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Fiscal Sponsorship – An Alternative to Becoming a 501c3 Charity

December 21, 2016

Fiscal sponsorship is an alternative to the 501c3 for groups or individuals who want to solicit donations from their supporters. Many people are performing charitable activities in their communities but do not want to take on the expense, reporting requirements and legal obligations of becoming a Registered 501c3 Nonprofit Corporation. They just want to continue to make a difference. This eliminates the need for the expense and time necessary for the extensive filing requirements, tax compliance, and other legal obligations associated with incorporation and tax exemption.
 

Fiscal sponsorship typically involves an arrangement with an existing 501(c)(3) tax-exempt public charity (commonly referred to in this context as a “Sponsor”) that assists an individual or organization with a charitable program (commonly referred to as a “Project”) by permitting the Project to solicit tax-deductible contributions or grants through the Sponsor that the Project is not eligible to receive on its own. Through such an arrangement, funds intended for the Project are deposited with the Sponsor, which then disburses them to the Project.


When is Fiscal Sponsorship Appropriate?

Fiscal sponsorship works well when a charitable program is in its beginning stages and relatively small in scope. For example, a group of volunteers who collect toys for needy children during the holidays, using the garage of one of the volunteers as a storage and wrapping space. The second type of program that can benefit from this structure are groups with expertise in performing social services but do not have expertise in corporate, financial or tax matters. Additionally, they do not have the bandwidth or resources to add staff to conduct or manage these compliance activities. After a few years of operating with the support of a Sponsor, some groups are in a position to form a separate charitable entity and terminate the fiscal sponsorship relationship. However, fiscal sponsorship is not necessarily suitable only for new programs or new ideas. Many projects have existed for years and years under Sponsors, declining to incorporate and obtain separate tax-exemption after realizing the advantages of fiscal sponsorship.
 

What are Some Advantages of Fiscal Sponsorship?
 

1. Ability to Receive Tax-Deductible Donations. A donor that contributes to a Project through a Sponsor with 501(c)(3) status may normally deduct the contribution as a charitable contribution deduction.


2. Ability to Get Off the Ground Faster. Typically, a Sponsor permits a new project to test its new ideas more quickly than it otherwise could by providing administrative and capacity building support and permitting charitable fundraising without the delays associated with incorporating and filing for tax exemption.


3. Wider Base of Support. If the organization that acts as a Sponsor has a solid track record with foundations and other funders, this may benefit a “Project” of that organization. Projects that don’t already have pre-existing relationships with funders may be in a better position to secure some grants or charitable donations if they have a fiscal sponsorship relationship with a reputable charity.


4. Technical Support / Administrative Support. Many Sponsors may also provide Projects with additional support such as marketing, technology, insurance, payroll and accounting services, office space, publicity, capacity building or fundraising assistance. This support not only makes it possible for Projects to focus more time and energy on their missions and less on administrative matters, but, due to economies of scale, may also be provided at lower cost to a Project than the Project might have to pay if it incorporated on its own.


5. Potentially Lower Insurance Costs. Often, Sponsors will be able to obtain lower insurance rates than would be available to a small start-up nonprofit corporation, and these savings can be passed along to the Project.


If We Choose Fiscal Sponsorship Now, Could We Still Incorporate as a Nonprofit Later?
 

The decision to contract with a Sponsor does not have to be final. The agreement can be structured so that a project can terminate the fiscal sponsorship relationship at any time and for any reason as long as it gives the Sponsor a reasonable amount of notice. Some Projects never terminate the sponsorship relationship. Others, after a few years of operating under a Sponsor, are ready to form a separate charitable entity, obtain tax-exemption for that entity, and terminate the fiscal sponsorship relationship. A Project should pay close attention to the termination provisions of the fiscal sponsorship agreement to ensure that it has the right to terminate the agreement for any reason with a reasonable amount of notice to the Sponsor.

INTERESTED IN LEARNING MORE ABOUT BECOMING A REGISTERED 501c3? Please contact us.

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