in Marketing and a minor in Psychology. He is currently a contributing editor for 365 Business Tips. Matt is passionate about marketing and business strategy and enjoys the San Diego life, traveling and music.