Breaking into Nonprofit: Considering Fiscal Sponsorship

The journey into the nonprofit sector can seem daunting, with a maze of paperwork, legalities, and a substantial commitment. I want to delve into an alternative path to starting a nonprofit that's often overlooked: fiscal sponsorship.

Many people looking to launch a nonprofit aren't aware of the viable alternative of fiscal sponsorship. This approach provides a lower barrier to entry, enabling you to test a charitable business model before fully committing to establishing a standalone nonprofit entity.

As a consultant, fiscal sponsorship is a sensible route for gaining insight into nonprofit leadership and establishing traction with a mission and impact. It's particularly fitting if your charitable initiative still needs to be completed or intended to be a full-time operation or if you're still weighing up the necessity of a standalone entity.

Fiscal sponsorship is a formal agreement in which an existing 501(c)(3) public charity, aka the fiscal sponsor, agrees to lend its legal and financial framework to a project that lacks exempt status. The crucial part of this arrangement is that the sponsor is responsible for ensuring the activities align with charitable initiatives. In effect, this relationship allows your project to share the sponsor's exempt status, and donors can make tax-deductible contributions directly to the sponsor on your project's behalf.

In my work with clients who are new or relatively inexperienced in the nonprofit industry, I recommend considering fiscal sponsorship. It provides the necessary back-office support and oversight while allowing them to focus on developing impactful programs and services, all within a supportive framework that ensures checks and balances.

Highly recognized fiscal sponsors such as TIDES, Players Philanthropy Fund, and Moore Impact are worth considering. They offer robust support and have proven track records, ensuring your project has the resources to flourish.

However, as beneficial as fiscal sponsorship might appear, it's essential to understand some potential drawbacks. Firstly, your project does not have legal autonomy under a fiscal sponsorship arrangement. The sponsor has legal control and discretion over your project's funds. You're also subject to the sponsor's governance, which may limit your freedom to manage the project as you'd like.

Secondly, there can be significant reliance on the fiscal sponsor. If the sponsor has or encounters financial or legal troubles, it can affect your project. The sponsor's reputation also becomes your project's reputation, which can be a double-edged sword.

Lastly, despite the lower barrier to entry, there are costs involved. Fiscal sponsors typically charge administrative fees to cover their expenses and costs for overseeing your project, ranging from 5% to 15% of the project's revenue. Of the fiscal sponsors I or my clients work with, we’ve seen percentages range between 6% to 8%.?

Selecting the right fiscal sponsor is a process that requires careful thought and investigation. Here are the steps you might consider:

1. Identify Potential Sponsors: Start by identifying potential sponsors that align with your project's mission and goals. Research their track record and reputation in the nonprofit sector.
2. Initial Contact: Reach out to prospective sponsors to gauge their interest in your project. This is also an excellent opportunity to get a feel for their communication style and responsiveness.
3. Review Sponsor's Policies and Procedures: Review your prospective sponsor's policies and procedures. Understand their fees, services provided, reporting requirements, and termination policies.
4. Reference Checks: Reach out to projects currently or previously sponsored by the organization. Ask about their experiences and any potential issues they may have encountered.
5. Legal Review: Before signing any agreement, it's crucial to have your legal team review the terms to ensure they're favorable and protect your interests.
6. Final Decision: Make your decision based on the information gathered, and commence your partnership with a comprehensive agreement that details each party's rights, roles, and responsibilities.

Remember, choosing a fiscal sponsor is a significant decision that requires time, research, and due diligence. It's a partnership that can determine the success of your initiative, so choose wisely.

Let's build change for good responsibly.

Kimberly O'Neil

CEO, Giving Blueprint

Founder, Cause Studio Nonprofit Startup Capacity-Building Training

This article is for informational purposes only and does not constitute legal or financial advice.