An Alternative to Forming a Nonprofit 501(c)(3) Corporation
What is fiscal sponsorship?
Fiscal sponsorship is an alternative available to individuals or groups performing charitable services and wishing to give their donors the ability to take a charitable contribution deduction, but not wanting to spend a great amount of time and resources to comply with the extensive filing requirements, tax compliance, and other legal obligations associated with incorporation and tax exemption.
To gain a comprehensive view of fiscal sponsorship, you can read this recently published white paper by our colleague organization Third Sector New England.
Why would I want to avoid starting my own nonprofit corporation?
Nonprofit corporations recognized as tax-exempt under Section 501(c)(3) are subject to a wide array of filing and regulatory requirements under local, state and federal law, and must continue to operate tax-exempt programs to maintain exemption from tax. Countless examples exist of nonprofits that have neither the time nor the resources to comply with these various requirements. There are innumerable other examples of nonprofits that waited until after obtaining recognition of tax-exempt status to test their programs, found that the programs were not feasible, and never began to operate the charitable programs.
In either case, the consequences of noncompliance can be dire. Failure to comply with applicable laws may result in taxes and fees that can grow to thousands of dollars if left unpaid. Organizations that fail to operate charitable programs can lose their tax exemptions and become subject to income taxes. Directors and officers can be held personally liable if they do not take due care to cause their organizations to comply with the law. Individuals who form a new nonprofit corporation often find themselves spending a lot of time and energy on corporate and tax compliance instead of focusing on the important work of developing and starting up their charitable programs.
Can I put my great idea for a new charity into action without forming a new nonprofit corporation?
Yes! When you develop your idea for a new charitable program, you will likely want to get started on the programs right away. Unfortunately, many people believe that the required first step in implementing a new charitable idea is to incorporate and file for recognition of tax-exemption under Section 501(c)(3) of the Internal Revenue Code (the “Code”). On the contrary, when developing a new idea it is important to take the time up front to design the proposed programs thoroughly, determine what resources (such as money, and staff or volunteer time) will be required to carry out the programs, and determine what types of funding sources a new nonprofit could feasibly tap to conduct the programs. These steps should be undertaken before you form a new entity to operate your charitable programs.
Fiscal sponsorship is a good option for individuals or groups starting their charitable programs and wishing to test the feasibility of their ideas before forming a new corporation, or wishing to focus their attention on the delivery of program services rather than on corporate and tax compliance.
How does fiscal sponsorship work?
Fiscal sponsorship typically involves an arrangement under which an existing 501(c)(3) tax-exempt public charity assists an individual or organization with a charitable project by permitting the project to solicit tax-deductible contributions or grants through the fiscal sponsor that the project is not eligible to receive on its own. Through such an arrangement, funds intended for the project are deposited with the sponsor, which then disburses them to the project.
What are some advantages of fiscal sponsorship?
- Ability to receive tax-deductible donations. A donor that contributes to a project through a fiscal sponsor with 501(c)(3) status may normally deduct the contribution as a charitable contribution deduction. Those funds will then be directed to the project to assist the project with running its programs.
- Ability to get off the ground faster. Typically, a fiscal sponsor permits a new project to test its new ideas more quickly than it otherwise could by providing administrative and capacity-building support and permitting the project to begin charitable fundraising without the delays associated with incorporating and filing for tax-exemption.
- Wider base of support. If the organization that acts as a fiscal sponsor has a solid track record with foundations and other funders, this may benefit a “project” of that organization. Projects that don’t already have pre-existing relationships with funders may be in a better position to secure some grants or charitable donations if they have a fiscal sponsorship relationship with a reputable charity.
- Technical assistance and administrative support. Many sponsors may also provide projects with additional support such as insurance, payroll and accounting services, office space, publicity, capacity building or fundraising assistance. This support not only makes it possible for projects to focus more time and energy on their missions and less on administrative matters, but, due to economies of scale, may also be provided at lower cost to a project than the project might have to pay if it incorporated on its own.
- Potentially Lower Insurance Costs. Often, sponsors will be able to obtain lower insurance rates than would be available to a small start-up nonprofit corporation, and these savings can be passed along to the project.
How does Community Partners’ fiscal sponsorship program work?
Learn more about our Incubator Services or review our Frequently Asked Questions.
What if the organization is already incorporated? Is it too late to choose fiscal sponsorship or work with Community Partners?
Not necessarily. We have worked with a number of organizations that were already incorporated as 501(c)(3) nonprofit corporations. Contact us for a consultation on whether fiscal sponsorship through Community Partners would provide benefits and cost savings to your organization.
If we choose fiscal sponsorship with Community Partners now, would we have to incorporate as a nonprofit later on? What if we decide we want to incorporate?
We encourage projects to plan to stay at least a year under our sponsorship, but do not place a limit on the length of time a project can remain under our auspices. Some projects never terminate the fiscal sponsorship relationship. Others, after a few years of operating with Community Partners as their fiscal sponsor, are ready to form a separate charitable entity, obtain tax-exemption for that entity, and terminate the fiscal sponsorship relationship. Working with project leaders, we evaluate each project annually to ensure continuous progress toward project goals. We take project leaders through a deliberate and intentional separation process once they and their advisory board decide their project has reached a level of sustainability and is ready to incorporate as an independent nonprofit. Learn more about how we work with Incubator Services projects.
Are there alternatives besides fiscal sponsorship if I have a good idea but don’t want to start a whole new nonprofit corporation?
There are other alternatives to incorporation or fiscal sponsorship for individuals or groups wishing to implement a charitable idea. For example, an individual or group might start out by volunteering, providing resources to, or partnering with an existing charity that conducts similar programs and is willing to expand its programs to encompass the new idea. Volunteering with an existing charity can be beneficial because it may help the individual to gain the expertise required to run a particular program or to make connections to the local nonprofit funding community. Also, if an individual volunteers with and maintains a good relationship with an existing charity, he or she may in time be able to work with that charity to apply for funds to operate a new charitable program as an employee of that charity. Many groups exist that connect volunteers with existing charities.
Special thanks to the Community Development Project at Public Counsel, from whose materials portions of this page have been adapted.