While fiscal sponsorships have been around for a long time, we have begun to see new use cases for them throughout the philanthropic sector. Our clients include corporate organizations, foundations, individuals and nonprofits who are looking for collaborative solutions to complex issues. Some of their underlying needs include bringing together partners, starting up short-term initiatives, setting up new projects that will expand over time, and setting other funding aside for future use. Think of a fiscal sponsorship as something akin to a traditional donor-advised fund but with additional capabilities.
The IRS defines a fiscal sponsorship as:
“A contractual relationship that allows a person or organization that is not tax-exempt to advance charitable or otherwise exempt activities with the benefit of the tax-exempt status of a sponsor organization that is exempt from federal income tax under Internal Revenue Code (IRC) Section 501(c)(3).”
Here are four reasons why a fiscal sponsorship may be the right solution for your philanthropic needs and goals:
1. Speed and Efficiency
Fiscal sponsorships have been traditionally used when a group wants to raise money to help solve a problem quickly but doesn’t want to go through the time and labor-intensive process of registering its own 501(c)(3). The IRS approval process can take six months or longer. Entering into a fiscal sponsor arrangement with a nonprofit is a speedier solution that lightens the administrative burden for the group.
2. Supportive Infrastructure
Other solutions that have entered the market, such as the popular Go Fund Me pages, do not provide donors with tax receipting or the oversight that is given through the nonprofit structure. While these pages may seem appealing in the short-term, this does not offer the same capacity for future scalability for projects. In addition, Go Fund Me pages and other similar channels can limit the donor pool as they are not able to receive corporate, foundation or public funds.
3. Increased Flexibility
We recently set up a fund for a corporate client who had set funding aside for corporate social responsibility programming in the current years’ budget but had not fully built out its strategy and initiative. We helped them set up a fiscal sponsorship now, allowing them to move the funding out of the organization and receive the tax deduction, while giving them the time and flexibility to finish their strategy-building process.Another example is if a nonprofit decides they want to collaborate with other funders that are addressing similar issues. A fiscal sponsorship can collect funds from multiple sources and then be used based on the wishes of the funders. A project committee is established by the group to manage the fiscal sponsorship needs.
4. Lower Costs
Fiscal sponsorships generally offer a lower point-of-entry cost for organizations than setting up a 501(c)(3), which is not a light undertaking financially and administratively. Setting up a new 501(c)(3) can cost $25,000 in legal support, plus the time working with lawyers to create By Laws and the 1023 filing for the initial organizational documents.
Ongoing compliance and infrastructure costs also contribute to the financial burden of a 501(c)(3) for an organization. Like any other business, a nonprofit will need to have an IT infrastructure which might include an Office365 license for staff, a website that might need to have an online donation capability, corporate insurance (especially Directors & Officers insurance for the Board members), and costs related to maintaining a bank account. State registrations are also required in order to remain in compliance. As with most start-ups, there are upfront costs in the initial years that are “one-time,” but funds will need to be allocated to cover these.
Personnel costs can also be significant. 501(c)(3)s often need not just staff for programs, fundraising, and marketing, but also general back-office support for HR, IT, and accounting. When you consider the costs related to supporting all these organizational needs, we do not suggest registering a new 501(c)(3) until the $3 million in revenues mark is attained and sustained.
It’s exciting to be part of new projects where the initiators decide that a fiscal sponsorship will provide a pivotal role in providing the supporting infrastructure to allow the project’s stakeholders to focus on the delivery and implementation of their mission. A fiscal sponsorship can be a solution for many different types of mission-driven projects.
Global Impact has supported hundreds of charitable projects through Fiscal Sponsorship over the last ten years. We are excited to see the growth and opportunities that this service offering brings to our partners in the philanthropic sector.