What is Fiscal Sponsorship?: The Ultimate Guide
What is fiscal sponsorship? What is Model C fiscal sponsorship?
Fiscal Sponsorship is a legal arrangement between an established 501(c)(3) nonprofit organization (the sponsor) and a new charitable program or project (the sponsee) that allows the established project to incubate the new program/project. There are multiple models of fiscal sponsorship, but Fiscal Sponsorship Allies uses Model C fiscal sponsorship.
Model C fiscal sponsorship is often called a “pre-approved grantor/grantee relationship.” Essentially, this means the sponsor can accept tax deductible grants and donations on behalf of the sponsee, then disburses the funding to the sponsee as a sort of “grant” to accomplish the charitable programming. The sponsor also often provides administrative support to their sponsees. This could include providing donation acknowledgements to donors and assisting donors if they have trouble with an online giving tool, or it could be services like bookkeeping or paying bills.
Each fiscal sponsor is different, but typically, fiscal sponsors that provide a lot of administrative support will charge higher fees than those who provide basic services. Fiscal sponsors often charge between 5%-10% of donations to act as a fiscal sponsor (though our rate is 2.89%).
How does fiscal sponsorship work?
The fiscal sponsor accepts funding (whether through a grant, a donation from a company or a donation from an individual) on behalf of the new program or project. Then, the sponsor disburses the funding to the people running the new charitable program so they can provide the charitable services. The sponsor is responsible for making sure that the sponsee uses the funding for charitable purposes (as defined by the IRS). The sponsee is responsible for the fundraising and applying for grants.
In our fiscal sponsorship program, we accept donations on behalf of sponsees through an online donation page, ACH or bank transfers, checks and donor advised funds. Next, we disburse funds to each sponsee monthly. We require our sponsees to provide reports to us each quarter so we can ensure funds were spent on permissible charitable activity.
For example, let’s say charity program A entered into our fiscal sponsorship program and they were awarded a grant for $10,000 on March 15th. We disburse donations monthly, between the 10th and 20th of each month, so they would receive the $10,000 (minus the 2.89% donation processing fee) sometime between April 10th and April 20th.
What are the benefits of fiscal sponsorship?
For new charitable projects or programs, fiscal sponsorship provides a variety of benefits. First, fiscal sponsorship can allow your organization to have a kind of “trial period” where you won’t have to fulfill every filing requirement to keep up your own 501(c)(3) nonprofit status, but you still get the benefit of accepting tax deductible donations and grants.
Fiscal sponsorship is great for new charitable programs who want to get started fundraising fast. Whether you’re helping with a natural disaster or a humanitarian crisis like Action Beyond Words, being able to respond to the immediate needs of a community quickly is invaluable. With fiscal sponsorship, you won’t have to wait the weeks or even months the IRS takes to process applications for 501(c)(3) status or the time it takes to register to fundraise in your state—you’ll be able to start fundraising now.
Fiscal sponsorship is also great if you’ve already applied for 501(c)(3) status with the IRS but you haven’t heard back yet. It can help give your donors the reassurance that their donations will be tax deductible, and if your fiscal sponsor has been around for a few years, it can allow you to apply for grants that might require an organization to have 501(c)(3) status for a certain amount of time before applying.
What are the downsides?
One downside to fiscal sponsorship is that your organization can miss out on some of the benefits of having your own tax exempt status from the IRS, such as discounts from certain vendors or in-kind donations. Nonprofit discounts are often exclusively for organizations who have their own 501(c)(3) status. Fiscally sponsored organizations will also have to pay things like sales tax, which many states allow nonprofits to complete a form to avoid.
No matter who your fiscal sponsor is, there’s also a time lag between when the donor makes a gift and when your program actually receives it. Each fiscal sponsor is different in this area, but Fiscal Sponsorship Allies disburses donations monthly.
Is fiscal sponsorship right for me?
Each situation is unique, but there are a few scenarios where it’s common to benefit from fiscal sponsorship.
- If you’re starting a new charitable program or event that is short-term (like one-time disaster relief)
- If you’re waiting for a determination letter from the IRS, but you still need to accept tax deductible donations now
- If your 501(c)(3) organization that doesn’t have enough years of financial history to provide to a grant provider who requires it
- If you’re trialing out a new charitable program prior to applying for nonprofit status
- If you’d still like to provide donors with tax deductibility while your nonprofit is attempting to reinstate 501(c)(3) status
Keep in mind that each fiscal sponsor has requirements for the programs they fiscally sponsor. For example, some fiscal sponsors will only act as a sponsor to one type of charitable program, like an art school that provides fiscal sponsorship to budding arts programs.
How do I apply? What should I expect during the application process?
Fiscal sponsors differ during the application process, but it’s common for fiscal sponsors to require an application that can often resemble a grant application. They often ask for information like:
- The name of your charitable program
- The mission of your program
- Information about what services you’ll provide to carry out your mission
- An anticipated budget for the 1st year of your program
- Contact information for key staff or volunteers
- Information about if you’ll charge for your services or not
You can apply for our fiscal sponsorship program here. You’ll submit some basic information like the name of your charitable program and information about your mission and services. Our team will review your application within 3 business days and we’ll either approve, deny, or ask questions about your application. If your application is approved, the next step is to read and sign your fiscal sponsorship agreement, which includes full details about the program including information about the legal relationship of a model C fiscal sponsorship, the fee structure and reporting requirements.