More nonprofit startups are choosing fiscal sponsorship—here’s why

Launching your own nonprofit can be an extremely rewarding experience. However, like most great things in life, it comes with its own set of challenges—particularly when it comes to the IRS.  

Filing for tax-exemption is no easy feat, but through fiscal sponsorship, your organization can receive tax-deductible donations from supporters, even if you haven't yet received your 501(c)(3) status. 

We’ll cover: 

• What a fiscal sponsorship is
• How nonprofit fiscal sponsorship works
• 2 ways to secure a tax-exempt status
• Common requirements for signing a fiscal sponsorship agreement
• How to lay the groundwork for strong fiscal sponsorship

What is a fiscal sponsor?

Fiscal sponsorship is an alternative route that some organizations take to get the benefits of 501(c)(3) nonprofit status, including receiving tax-deductible donations, applying for and administering grants, and organizing fundraisers. 

Usually, fiscal sponsorship entails a larger, more established nonprofit assuming financial and legal oversight of a smaller organization—essentially taking them on as a project or program in exchange for a percentage of their income. 

Some organizations choose to stay with a fiscal sponsor only until they receive their tax-exempt status and can go out on their own. Others choose to to stay under the umbrella of their fiscal sponsor indefinitely.

How does nonprofit fiscal sponsorship work?

To understand how a fiscal sponsorship program works, you first need to understand the basics behind nonprofit tax laws. To be fully recognized as a public charity in the United States, your nonprofit organization needs to obtain 501(c)(3) status from the IRS. 

Doing so comes with a number of advantages for both you and your supporters, including: 

• 💸 Tax exemption: Public charities are exempt from paying federal income and unemployment taxes, state income tax, and even sales tax.
• 🏦 Tax-exempt financing: If you ever need to borrow funds for a capital project or other necessity, 501(c)(3) organizations can apply for a tax-exempt bond.
• 🎁 Tax-deductible donations: Charitable contributions can reduce the taxable income of your supporters—but only if you've received your 501(c)(3) status.
• ✨ And so much more: Charitable organizations and private foundations are eligible for reduced postal rates, can be taken on as a pro-bono client at marketing agencies and law firms, and may even get a discounted "nonprofit rate" for advertising fees.

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2 ways to secure a tax-exempt status

To officially gain 501(c)(3) status, you have two options: file with the IRS or get fiscally sponsored by an existing nonprofit.

1. File for your own nonprofit status 

Going the traditional route of applying for your own 501(c)(3) status may require more time and money. Here’s a basic overview of the process: 

• 💰 Upfront fees: The filing fee for Form 1023 is $600, while the fee for Form 1023-EZ is $275. Coupled with attorney fees, you should expect to accrue roughly $3,000 in start-up costs.
• 🗓️ Waiting periods: Being granted 501(c)(3) status isn't guaranteed. Expect to wait 2–12 months for the IRS to review submitted paperwork and either approve or deny the request.
• 🔁 Ongoing costs: To maintain your nonprofit status, expect to spend $2,500 annually and to keep bookkeepers, accountants, and even attorneys on retainer.
• 🛑 Closing costs: Closing up shop at your nonprofit? Expect to spend $5,000 in closing costs if your 501(c)(3) status gets revoked.

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2. Seek a nonprofit fiscal sponsorship arrangement 

A comprehensive fiscal sponsorship agreement comes with a number of perks for new nonprofits, which can include grant proposal writing, financial management, and cost savings. 

In fact, seeking a fiscal sponsor agreement through an existing nonprofit can guarantee several benefits in addition to receiving a tax-exempt status: 

• 📚 Expert bookkeeping and administrative support: Don't feel like wading through mounds of paperwork? Have confidence that the bookkeeping paperwork and taxes will be taken care of by the nonprofit sponsor.
• 🤓 Predictable administrative fees: Typically, the sponsoring organization will have a fixed fee structure, preventing you from paying ad hoc legal operating costs.
• 💛 Built in HR, benefits, and board: Fiscally sponsored organizations do not need to have their own board of directors or a legal requirement of 501(c)(3)s. Plus, many can also get their staff on the healthcare plan of their sponsoring organization in addition to other benefits.
• 🙅 No commitment: At any time, you can terminate your fiscal sponsorship agreement and file for a separate tax-exempt status. 

Fiscal sponsorship is a great avenue for small start-up projects, student-led organizations, and anyone looking to avoid a headache with the IRS while still getting the benefits of a nonprofit status. 

It's also a great way for organizations to manage their finances and gauge whether becoming an independent nonprofit will be practical and financially feasible in the future.

What does signing a fiscal sponsorship agreement typically involve?

These arrangements can take many forms, but to qualify from the outset, organizations or sponsored projects must fulfill these three IRS requirements: 

1. Be committed to the nonprofit sector 🌎: Your organization must remain fully committed to being not-for-profit and charitable in nature, meaning all expenses must go towards running your nonprofit.

2. Have no political affiliation 🙈: Your organization must remain nonpolitical—political nonprofits are a completely different category within the IRS.

3. Follow expense reporting requirements 📊: Your team must submit receipts for every purchase so that your fiscal sponsor can file taxes on behalf of your tax-exempt organization.

While some organizations will only seek a fiscal sponsorship for a short period of time, more and more organizations are opting for a longer-term, mutually beneficial partnership. 

Many groups now act as fiscal sponsors to a large number of smaller organizations at one time, enabling them to focus on their mission and programmatic work while taking the administrative and financial responsibilities off their shoulders. For some groups, this arrangement will work well for many years, while others will want more independence as they grow.

Lay the groundwork for a strong fiscal sponsorship 

Building a new organization comes with plenty of upfront hurdles, particularly surrounding filing for tax-exempt status. As an alternative, many charitable organizations choose to get fiscal sponsorship to gain instant tax-exempt status, avoid hidden fees, and get ongoing financial management for your organization. 

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‍Sign up for a free Givebutter account today and you can start raising funds in just few minutes. Soon enough, you will be well on your way to becoming a fully-funded nonprofit!