How fiscal sponsorship can help small organisations do big things

Sometimes, individuals or business organisations are driven to embark on charitable projects to improve their communities and the world. To accomplish this, they typically need funding. But fundraising can be a challenging task for some organisations, especially for those with limited reach or resources, or those not registered as a nonprofit organisation. 

This could therefore present a roadblock in the project or undertaking. Fortunately, there’s a more desirable alternative that makes it possible for these entities to execute their philanthropic projects.

Enter fiscal sponsorship.   

What is fiscal sponsorship and how does it work?

Fiscal sponsorship is a legal arrangement that allows an individual, business organisation or any other entity to enjoy tax-exempt status and execute charitable activities by getting a fiscal sponsor. In the United States, a fiscal sponsor is an established organisation under Sec 501(c)(3) of the Internal Revenue Code that extends its credibility and tax-exempt status to the sponsored entity and receives donations that are deductible to the sponsored organisation. 

The fiscal sponsor is financially and legally responsible for the sponsored organisation; so, they usually charge a fiscal sponsorship fee for their service. This fee is normally a percentage of the project’s budget. It’s essential that the aim of the charitable project be aligned with or related to the sponsor’s mission.

Noteworthy is the fact that the sponsored organisation can even be an established tax-exempt nonprofit organisation.   

Not all fiscal sponsorship arrangements are the same. So, to understand how fiscal sponsorship works, it’s important to unwrap the various models.    

Comprehensive fiscal sponsorship model

The comprehensive fiscal sponsorship model (Model A) is an arrangement under which the sponsored organisation relinquishes ownership and control of the charitable venture to the fiscal sponsor. The sponsored organisation is not an established nonprofit organisation nor a tax-exempt entity, so, on its own, it cannot solicit funds or directly receive charitable donations.

The assets and liabilities of the charitable project are seen as that of the sponsor just as the employees of the sponsored organisation are considered agents of the fiscal sponsor. The sponsored entity pays a fiscal sponsorship fee to the sponsor; this fee is charged to the fund dedicated to the charitable venture.   

The pre-approved grant relationship model

Under the pre-approved grant (Model C) arrangement, the fiscal sponsor and the sponsored organisation have a grantor-grantee relationship. The project along with its assets and liabilities are owned by the sponsored entity – which is in this case responsible for its tax obligations. 

Since the sponsored organisation lacks tax-exemption status for deductible contributions, fundraising is carried out by the fiscal sponsor. Likewise, the employees of the sponsored organisation function as the agents of the fiscal sponsor during fundraising. Upon receiving grants and contributions, the fiscal sponsor determines how the resources are used.

The sponsor can then grant them to the sponsored entity, hence the grantor-grantee relationship, or another organisation.   

Independent contractor and technical assistance models

These are two less popular models of fiscal sponsorship. Under the independent contractor model (Model B), the sponsored organisation is a separate legal entity; while the fiscal sponsor usually maintains control of the charitable project, ownership of the assets and the venture can belong to both or either of the parties. 

Operations of the charitable venture are contracted to the sponsored organisation, but fundraising is done in the sponsor’s name and the contributions belong to the sponsor.

Under the technical assistance model (Model D), the sponsored organisation is usually an established nonprofit organisation under Sec 501(c)(3) that requires assistance with managerial responsibilities beyond its capacity. These responsibilities could be bookkeeping, compliance or financial management and the fiscal sponsor assists the sponsored organisation.

The sponsored organisation maintains ownership of its charitable ventures and funds are raised in its name.      

How can small organisations get fiscal sponsorship?

Fiscal sponsorship offers the opportunity for an individual or a business organisation to do big things. How can an organisation find a sponsor? Here are a few possible avenues! 

• Have conversations with notable community foundations and capacity-building organisations to find out if they have funding opportunities.
• Join networks dedicated to connecting fiscal sponsors to charitable projects. The popular National Network of Fiscal Sponsors and Fiscal Sponsor Directory are excellent sources of potential fiscal sponsors. A simple search through their membership directory will provide relevant details of nonprofit organisations that are potential fiscal sponsors.
• Check out local nonprofits with a similar mission; many fiscal sponsors prefer to partner on projects within a designated field and geographic area.
• Consider the less-obvious options. Think outside the box by reaching out to social service organisations such as educational, medical and art institutions. They usually have nonprofit status or a nonprofit arm.      

The benefits of fiscal sponsorship

Fiscal sponsorship offers multiple upsides to small organisations.

Firstly, it helps small organisations and individuals make a positive impact without dealing with the rigours of incorporating a nonprofit organisation. Setting up a nonprofit from scratch can take multiple months and cost thousands of dollars. In the event that the project to be executed is time-sensitive, the process will waste time and reduce its impact.

However, fiscal sponsorship makes it possible for the sponsored entity to swiftly embark on projects that respond to immediate needs without dealing with legal fees or wasting time. 

Similarly, fiscal sponsorship relieves the sponsored entity of expenses and administrative concerns that pertain to the maintenance of a charitable organisation under Sec 501(c)(3) of the Internal Revenue Code. The law requires organisations to conduct annual audits, reviews and tax filings.

Complying with these requirements can be time-consuming, tasking and costly; the sponsored organisation will not have to deal with them.                  

The sponsored entities enjoy various benefits that accrue to the fiscal sponsor. For one, the tax-exemption status will incentivise the donors to give more to the cause, while the grant opportunities available will help them establish a relationship with the grantors. 

In the same vein, sponsored organisations benefit from the fiscal sponsors’ expertise. Since there’s already an experienced board of directors and nonprofit experts, the small organisations will receive guidance in the form of best practices for grant management, disbursement of funds, reporting, transparency and compliance.

Ultimately, fiscal sponsorship yields efficient philanthropy. Different charitable ventures geared towards a common goal can be united under a single fiscal sponsor, leading to greater impact without only the sponsor having to formulate every single initiative.

In all, fiscal sponsorship is a fantastic way to attract funds for charitable projects or leverage the administrative and technical assistance of 501(c)(3) organisations. They give individuals and business organisations the opportunity to make a remarkable impact without joggling the bureaucratic responsibilities involved in setting up and running a full-fledged nonprofit.