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What is fiscal sponsorship? A Complete Breakdown of Fiscal Sponsorship

What is fiscal sponsorship?

Fiscal Sponsorship can be an efficient way to raise funds legally for a charitable cause, without having to officially incorporate or wait months and months for the IRS to grant tax-exempt 501(c)(3) status. 

If you or your project would like to solicit tax-deductible donations, host a fundraiser or charity event, support a mission-based project, respond to an event or time-sensitive need (like a natural disaster or catastrophic event), or are looking to receive or distribute a grant, then a Fiscal Sponsor is the most efficient way to get started.

What is a fiscal sponsor?

A Fiscal Sponsor is a tax-exempt nonprofit organization that has jumped through the legal and financial hurdles required to receive and maintain nonprofit status from the Internal Revenue Service. 

The Fiscal Sponsor can ‘lend’ their nonprofit status to a nonexempt project or cause through a process called Fiscal Sponsorship. This allows the sponsored organization to focus on mission-critical charity work, all the while operating legally under the “borrowed” 501(c)(3) status of the Fiscal Sponsor.

What's included in this article

  • What is a fiscal sponsor?
  • What is fiscal sponsorship?
  • What is a fiscal sponsorship agreement?
  • Why should I use a fiscal sponsor?
  • What are the benefits of fiscal sponsorship?
  • What are the disadvantages of fiscal sponsorship?

What is a fiscal sponsorship agreement?

A fiscal sponsorship agreement is a contract or agreement between an existing nonprofit (the fiscal sponsor) and a sponsored organization. In this agreement the fiscal sponsor agrees to accept tax deductible donations on behalf of a sponsored organization. They also agree to provide oversight of the funds to ensure they’re being used for the charitable purposes laid out by the sponsored organization. 

These types of agreements vary based on the fiscal sponsor, but in general they establish a link between the sponsor and sponsored organization that governs the exchange of charitable funds.

Why would I use a Fiscal Sponsor?

Fiscal Sponsors provide fiduciary oversight and back-office management so that you can accomplish your charitable goals quickly. They enable you to do charitable work within compliance standards, which protects your project and your donors.

If you or your project would like to solicit tax-deductible donations, host a fundraiser or charity event, support a mission-based project, respond to an event or time-sensitive need (like a natural disaster or catastrophic event), or are looking to receive or distribute a grant, then a Fiscal Sponsor is the most efficient way to get started.

Partnering with a Fiscal Sponsor can also open opportunities to receive funding that you would otherwise be ineligible for, like grants! Most Grant funders will only distribute funds to registered 501(c)(3) organizations. When you use a Fiscal Sponsor, you are able to apply for a grant under the Sponsors EIN, and shorten the consideration process and distribution period.

Fiscal Sponsors Chart - Core Qualities of a Great Fiscal Sponsor

A Fiscal Sponsor might be right for you if…

  1. You have a cause that has a short timeframe or there is an immediate charitable need, but you don’t have the time or resources to become a fully registered tax-exempt organization
  2. You are a start-up cause, looking to gain momentum and get your feet wet before fully registering
  3. You are being gifted money for charitable work you do and wish to be able to provide tax receipts to your donors
  4. You are using your own money, time and resources to support mission-driven projects

Use fiscal sponsorship for your community events

Tom has been organizing a ‘Lights of Boulder’ event in his town of Boulder, CO for a few years and wants to improve it. His family, friends, and neighbors have given him money to support this fun, community event. This year they would like to apply for an improvement grant, but have hit a roadblock – the grantmaker requires that funds can only go to tax-exempt organizations.  Because Tom is not incorporated his cause can not be considered for the grant. 

Tom needs a solution. He does not have the money and time to become a fully compliant 501(c)(3) organization, so he could partner with a fiscal sponsor. This would allow him to apply for the grant under the Fiscal Sponsors EIN (Employer Identification Number), and it would provide tax receipts to the members of his community who donate to this cause. Now Tom’s cause can be considered for the Grant!

What are the benefits of fiscal sponsorship?

Use fiscal sponsorship to ease time, money, and overall commitments

Starting, running, and maintaining a nonprofit is commendable! In order to do it right you first have to get your 501(c)(3) status. It can take new nonprofits 6 – 12 months just to be approved by the IRS plus thousands of dollars in annual fees, paperwork, and personnel costs to navigate the required paperwork. 

If you’re trying to start making a difference immediately, this level of commitment can be off-putting. The fiscal sponsorship model allows you to do good work without the needless burdens and commitments associated with the 501(c)(3) process. It helps your organization grow quickly by easing compliance burdens, alleviating start-up costs, and lightening time constraints, so you can focus on the work at hand, not the paperwork. 

Build a network of nonprofits

Established nonprofits can also take advantage of the fiscal sponsorship model. Existing nonprofits can sponsor charitable groups or projects through ribbon. When you sponsor another group or project, you’re allowing them to use your tax-deductible status to raise funds and start doing good.

There are lots of reasons established nonprofits might look to fiscal sponsorship as a solution. Using this model nonprofits can:

  • Create a national network of charities united around a single cause or mission.
  • Sponsor groups that do similar work to their nonprofit.
  • Help partners or individuals in their community establish their own nonprofits.
  • Avoid mission creep by regulating new projects or programs into separate fiscal sponsorsips.

Start your new charity today with ribbon

Ribbon helps you start a new charitable organization quicker through fiscal sponsorship.

How long can a fiscal sponsorship last?

Fiscal Sponsorship partnerships can last for many years. You can continue to rely on the support your Sponsor provides each year as your cause thrives and grows. The ongoing guidance and structure make it easy to put as much time as you can into your charitable work, without being strapped down by administrative tasks.

What are the disadvantages of fiscal sponsorship?

Oversight

If you are seeking sole control of your organization’s structure and charity work and do not mind carrying full liability, then Fiscal Sponsorship might not be best for your organization. 

One of the ways that Fiscal Sponsors come alongside projects is by accepting fiduciary responsibility for donations received. This can lighten the audit burden and ensure a clean financial trail for your cause. If however, you require sole control and do not mind full liability, you might not like this added service. 

Ribbon receives donations made in your name and the funds are available for use within days. Administrative oversight is provided, lending structure and ensuring that financial records, fund disbursements, and overall organizational integrity.

Advantages – efficiency, guidance, administrative support, financial reporting, fund disbursement, receipt generation, quickest to market, responsive 

Receipts

When you use Ribbon, donation receipts are sent immediately on an automated basis. This ensures that all who have supported your cause financially receive the proper documentation they require to claim a tax benefit. Some charitable organizations prefer to manage receipts on their own, and do not wish to have the automated service that Ribbon provides.  

Size

If you’re a big organization with tons of staff, establishing a 501(c)(3) might fit your needs best. Similarly, if your new charity is projected to raise hundreds of thousands of dollars in funds, or your current project already does, fiscal sponsorship might not be beneficial.

Putting it all together

Ultimately, grassroots fundraising is a strategy that focuses on achieving regular, small-to-medium donations from everyday donors. When a nonprofit uses a grassroots fundraising model they’re placing an emphasis on their local community’s support, rather than the large-dollar donations from a handful of wealthy donors.

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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