What is a Fiscal Sponsor?
Who Needs a Fiscal Sponsor?
What Does A Fiscal Sponsor Do?
Elements of a Successful Relationship
Finding a Fiscal Sponsor
Being A Fiscal Sponsor
Evaluating the Project-Fiscal Sponsor Relationship
Fiscal Sponsor Checklist
Resources

What is a Fiscal Sponsor?

Getting incorporated and tax exempt takes money, time and energy, and may distract people from the program they are creating. As an alternative, people who have a new project, or an idea for one, often turn to a Fiscal Sponsor to get it off the ground. A Fiscal Sponsor is a non-profit organization with 501(c)(3) tax exempt status from the Internal Revenue Service that acts as a guardian of grants and donations for a Project that does not have 501(c)(3) designation.

A Fiscal Sponsor is necessary for one good reason: funders rarely (if ever) make donations to anyone without 501(c)(3) status. That's because tax exempt status, like incorporation, bylaws and other formal designations, inspires confidence in potential donors and funders. It demonstrates that the organization has a legitimate charitable purpose, has a structure for accomplishing its goals, and is accountable to the public.

Foundations, and sometimes governments simply cannot give grants to projects without a 501(c)(3). Individuals often prefer to give to 501(c)(3) organizations so they can deduct the charitable donation on their annual tax return.

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Who Needs a Fiscal Sponsor?

Situations that could call for a Fiscal Sponsor include:

• Organizations or projects that can deliver programs effectively, but don't have support staff;
  
• Projects that are short term, or temporary, that wish to avoid the time and expense of applying for a 501(c)(3);
  
• Pilot projects, that haven't demonstrated long term viability;
  
• Organizations that are awaiting, but have not received 501(c)(3) status.
  

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What Does A Fiscal Sponsor Do?

At the very least a Fiscal Sponsor manages specific grants made to a Project. For example, it:

• receives the grant and the funds for the designated program;
• writes the checks for program expenses;
  
• includes the grant in its annual tax return and audit.

It could also take a much broader role. It could, for example, act as a human resources manager, an administrative coach, or a fundraising partner.

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 Elements of a Successful Relationship

With foresight and planning, a Fiscal Sponsor relationship can be good for everyone. The sponsoring organization has an opportunity to further its charitable purpose, and to collaborate with others. Project leaders have an opportunity to gain skills and experience through a more seasoned agency.

But willingness alone does not lead to success. Sponsors and Projects must negotiate the details of their relationship, and set them down on paper. Project creators will want to be sure that there is a fair and timely process to access Project funds, and that the Fiscal Sponsor handles their affairs responsibly. A Fiscal Sponsor will want to have confidence in the Project's creators and implementers so that their reputation with funders, constituents, even the IRS, is not sullied.

The Fiscal Sponsor Checklist that follows will get you started thinking about the details of a successful Sponsor-Project relationship.

Finally, don't assume that Fiscal Sponsor services are free. There are many administrative expenses that will be incurred, and the Project should expect to pay for them, and build them into the budget. For example, staff will need to be paid to process and approve paperwork, write checks, keep records, produce reports and so on. There may be bank fees, accounting fees or audit costs. A Sponsor could charge a flat fee, or a percentage of Project revenues, which could range between 2 and 10 percent. Agree on the fee in advance, in writing, and list the services the Fiscal Sponsor will provide in return for that fee.

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Finding a Fiscal Sponsor

Finding a Fiscal Sponsor before fundraising begins benefits everyone. The Project can benefit by being aware of funder requirements up front. And the Fiscal Sponsor can avoid the appearance of a mere "pass-through" organization, which the IRS frowns upon.

To find a Fiscal Sponsor, start by making a list of non-profit organizations that are familiar with you and your work. Add to the list organizations with a similar purpose or constituency, that work in your community. The IRS requires that a sponsored Project be consistent with the legal purpose espoused by a sponsoring organization.

Meet with someone associated with each organization on your list. Introduce your Project, and inquire about the possibility of a Fiscal Sponsor relationship. Remember that this may be new to them. Few non-profits have much experience as a Fiscal Sponsor. Make certain your potential Sponsor has 501(c)(3) status by asking for a copy of their IRS Determination Letter. Also, although you may be speaking with the executive director or another staff member, ultimately it is the Board of Directors that must approve, or decline, the relationship.
 
Your local library or Foundation Center can help produce a list of Fiscal Sponsor candidates. In Southwestern Pennsylvania, check the Three Rivers Freenet's list of nonprofit organizations. Or use the IRS's Exempt Organization Search. The IRS's Publication 78 lists organizations with tax exempt status. Request it by calling the IRS at 800-829-3676.

The Tides Center may be another option. The mission of this national non-profit organization is to serve as a Fiscal Sponsor to Projects that promote social change. Visit the Tides Center web page, or call them at 415-561-6300.

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Being A Fiscal Sponsor

Perhaps you are reading this because you've been asked to be a Fiscal Sponsor. Keep these points in mind:

• You will be taking responsibility for the funds and their proper disbursement. The buck stops with you.
  
• You will be legally responsible for the Project. Make certain the Project has insurance, or obtain coverage from your existing insurer.
  
• If the Project has staff, they may be your employees under the law, subject to your workers compensation, unemployment compensation and personnel policies.
  
• The Project must be consistent with your non-profit mission.
  
  

Serving as a Fiscal Sponsor is an opportunity to expand your organization's impact, but it comes with serious obligations. Review them carefully with your Board before committing.

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Evaluating the Project-Fiscal Sponsor Relationship

Once the details have been worked out, decide when to evaluate the relationship. At least once a year you will want to consider whether the relationship is still working. What details or procedures need to be adjusted? What problems have been encountered?

Eventually one party or the other may need to end the relationship. Perhaps the Project is complete, or funding exhausted. Perhaps the Project incorporated and obtained its own 501(c)(3) status. Or perhaps the relationship has not worked out as planned. Agreement at the beginning on when and how to terminate the relationship, will mean fewer problems at the end.

Fiscal Sponsor Checklist
General
Is the Project consistent with the Sponsor's mission?
When will the relationship begin?
When will it end?
When will the relationship be evaluated?
Financial
In which account will the funds be housed?
Who is authorized to request disbursements?
What documentation is required for disbursement?
When may requests for disbursements be made?
How quickly will the Sponsor make disbursements?
Reporting
What are the IRS reporting requirements for each party?
Is an audit required? Who will oversee it?
Who will report to funders?
Are there other reporting requirements?
Fee
How much is the fee?
How and when will the fee be collected?
Other
Are there procedures for using corporate names and materials for outreach and publicity?
Whose insurance will cover the Project?

Resources

Colvin, Gregory. Fiscal Sponsorship: 6 Ways To Do It Right. San Francisco: Study Center Press, 1993. A thorough resource that provides various models of fiscal sponsor relationships. Available in libraries and bookstores.

Internal Revenue Service, Exempt Organization Office is the authority on becoming a tax exempt, 501(c)(3) organization. Call them at (877) 829-5500 (toll free).

David Barlow, Executive Director of the San Francisco Foundation Community Initiative Funds answers frequently asked questions about fiscal sponsorship, and provides sample agreements for the Nonprofit Genie.

The Tides Center is a non-profit organization that provides fiscal sponsor services to projects that "promote social change."

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