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The Key Differences Between Fiscal Sponsorship and 501(c)(3): a Breakdown

Differences between fiscal sponsorship and 501(c)(3)

When starting a philanthropic or charitable venture, you may encounter different options for formalizing your idea. One of those will be to start your own charitable organization and register as a 501(c)(3). Another may be to partner with a Fiscal Sponsor.

Fiscal Sponsorship is not new, in fact, programs and projects have been thriving under Fiscal Sponsorship since the 1950s. The US alone has hundreds of Fiscal Sponsors who manage portions of the annual two trillion dollar nonprofit spend.

What is a Fiscal Sponsor?

A fiscal sponsor is a 501(c)(3) organization that takes nonexempt projects or causes under its umbrella and ‘sponsors’ them in an arrangement called Fiscal Sponsorship

This provides the sponsored group 501(c)(3) ‘status’ so that they can start tax-deductible fundraising activities quickly.

The process of becoming a 501(c)(3) charitable organization can be laborious, time-consuming, and expensive. While nonprofit status might feel necessary, when using a Fiscal Sponsor you can avoid the full process and pursue mission-critical projects sooner.

As Social Impact Commons writes:

“Fiscal sponsors can offer greater efficiency and “savings” in back-office operations, allowing more financial and time resources to be tasked to programs and services.” Fiscal Sponsorship - A Brief History and Possible Future - Social Impact Commons

Social Impact Commons

Some main differences between operating under a fiscal sponsor and operating as an independent 501(c)(3) have to do with maintaining compliance, time commitments, and fund management.

Differences in compliance requirements between 501(c)(3)s and fiscal sponsorships

A 501(c)(3) carries the sole responsibility for liability and compliance procedures. They also hold full control of assets and donated funds go directly to them. As a result, control of the organization is held directly by the creators of the nonprofit and not shared with outside entities. This means that 501(c)(3)s are solely accountable for operations. 

Generally speaking, a 501(c)(3) must*:

  • File state registrations(s)
  • File Federal registration
  • Pay annual state and federal filing fees 
  • File annual tax returns (Form(s) 990)
  • Hold full responsibility for maintaining financial records for audit purposes
  • Accept liability for missed filings and penalties (up to $10,000)
  • Be subject to revocation of nonprofit status for noncompliance   

*This is not an exhaustive list and requirements change by state. Refer to your specific state and legal council for compliance requirements.

While fiscal sponsorships are not immune from compliance requirements, they do get the added benefit of their fiscal sponsor’s expertise and authority. A fiscally sponsored project relies on the sponsor to maintain all required compliance and regulatory processes. The sponsor carries liability and maintains audit-ready records.

Funds pass through the fiscal sponsor and are sent to the sponsored project so that an immediate impact can be made. This fiduciary oversight protects the project. The sponsor manages operations and back-office paperwork, so the project can focus on services.  Bypassing administrative overhead improves program delivery, agility, and capacity.

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Differences in startup time commitments between 501(c)(3)s and fiscal sponsorships

A common roadblock to running an effective program is the length of time it takes to establish a nonprofit. Without the efficiency of experienced management, organizations can experience bleeding of precious resources.

“Our sector is fragmented and fragile, which presents a constant threat to sustainability and impact. There are about one million independently formed nonprofits in the U.S. today. Eighty-eight percent of them operate below $500,000 in budget; 97% operate below $5 million. It is arguable that organizations don’t start to attain optimal efficiency until they reach between $5 million and $10 million in budget. It’s a matter of ratio, proportion, and scale of overhead costs to program delivery. This means that 97% of the sector is likely spending more on back office than it needs to (at least 10% more!), leaving billions in program and service dollars sequestered.”

Social Impact Commons

On average, nonprofits report waiting 6 – 12 months for the IRS to process and approve their applications. Additionally, when applying for 501(c)(3) status, nonprofits report spending lots of time consulting with legal experts, accountants, and nonprofit experts to navigate the legal requirements of applying for 501(c)(3) status.

Using a fiscal sponsorship platform like Ribbon, is an efficient way to save startup time and reduce operating costs while increasing the capacity to serve the mission at hand. When an organization partners with a fiscal sponsor, they bypass the long application and approval process needed to establish an initial 501(c)(3) with the IRS. 



Differences in managing funds between 501(c)(3)s and fiscal sponsorships

When 501(c)(3)s are established, they maintain direct control over the funds they raise. They’ll often create their own internal accounting and auditing practices and still have to maintain set compliance requirements. However, in a general sense, 501(c)(3)s are able to spend and manage their funds according to their organization’s mission. Additionally, established 501(c)(3)s are able to raise tax-deductible funds.

Since fiscally sponsored organizations are not independent 501(c)(3)s they rely on their fiscal sponsor to help them manage and distribute funds accordingly. Generally, the fiscal sponsor and the sponsored organization will come up with a mutually agreed upon fiscal sponsorship agreement which outlines the mission of the organization and the process for distributing funds.

With ribbon, we make this distribution process easier. Fiscal sponsors are able to access funds, manage funds, receive funds, and distribute funds to their sponsored organization effortlessly. Through our platform fiscal sponsors can distribute debit cards, add team member permissions, and even create unique donation forms for each sponsored program to use during fundraising.

Putting it all together

Ultimately, the core differences between a 501(c)(3) and fiscal sponsorship come down to the initial startup costs, who maintain compliance, and how funds are distributed or managed. While both fiscal sponsorships and 501(c)(3)s allow for tax-deductible contributions, fiscal sponsorships are generally less expensive to start, take less time to start, and require a significantly smaller initial investment to get started.

Disclaimer

This article contains general information intended to be educational and does not constitute legal advice. Ribbon is not a law firm nor a substitute for an attorney.

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