At a local gathering of the Nonprofit Startup School here in Portland I presented a session on how fiscal sponsorships can help new nonprofit organizations. One thing that surprised me (just a bit) was that several attendees assumed a fiscal sponsor was a for-profit organization that could help your nonprofit find money. Not so!
Normally a fiscal sponsor is an existing nonprofit with its own 501(c)(3) designation from the IRS. This sponsor can help your project by acting as the receiver and manager of your tax-exempt funds. This arrangement means you do not need to file for a tax exempt status of your own. The sponsor handles that, receives the donations, provides tax receipts, deposits the money, and authorizes all expenses. That is, they act as a financial overseer for your project, taking on a lot of the dealing with the IRS in the process. Some offer more services as part of the package, and some of those services might help you raise money, but the sponsor isn’t a place to look for money directly.
There are a few scenarios where a startup might find a fiscal sponsor to be quite useful. Let’s review three of them.
Incubator. If you’re just starting, it’s possible that you’re trying something so new and innovative that you’re just not certain if it will work or not. If your idea succeeds, you’ll want your own incorporated organization with a tax-exempt status, but if things go south, you don’t want to be left with an empty shell of a legal organization along with all the reporting requirement that entails. Simply put a fiscal sponsor allows you to skip the steps you will later need to undo. It’s like training wheels until you are certain enough to ride on your own.
Short term nonprofits. Some nonprofits work on projects that will be done in a year or two (maybe even less). In these cases, the work will be finished but the organization will still exist and need to be dissolved. Why create an organization that you know will just go away? Again, a fiscal sponsor can let you skip the step of establishing the legal entity and also skip the step of taking it apart.
Once-in-a-while nonprofits. Similarly, some nonprofits are established to do work that only comes up once a year. For most of the time the group will be doing nothing. If that’s the case, it seems like overkill to create a legal organization that will be dormant most of the time. A fiscal sponsor can be an ideal approach to this kind of work.
If you fit into one of those categories, you might next be wondering what the catch is, and it’s pretty simple. They charge you for this service. This is like a decision to rent vs. buy a house. If you rent, the landlord deals with the leaky roof and clogged drains, and you pay them rent to do that. If you buy your own house, there is no landlord. You deal with the roofers and plumbers on your own. So it’s a trade off. What works better in your situation? Typical fiscal sponsors charge a percentage of every donation made, often as low as 5% but more (perhaps 10% or 15%) if they offer more services. Once you understand the full value of these services, using a fiscal sponsor can turn out to be a great bargain.
So where do you find one? There are a handful of national 501(c)(3) organizations that are established to provide fiscal sponsor services to nonprofit projects. One is Tides, a community foundation that sponsors hundreds of nonprofit projects. If you’re starting an arts-based nonprofit, perhaps Fractured Atlas is a better fit. Search for smaller, local organizations in your community as well. Here in Portland, there’s a small, volunteer-run organization called the Charitable Partnership Fund that offers a low-fee, no-frills fiscal sponsorship option. You may have something in your community as well. The Fiscal Sponsor Directory will let you search for potential sponsors in your home city and state. You can also approach any 501(c)(3) organization with a compatible mission, but it’s wise to be thorough when looking.
Obviously, not all fiscal sponsors are alike, and some will address your situation better than others. It’s important to vet your fiscal sponsor. This is especially true when approaching smaller organizations that might not fully understand what it takes to be a good sponsor. Like hiring a contractor to help fix up a house, it’s a good idea to approach a few, take notes, compare, and pick the one that fits best. Some things to consider:
- Do they have a good reputation in the community?
- Do they have a written process they follow when setting up the arrangement?
- Can you see their financial statements?
- Does someone who understands nonprofit accounting believe them to be sound financial statements?
- Do they have sufficient financial resources to pull this off?
- Do they have audited books?
- Do you have a good “gut feeling” about the people working with the sponsor?
- Does their mission match yours?
- Do they ask you to sign a memorandum of understanding?
- Do they keep your funds in a separate bank account?
Try to find an organization with as many “yes” answers as possible.
In short, the road to successfully establishing a nonprofit organization has many steps. Using a fiscal sponsor is a legitimate shortcut on this path and can help you skip some of the more bureaucratic steps. It’s an option worth considering.
In the Portland area and interested in meeting with me? Drop me a line.
–Richard Seymour, Nonprofit Startup School