What Is Fiscal Sponsorship? (A Nonprofit’s Beginner’s Guide)

Nonprofit leadership coming to a fiscal sponsorship agreement with a sponsor

One way nonprofit organizations secure funding is through fiscal sponsorships. Nonprofits engage in fiscal sponsorship by providing services to projects relating to the mission of the organization.

Services provided by the nonprofit, or fiscal sponsor, may include fiduciary services including governance, fund management, and other administrative support, but the most common role of a fiscal sponsor is to provide financial support.

Fiscal sponsorship can provide an alternative to forming a formal nonprofit for groups and cause leaders or may provide an option in early and transitional phases.

An agreement between a fiscal sponsor and a nonprofit is created to determine the roles and responsibilities of the sponsorship. Some agreements will outline services to include financial and legal guidance, audit compliance, insurance, and payroll management.

A fiscal sponsor often receives donations on the behalf of an existing nonprofit or an organization whose nonprofit or tax-exempt status is pending. Organizations, projects, social groups, and other parties may also benefit from entering fiscal sponsorship.

The sponsor that receives the donations then treats the revenue as restricted funds, set aside to further a charitable purpose. The sponsor does not freely pass the donations on to the organization, cause, or group whose behalf they were collected but designates how the funds will best be used.

The fiscal sponsor has the authority to designate the funds themselves or assign management of the funds to other staff members within the sponsor’s organization.

Who Benefits From Fiscal Sponsorships?

Fiscal sponsorships most benefit new nonprofit organizations that have not secured IRS recognition as a 501(c)3 tax-exempt organization. The 501(c)3 designation from the IRS requires that a business is legally incorporated, completes the necessary application and forms with the IRS.

Becoming a 501(c)3 organization also requires that the nonprofit pay local, state, and federal fees. Since the process can be expensive and lengthy, fiscal sponsorship provides the opportunity to raise funds in the meantime.

Organizations that are just starting out and have not been able to receive this recognition can still attract donors, raise funds, and network for future contributor relationships.

Other organizations, groups, or programs that benefit from fiscal sponsorships maybe those that are not in the process of obtaining a 501(c)3 or other tax-exempt organization but can achieve their mission without legally structuring a separate entity. These groups often enter into long-term relationships with fiscal sponsors.

Nonprofits that have formed a legal entity and received a formal tax-exempt designation may still benefit from using a fiscal sponsor. Outsourcing certain functions within the organization, like administrative duties, payroll management, fundraising, and accounting, can be a way for the organization to meet its goals in the most cost-effective manner.

Nonprofits that are run by volunteers, with no salaried employees, often find this arrangement beneficial.

Types of Fiscal Sponsorships

Fiscal sponsorship can represent different relationships depending on the agreement between the sponsor and recipient. There are two basic modules of fiscal sponsorship which include comprehensive fiscal sponsorship and pre-approved grant relationship fiscal sponsorship.

Comprehensive fiscal sponsorship

In a comprehensive fiscal sponsorship arrangement, the sponsor is in charge of all legal and financial aspects of a project or cause.

New nonprofits often choose this type of sponsorship to test drive a new project or program. The sponsor runs the program so that its success can be analyzed before creating a unique nonprofit dedicated to the cause.

Short-term projects are another example of reasons to use fiscal sponsorship. A group or organization wishing to achieve one goal, like raising funds for a community park, may use sponsorship as an alternative to forming an entity.

Pre-approved grant relationship fiscal sponsorship

In this second type of fiscal sponsorship, a project or organization applies for grant money from the sponsor.

The sponsor funds the grant with revenue collected from nonprofit activities. The nonprofit or group benefits from the receipt of the funds and the sponsor is able to collect tax-deductible contributions because the fiscal sponsor is a tax-exempt Section 501(c)3 charity.

The reach of the sponsor’s management into the project is determined in the agreement between the two parties.

GAAP Considerations For Fiscal Sponsorships

Funds collected, or raised, by fiscal sponsors are accounted for according to the Generally Accepted Accounting Principles (GAAP). The funds must be recorded as restricted funds on all financial documents. In order to stay in compliance with GAAP, parties entering fiscal sponsorships can use the following guidelines:

  • Consistency with the tax-exempt mission – The fiscal sponsor must ensure that the activities of any projects, organizations, and groups that are sponsored align with the tax-exempt mission of the sponsoring nonprofit and do not fall into the category of prohibited activities for tax-exempt organizations.
  • Communication with donors – The IRS mandates that the fiscal sponsor is obliged to exercise complete discretion and control over the donated funds in order to ensure the donations can be tax-deductible.
  • Maintain financial oversight – It is the responsibility of fiscal sponsors to review the financial activities of their projects and sponsored activities.
  • Document the agreement – A written fiscal sponsorship agreement lists the terms relating to the sponsorship and protects both parties. The agreement should designate responsibilities as well fund disbursement details.

Final Thoughts

Fiscal sponsorships can offer organizations financial flexibility whether they are just starting out or hoping to accomplish their mission without the hassle of forming a legal entity. If you are considering fiscal sponsorship, the National Council of Nonprofits offers many resources for nonprofits.

Exploring funding options for nonprofit organizations and accounting for charitable activities may also be more manageable with the help of an accounting expert, like those available at JFW Accounting Services. Contact us today to learn more!

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