Why more nonprofit startups are choosing fiscal sponsorships

Filing for tax exemption is no easy feat, but through fiscal sponsorship, your organization can receive tax-deductible donations from supporters, even if you haven't yet received your 501(c)(3) status.

In this blog, we’ll cover everything you need to know about nonprofit fiscal sponsorship, so your organization can take advantage of all the benefits that come from charity status.

What is a fiscal sponsor?

Generally speaking, fiscal sponsorship entails a larger, more established nonprofit (i.e., the fiscal sponsor) assuming financial and legal responsibility for a smaller organization—essentially taking them on as a project or program in exchange for a percentage of their income.

How does nonprofit fiscal sponsorship work?

To understand how a fiscal sponsorship program works, you first need to understand the basics of nonprofit tax laws. To be legally recognized as a public charity in the United States, your nonprofit organization needs to obtain 501(c)(3) status. There are two methods to acquire this status: file with the IRS—which can be a lengthy and tedious process—or become fiscally sponsored by an existing nonprofit. 

Obtaining 501(c)(3) status provides several tax advantages for both you and your supporters, including:

• Tax exemption 💸 Charitable projects are exempt from paying federal income and unemployment taxes, state income tax, and even sales tax.
• Tax-exempt financing 🏦 If you ever need to borrow funds for a capital project or other necessity, 501(c)(3) organizations can apply for a tax-exempt bond.
• Tax-deductible contributions 🎁 Charitable contributions can reduce the taxable income of your supporters—but only if you've received your tax-exempt status.

What are the benefits of nonprofit fiscal sponsorship?

In addition to all the tax advantages, nonprofit fiscal sponsorship comes with great perks like:

• Expert bookkeeping and administrative support 📚 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.
• Built-in HR, benefits, and board 💛 Fiscally sponsored organizations do not need their own board of directors or human resources team. Many can also enroll their staff in the healthcare plan of their sponsoring organization, in addition to other benefits.
• No commitment 🙅 If and when you’re ready, you can terminate your fiscal sponsorship agreement and file for a separate tax-exempt status.

Fiscal sponsorship is a helpful route for new nonprofits, 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.

What are the different types of fiscal sponsorship? 

Fiscal sponsorship models are different structures organizations can use in a fiscal sponsorship arrangement. The specific model chosen depends on the type of nonprofit of both the fiscal sponsor and the sponsored project. 

Common fiscal sponsorship models include:

• Pre-approved grant relationship 👍 In this model, the sponsor is a separate entity from the organization. Funds that the sponsor collects are then funneled to the sponsored project or organization.
• Direct project 🤝 The project or organization legally belongs to the sponsor, and activities are carried out by its volunteers and staff. 
• Group exemption ☂️ In this model, the fiscal sponsor is typically an umbrella organization that sponsors multiple affiliated projects or chapters and grants group tax exemption.
• Independent contractor project 💼 The fiscal sponsor hires contractors to work on specific projects under the fiscal sponsor's guidance and oversight.
• Technical assistance ⚙️ The fiscal sponsor provides specific services to the sponsored organization like program development or grant writing.

Who can be a fiscal sponsor?

A fiscal sponsor can be any established nonprofit organization with tax-exempt status under section 501(c)(3) of the IRS code in the United States.

Fiscal sponsor vs. fiscal agent

There are two main types of fiscal entities that provide financial oversight to nonprofits: a fiscal agent and a fiscal sponsor. While they serve similar functions, they differ in legal and tax responsibilities.

💰Fiscal sponsor: A fiscal sponsor allows an organization to operate under its tax-exempt status, often maintaining financial control of the sponsored project.

‍💰Fiscal agent: A fiscal agent manages the financial operations of a project or organization but does not provide tax-exempt status.

How to establish a fiscal sponsorship in 3 easy steps

Creating a partnership with a fiscal sponsor can be stress-free with the right tips and tools. 

1. Research potential sponsors 🔎

There are plenty of fiscal sponsors, but it’s essential to partner with one complementary to your organization. To find the right match, be sure to:

• Look for similar nonprofits 🏢 One of the best ways to find the right sponsor is to seek out organizations whose values and mission align with yours.
• Use online directories 💻 Use directories like the Fiscal Sponsor Directory or the National Network of Fiscal Sponsors to find a potential fiscal sponsorship match.
• Ask for recommendations 🙋 Sometimes, word of mouth is best! Call on some of your most trusted network connections for recommendations.

2. Prepare your proposal and submit ✍️

Once you’ve narrowed down your options, prepare a comprehensive proposal that clearly articulates your mission, project details, budget, fundraising strategy, and anticipated outcomes. 

This proposal will serve as your formal introduction to potential sponsors, so it should be tailored to address their specific requirements and interests. Be sure to follow the sponsor's guidelines, provide all necessary documentation, and of course, be prepared to answer any questions they may have about your project.

3. Finalize the agreement 🤝

Lastly, once a sponsor expresses interest, work together to finalize the fiscal sponsorship contract. This step involves negotiating terms, clarifying expectations, and ensuring both parties understand their roles and responsibilities.

While every agreement is different and should be vetted by a professional, they usually include details about:

• Financial responsibilities
• Reporting requirements
• Decision-making processes
• Level of control the fiscal sponsor will have over the project
• Communication requirements
• Definition of charitable purpose and activities of the project

Before signing off, it’s important to keep in mind that you might have to negotiate terms like fees and services, too.

What does signing a fiscal sponsorship agreement typically involve?

These arrangements typically require following fiscal sponsorship guidelines to ensure compliance with IRS regulations. Organizations or sponsored projects must fulfill these three requirements from the start:

• Be committed to the nonprofit sector 🌎 Your organization must remain fully committed to being not-for-profit and charitable in nature, meaning all expenses must go towards running your nonprofit.
• Have no political affiliation 🙈 Your organization must remain nonpolitical—political nonprofits are a completely different category within the IRS.
• Follow expense reporting requirements 📊 Your team must submit receipts for every purchase so that your fiscal sponsor can file taxes on behalf of your tax-exempt organization.

While some organizations will only seek a fiscal sponsorship for a short period of time, more and more nonprofits are opting for a longer-term, mutually beneficial partnership.

Fiscal sponsorship agreement templates

Fiscal sponsorship agreements can be pretty hefty and full of legalese. When crafting your own, be sure to consult with nonprofit lawyers or legal aid organizations, or search for legally vetted templates.

Whichever contract or template you use, make sure it includes information like:

• Roles and responsibilities of both parties
• Financial arrangements and fee structures
• Reporting requirements and timelines
• Intellectual property rights
• Termination clauses

Lay the groundwork for a strong fiscal sponsorship

Building a new organization comes with plenty of upfront hurdles, particularly surrounding filing for tax-exempt status. As an alternative, many nonprofits choose fiscal sponsorship to gain instant tax-exempt status, avoid hidden fees, and receive ongoing financial management for their organization.

With Givebutter, fiscally-sponsored nonprofits can now access hundreds of free fundraising tools by signing up with their sponsor’s Employer Identification Number (EIN). Gain access to a full suite of fundraising, event management, and donor engagement features—plus, enjoy exclusive perks for verified nonprofits, including a “Verified” status badge, EIN on campaign pages and receipts, and so much more.

‍Sign up for a free Givebutter account today and start raising funds in just a few minutes. 

FAQs for fiscal sponsorship for nonprofits

How much does fiscal sponsorship cost?

Costs vary widely depending on the sponsor and the services provided. Typically, fiscal sponsors charge a percentage of the project's revenue, ranging from 5% to 15%; others charge a flat fee instead. Additional fees might apply for specific services like payroll or grant management, too, so it’s essential that both parties discuss fees upfront.

How long does a fiscal sponsorship last?

The duration of a fiscal sponsorship is flexible and can vary based on the needs of the project. Some last only a few months for short-term projects, while others continue for several years as organizations grow.

Can an individual be fiscally sponsored?

Yes, individuals can be fiscally sponsored, though it's less common than organizational sponsorship. This arrangement is often used for:

• Independent artists or activists
• Individuals running community projects
• Researchers or scholars seeking grant funding

Does a fiscal sponsor own the project?

No, the fiscal sponsor does not own the project. However, they do have legal and financial responsibility for it.