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On Using a Fiscal Sponsor

Ben Delaney

If you are considering starting a new nonprofit, you should be looking to put as many of your resources as possible into program delivery. One way to avoid many of the hassles of starting a new nonprofit is to use the services of a fiscal sponsor.

A fiscal sponsor is an established nonprofit organization that offers financial and administrative support to a project or organization that does not have its own 501(c)(3) status. Smaller nonprofit organizations that are not yet ready or do not have the capacity to operate independently are good candidates for fiscal sponsorship.

A fiscal sponsor can provide a variety of services, such as managing finances, handling legal and regulatory compliance, and providing human resources support. The use of a fiscal sponsor can have advantages and disadvantages for small- to medium-sized nonprofits, depending on their specific needs and circumstances.

Various fiscal sponsoring organizations have many different work styles, procedures, and focus areas. Some are large nonprofits with their own mission that offer fiscal sponsorships to help organizations get on their feet. Others make a business of fiscal sponsorships, and have few or no programs of their own. Either type of organization may offer benefits to a startup nonprofit. These pros and cons should be carefully evaluated before deciding on a fiscal sponsor.

Here are some of the advantages of fiscal sponsorship:

  1. Tax-exempt status: A fiscal sponsor provides tax-exempt status to the sponsored organization, which allows donors to make tax-deductible contributions. This can be helpful while waiting for IRS approval, which, due to current under-staffing, can take up to a year. It can be a major incentive for donors to give to the organization, as only donations to an IRS-approve 501(c)(3) organization are tax deductible. That deduction increases the value of donations and can help to attract more funding.

  2. Reduced administrative burden: Small- to medium-sized nonprofits may not have the staff or resources to manage all the administrative tasks associated with running a nonprofit organization. Using a fiscal sponsor can relieve the sponsored organization of these responsibilities, allowing it to focus on its mission and programs.

  3. Shared resources: A fiscal sponsor can provide access to shared resources, such as office space, equipment, and staff. This can be especially helpful for small nonprofits that are just starting out and may not have the ability to acquire these assets on their own.

  4. Fiscal sponsors may also offer access to resources that are not easily available to smaller nonprofits, such as professional expertise, HR services, insurance, fundraising networks, and grant opportunities. By partnering with a fiscal sponsor, smaller nonprofits can tap into their resources and potentially expand their impact.

  5. Increased credibility: Fiscal sponsorship can enhance the sponsored organization's credibility and legitimacy in the eyes of donors, funders, and other stakeholders. This can be particularly important for new or emerging organizations that lack a track record of success.

However, there are also some potential drawbacks to using a fiscal sponsor, which include:

  1. Loss of control: When a nonprofit uses a fiscal sponsor, it cedes a degree of control over its finances, legal matters, and operations to the sponsor. The fiscal sponsor may have policies and procedures that differ from those of the sponsored organization, and the sponsored organization may have limited input into these decisions. Because the fiscal sponsor is responsible for managing the sponsored organization's finances, the sponsored organization may have limited flexibility in how it uses its funds. This can limit the autonomy and independence of the sponsored organization, which may be a concern for some organizations

  2. Costs: Fiscal sponsorship comes at a cost, and these costs can vary widely depending on the sponsor and the services provided. Typically, a fiscal sponsor will charge fees of 5-10% of gross revenue, though significantly higher fees are not unusual. Small- to medium-sized nonprofits with limited budgets may struggle to afford these costs. As a nonprofit organization grows, it may find it more cost effective to take over the back office functions and assume full responsibility for its operations and budget.

  3. Perceived stigma: Some donors and funders may view fiscal sponsorship as a sign that the sponsored organization is not yet fully established or credible. This perception can be a barrier to attracting support and may limit the sponsored organization's ability to grow and achieve its goals. In addition, if the sponsor has a poor reputation or has faced legal or financial issues in the past, this could reflect poorly on the sponsored organization and may make it more difficult to attract donors and supporters.

For small- to medium-sized nonprofits, using a fiscal sponsor can be a viable option for achieving their goals and expanding their impact. However, it is important for nonprofits to carefully consider the pros and cons of fiscal sponsorship before entering into such an arrangement. Nonprofits should thoroughly research potential sponsors, talk to leaders of other sponsored organizations, review the sponsor’s policies and procedures, and carefully evaluate the costs and benefits of using a fiscal sponsor.

In addition, the agreement for fiscal sponsorship should describe the exit process, so that when the time is right, the sponsored organization can easily, and without rancor, end the association.

By doing some research, including talking to fellow nonprofit leaders in your community, nonprofits can make an informed decision about whether fiscal sponsorship is the right choice for their organization.

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