You’ve got a brilliant idea for a nonprofit. You’ve done your research, gathered your team, and even have a lead on some funding. Someone suggests fiscal sponsorship as a smart way to start your project. But what is that? And how do you find a good fiscal sponsor?
What is Fiscal Sponsorship?
Put most broadly, fiscal sponsorship is the term applied when a nonprofit organization agrees to assume legal and financial oversight for a charitable activity or project that does not have its own legal nonprofit (501(c)3) status. There are different models for fiscal sponsorship, each with its own characteristics and legal structures. The models, and some myth-busting explanations, are explained in detail by the National Network of Fiscal Sponsors. The article “Fiscal Sponsorship: A 360 Degree Perspective” also offers a good overview of fiscal sponsorship as well as evolving trends in the field.
There are many benefits to fiscal sponsorship. While the application process with the IRS has become much easier, setting up a nonprofit still requires federal and state applications and extensive annual reporting. Rather than setting up your own organization and operating systems, fiscal sponsorship can give you access to a team of dedicated professionals who handle your accounting, grants management, and human resources needs.
Not only does this make your life easier and enable you to focus on your mission, many funders view fiscal sponsorship as a way to help minimize risk, especially with small or start-up ventures. And the leaders of many sponsored projects find that fiscal sponsorship is less expensive than operating as an independent organization.
This chart from attorney Greg Colvin offers a quick look at the basic differences between forming an independent 501(c)3 nonprofit corporation and fiscal sponsorship. If you decide that fiscal sponsorship is the way you’d like to go, you’ll need to take the time to find an organization that is both reputable, and the right fit for you!
#1 Identify Your Prospects
Many organizations provide fiscal sponsorship. Some are “dedicated” fiscal sponsors, meaning sponsorship is at the core of their mission. Others might offer fiscal sponsorship on a more informal and limited basis -- a way to help out a friend or a related program.
The San Francisco Study Center hosts an online directory of fiscal sponsors across the country. Word of mouth is also a good way to find fiscal sponsors in your area: ask friends or staff members at organizations that are likely to work with fiscal sponsors, including:
- Your local community foundation
- Foundations serving your area
- A nonprofit management support organization
- The local or regional association of foundations that encompasses your area
- Local attorneys, or the tax-exempt division of the bar association
- Accountants, fundraisers, consultants and others who serve the nonprofit sector
#2 Make the Right Match
Securing fiscal sponsorship is a two-way street: you’ll need to put your best foot forward through what can be a rigorous selection process. But you should also be selective about choosing your fiscal sponsor. This will be your organizational home, so it’s important to find a good match, a place where you’ll be comfortable, and where you’ll have access to the services and support you need. Before applying, be sure to ask some questions about a prospective sponsor and what you can expect from the relationship.
Can they do it right?
The organization should be able to manage your project funds and activities effectively, separate from their core operations or other projects.
- Is there good mission fit? Is their view of the world compatible with the mission of your project?
- Is their organization an appropriate sponsor for the size and scale of your project?
- Do they have a policy and safeguards in place to ensure that project funds will not be used for their own purposes (beyond the agreed-upon administrative fees)?
- Do they have an accounting system robust enough to account separately for your project funds and generate sufficiently detailed financial reports?
Is the organization solid?
You’ll want to check out the fiscal sponsor itself to make sure it’s healthy and stable. Remember, the fiscal sponsor will be managing your project’s funds.
- Do they have a good reputation? Your credibility is only as good as your fiscal sponsor’s.
- Are they in good standing with the IRS and state agencies?
- Do they have clean annual financial audits?
- Do they have adequate reserves to sustain them into the future?
- Do they have enough insurance and adequate policies in place to manage risk?
What services do they offer?
Fiscal sponsors vary widely in what they provide and how they charge.
- Do you know what services you’ll receive? Some provide mainly accounting and administrative services, while others also offer advice and counsel to help projects grow and develop. Grant writing or even staffing can be a part of a sponsorship program.
- Are they clear about how much they charge, and for what? Some provide a package of services for a percentage-based fee or set charge; others charge different fees for different services.
Put it in writing with a formal sponsorship agreement
Many a project leader has gotten into trouble because the agreements were unclear or the fiscal sponsor did not want to end a relationship.
- Will there be a written agreement that covers all these things—the services, fees, expectations, policies, and procedures?
- What would happen if or when you want to leave the fiscal sponsor? What is the process and are there provisions for who will own the project assets in the case of a separation?
See the National Network of Fiscal Sponsors Guidelines for a more thorough checklist of best practices for the two most common kinds of fiscal sponsorship. The list can help you evaluate a prospective fiscal sponsor and serve as a guide to entering into a solid relationship. Done well, fiscal sponsorship is an excellent alternative to nonprofit incorporation and a great way to let the brilliance of your good work shine quickly and easily.
LINDA FOWELLS is executive vice president at Community Partners, a Los Angeles-based fiscal sponsor and intermediary organization since 1992.