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How fiscal sponsorships support new nonprofit organizations

January 11, 2022
This nonprofit employee is closing a deal on a fiscal sponsorship to support their organization.

So, you just filed your Form 1023 to obtain your 501(c)3 designation so the Internal Revenue Service (IRS) will recognize your group as a tax-deductible nonprofit organization. Congratulations!

Now you’re ready to start fundraising, but there’s a catch: you have to wait for the IRS to get back to you about your 501(c)3 status. Your donors can’t give because you’re waiting to hear back about your tax-exempt status and you’re not eligible for grants yet because you aren’t officially recognized as a nonprofit entity. 

However, there is a way to get out of this bind: pursuing fiscal sponsorships.

A fiscal sponsor is another tax-exempt organization that agrees to receive funds and conduct other administrative functions on your organization’s behalf. Your fiscal sponsor processes your donations and then disburses the funds to your organization. 

Sometimes a sponsor will ask for a small administrative fee in exchange for processing the transactions, but it’s still a great option for organizations that need to raise money as soon as possible. Plus, it provides peace of mind to donors who want to make sure their contribution is tax-deductible.

Who can serve as a sponsor?

Technically, any 501(c)3 can be a fiscal sponsor. The National Council on Nonprofits recommends that you look for an organization with a similar purpose to yours. Be sure that both parties agree to the terms of the partnership, and clearly outline those terms in a written agreement to make the sponsorship formal.

Candid’s guide on the subject recommends reaching out to private foundations, religious organizations, institutional fiscal sponsors, other organizations that might provide one-off sponsorships, and any established nonprofit organization. When searching for a fiscal sponsor, remember that you want them to have a good experience working with your organization. They may be a great partner in the future as well!

Fiscal sponsor vs. fiscal agent

Sometimes, when looking for fiscal sponsors, your organization might run across fiscal agents. It’s important to distinguish between these two entities as they’re not the same thing:

  • Fiscal sponsor: Fiscal sponsors accept donations on your organization’s behalf but ultimately maintain discretion about how those funds are used. They’ll have a greater say in how your organization uses those funds to launch a program or project. 
  • Fiscal agent: Fiscal agents, meanwhile, act as the legal agent for a project and don’t have full discretion over the funds and how they’re used. This agent acts on behalf of organizations, but the organization maintains control over how the funds are ultimately used. 

The primary difference nonprofit organizations concern themselves with in regard to fiscal sponsors versus fiscal agents is the matter of tax deduction. While donations made through a fiscal sponsor are tax-deductible to the donor, those made through a fiscal agent are not. 

What does fiscal sponsorship look like?

An effective fiscal sponsor will have the infrastructure and policies that provide oversight of your organization’s projects and programs. Therefore, sponsorships aren’t simply a way to obtain funding. You’ll need to work closely with your sponsor to ensure they have an understanding of your next project and what you’re trying to accomplish with the funds. 

This makes sense as the fiscal sponsor would be liable for any negative compliance repercussions if your organization were to accidentally misuse the funds. 

Fiscal sponsors are also required to keep comprehensive records and reports of the funds used by your organization. Accurate reporting is essential to protect against the misuse of assets. Therefore, your nonprofit will need to be transparent about how funds are spent and the implications of that spending.

How do you find a fiscal sponsor?

To get started, follow these steps to receive a fiscal sponsorship: 

  1. File for your organization’s 501(c)3 status, if you haven’t already.
  2. Search this directory to find a prospective fiscal sponsor.
  3. Once you’ve found a sponsor that aligns with your purpose, formalize the sponsorship with a written agreement.
  4. Create your fundraising strategy and invest in tools to collect online donations, communicate with your supporters, and organize special events.
  5. Start collecting donations through your fiscal sponsor.
  6. Don’t forget to thank your new donors! (Your fiscal sponsor should take care of sending donation receipts on your behalf.)
  7. Start testing out different fundraising ideas, and continue to update your donor communications and donor thank-you messages.

Once you’ve found a fiscal sponsor, discuss what an agreement between your nonprofit organization and theirs will look like and how long you should have the agreement in place. Then, get started earning funds!

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