Launching your own nonprofit can be an extremely rewarding experience. However, like most great things in life, it comes with its own set of challenges—particularly when it comes to the IRS.
Filing for tax-exempt status is no easy feat and may require you to seek legal council. Fortunately, there's another option: Through a fiscal sponsorship, your organization can receive tax-deductible donations from supporters, even if you haven't yet received your 501(c)(3) status.
Fiscal sponsors help founders of various charitable projects become eligible for tax-deductible donations, apply for and administer grants, and organize fundraisers. Hack Club Bank, a fiscal sponsor and Givebutter partner, helps startup nonprofits get off the ground by handling back-office administration (including filings with the IRS), financial oversight, and transaction assistance so organizations can focus solely on their mission and events.
Below, we'll cover what fiscal sponsorship is, what it does for your organization, and how Hack Club Bank helps startup nonprofits accomplish their mission.
What is fiscal sponsorship?
To understand fiscal sponsorship programs, you first need to understand the basics behind nonprofit tax laws.
To be fully recognized as a public charity in the United States, your nonprofit organization needs to obtain 501(c)(3) status from the IRS. Doing so comes with a number of advantages for both you and your supporters, including:
- Tax exemption: Public charities are exempt from paying federal income tax, federal unemployment tax, employment taxes, state income tax, and sales tax.
- Tax exempt financing: If you ever need to borrow funds for a capital project or other necessity, you can apply for a tax-exempt bond.
- Tax-deductible donations: Charitable contributions can reduce the taxable income of your supporters—but only if you've received your 501(c)(3) status.
- And much more: Charitable organizations and private foundations are eligible for reduced postal rates, can be taken on as a pro-bono client at marketing agencies and law firms, and might get a discounted "nonprofit rate" for advertising fees.
To officially gain 501(c)(3) status, your organization has two options: file with the IRS or get fiscally sponsored by an existing nonprofit.
Option one: File for your own nonprofit status
Want to file for tax-exempt status? Great! Before you start, you should know this (quite lengthy) process requires the following steps:
- Upfront fees: The filing fee for Form 1023 is $600, while the fee for Form 1023-EZ is $275. Coupled with attorney fees, you should expect to accrue roughly $3,000 in start-up costs.
- Waiting periods: Being granted 501(c)(3) status isn't guaranteed. Expect to wait 2–12 months for the IRS to review submitted paperwork and either approve or deny the request.
- Ongoing costs: To maintain your nonprofit status, expect to spend $2,500 annually and to keep bookkeepers, accountants, and even attorneys on retainer.
- Closing costs: Closing up shop at your nonprofit? Expect to spend $5,000 in closing costs if your 501(c)(3) status is revoked.
Option two: Seek a fiscal sponsorship arrangement
A comprehensive fiscal sponsorship agreement comes with a number of perks for new nonprofits, including grant proposal writing, financial management, and cost savings. In fact, seeking a fiscal sponsor agreement through an existing nonprofit can guarantee:
- Tax-exempt status: After agreeing to the nonprofit's terms and conditions, you will receive access to legal 501(c)(3) status.
- Expert bookkeeping: Don't feel like wading through mounds of paperwork? Have confidence that the bookkeeping paperwork and taxes will be taken care of by the nonprofit sponsor.
- Predictable administrative fees: Typically, the sponsoring organization will have a fixed fee structure, preventing you from paying ad hoc legal operating costs.
- No commitment: At any time, you can terminate your fiscal sponsorship agreement and file for a separate tax-exempt status.
Fiscal sponsorship is a great avenue for small start-up projects, student-led organizations, and anyone looking to avoid a headache with the IRS while still getting the benefits of nonprofit status.
It's also a great way for organizations to manage their finances and gauge whether becoming an independent nonprofit will be practical and financially feasible in the future.
Why become fiscally sponsored through Hack Club Bank?
Hack Club Bank acts as a fiscal sponsor for many projects and nonprofit teams across the United States. In addition, Hack Club Bank strives to provide a constantly improving user experience that's unique in its kind.
Here are some of the benefits Hack Club Bank offers to the hundreds of organizations that choose to partner with them:
- Instant 501(c)(3) status: Through Hack Club Bank, you gain instantaneous access to nonprofit status after signing your agreement.
- User-friendly online experience: Hack Club Bank offers a beautiful web interface that looks and operates like a bank account.
- Flexibility for scaling teams: Have a growing team? Hack Club Bank offers an unlimited amount of debit cards for spending funds.
- Easy financial management: Hack Club Bank offers fee-free invoicing, sent checks, domestic bank transfers, and reimbursements.
- Easily accept charitable donations: Hack Club Bank offers an individualized donation URL with the ability to embed it directly into your nonprofit website.
- Public-facing reporting: Do you publish an annual report for your supporters? Hack Club Bank offers optional transparency mode to showcase finances publicly. Hack Club is currently the only fiscal sponsor that offers this feature, visible through their finances tab at any time (view this initiative from Hack Pennsylvania).
- Quick response times: With Hack Club Bank, there's a 24-hour turnaround time on all responses to queries.
- No hidden fees: Through Hack Club Bank, there's no annual or monthly operating fees. You can also terminate your agreement at any point in time, without accruing any hidden costs.
How do you become fiscally sponsored?
So, what does signing a fiscal sponsorship agreement with Hack Club Bank involve? To qualify, organizations or sponsored projects must fulfill these three IRS requirements:
- Committed to the nonprofit sector: Your organization must remain fully committed to being nonprofit and charitable in nature, meaning all expenses must go towards running your nonprofit.
- No political affiliation: Your organization must remain nonpolitical—political nonprofits are a different category within the IRS.
- Expense reporting requirements: Your team must upload receipts for every purchase so that Hack Club Bank can file taxes on behalf of your tax-exempt organization.
FAQ: Does it cost anything to join Hack Club Bank?
In return for operating on Hack Club Bank and maintaining your nonprofit status, Hack Club Bank deducts a 10% fee on each incoming transaction. This is automatically collected from your balance and covers:
- Operational fees: including operating, legal, and financial backend fees
- Transaction fees: including reimbursement, invoicing, ACHs, mailed checks, and Visa debit cards
- Bookkeeping: including tax filings and accounting or bookkeeping services
- Ongoing support: including full-time support staff with 24-hour weekday turnaround for anything requiring assistance
There are no monthly or annual costs for being on Hack Club Bank, and you can terminate at any time with no additional fees. Please note: Any organization found through a national network of fiscal sponsors will typically charge 10-20% for ongoing fees. Hack Club Bank is committed to keeping fees as low as possible so the majority of the money raised through your fundraising strategy can go toward your mission.
Speak to Hack Club Bank about fiscal sponsorship
Launching a nonprofit can help improve your community and bring about social change. However, starting a new nonprofit comes with plenty of upfront hurdles, particularly surrounding filing for tax-exempt status.
Obtaining your 501(c)(3) status can cost up to $3,000 and take up to a year to process. After that, you can expect to spend $2,500 annually for accounting, legal, and bookkeeping costs.
As an alternative, many charitable organizations choose to get fiscal sponsorship. Through a fiscal sponsorship agreement with Hack Club Bank, you can gain instant 501(c)(3) status, avoid hidden fees, and get ongoing financial management for your organization.
Ready to see how Hack Club Bank can help get your organization off the ground? If you're operating in the United States, you can join the waitlist today!
Liv enjoys helping others achieve their nonprofit goals, any opportunity to dive deep into problem-solving, a good travel story, and finding the perfect song to dance to.