Thinking about starting a nonprofit organization? If you’ve started to delve into a little research on the process, you might have come across the term: Fiscal sponsor.
But what exactly is a fiscal sponsor? Do you need to consider finding one when starting a nonprofit?And what are the benefits or pitfalls of using a fiscal sponsor?
We’re going to cover all that in this blog. We’ll explore what a nonprofit fiscal sponsor is, the pros and cons of using one when starting a nonprofit, and how to find the right fiscal sponsor for your organization’s needs. Let’s do this!
What is a Nonprofit Fiscal Sponsor?
Before we delve into the advantages and disadvantages of having a fiscal sponsor for your nonprofit venture, let’s clarify what a nonprofit fiscal sponsor actually is.
A nonprofit fiscal sponsor is an established nonprofit organization that provides administrative support and financial oversight to a new or emerging nonprofit, also known as the sponsored organization.
The idea behind a fiscal sponsor is that, when starting a nonprofit, if you’re not ready (or you don’t have the resources) to file the nonprofit paperwork to get official tax exempt status for your organization, you can have your organization exist under the umbrella of an established nonprofit.
This nonprofit – your fiscal sponsor – should have a mission that aligns with yours (versus being completely unrelated to your mission). Then, when you’re ready to register your organization as its own entity, you can become independent and fly on your own.
Basically, a fiscal sponsor acts as both an umbrella organization and a mentor, helping the sponsored organization navigate the complex world of nonprofit operations, finances, and compliance (which can be overwhelming, for sure!).
Let’s explore some reasons you might consider having a fiscal sponsor when starting a nonprofit.
Pros of Using a Nonprofit Fiscal Sponsor When Starting a Nonprofit
There are several benefits to having a fiscal sponsor, including:
Not having to wait for Tax-Exempt Status: One of the most significant advantages of partnering with a fiscal sponsor is the ability to receive tax-exempt status right away. This means that donors can contribute to your cause and receive tax deductions, even before you obtain your own 501(c)(3) status.
Administrative Support: Fiscal sponsors often offer administrative support, helping you with tasks like payroll, bookkeeping, and grant management. This can be a tremendous relief for those who are new to the nonprofit world and may not have the resources or expertise to handle these responsibilities independently.
Credibility for the new kid on the block: Being associated with an established nonprofit can lend your organization instant credibility. Donors and grantors may be more inclined to support your cause if they see that you have the backing and guidance of a reputable fiscal sponsor.
Access to Grants: Many foundations and government agencies have stringent requirements for grant applicants. Some even require a track record of successful grant management (as in, the ability to manage what was spent of the grant funding, and evaluate the success of the funded programs through impacts tracking), which new nonprofits often lack. By teaming up with a fiscal sponsor, you can access grant opportunities that might otherwise be out of reach.
There can be some cost savings: Sharing resources with a fiscal sponsor can lead to significant cost savings. Instead of investing in your own office space, staff, and infrastructure from day one, you can utilize the sponsor’s resources, allowing you to allocate more funds directly to your mission.
Cons of Using a Nonprofit Fiscal Sponsor When Starting a Nonprofit
While there are undoubtedly benefits to having a fiscal sponsor, it’s important to consider the potential drawbacks as well.
Limited Autonomy: When you partner with a fiscal sponsor, you may have less control over your organization’s operations and decision-making. Some sponsors may impose restrictions on how you can use funds or run programs. This is because their reputation is now tied to yours, and as the umbrella organization, they have to protect their own brand and efficacy, too.
You’ll share a reputation: Speaking of reputation… Your organization’s reputation may become intertwined with that of your fiscal sponsor in the eyes of the public. So, if the sponsor faces negative publicity or legal issues, it could impact your nonprofit’s image and fundraising efforts. (This is one reason to choose your fiscal sponsor wisely!)
There could be costs: Fiscal sponsors often charge fees for their services. These fees can vary widely and may include both upfront costs and a percentage of your donations. This may be important to the sponsor organization because by serving as the umbrella to your start-up, they’ll also incur some of your costs. It’s really important to understand the financial arrangement before entering into a sponsorship agreement.
It’s a Temporary Solution: Fiscal sponsorship is typically seen as a temporary arrangement. While it can provide a valuable stepping stone, you’ll eventually need to establish your own independent nonprofit status if you want long-term control and sustainability. I recommend writing out a timeline and transition plan for when and how your startup nonprofit would eventually become independent.
How to find a Nonprofit Fiscal Sponsor
Let’s say you’ve thought it over, and you’ve decided: Yep! A nonprofit fiscal sponsor is the way to go! Here are some steps on how to actually find a fiscal sponsor that might be a good fit for your organization:
1. Identify Potential Fiscal Sponsors: Research established nonprofits that align with your mission and values. Look for organizations that have experience with fiscal sponsorship, especially. Not sure? It can’t hurt to email them and ask! (Here’s one helpful site to start your search!)
2. Reach Out and Connect: Contact the potential sponsors and express your interest in partnering with them. Schedule a coffee meeting and talk about how your goals align. And of course, whether they’re even open to fiscal sponsorship arrangements.
3. Assess Your Compatibility: During your discussions, assess whether the potential fiscal sponsor is a good fit for your organization. You might consider writing out your list of questions before you meet, so you can think through all of the must-haves in your potential partnership, like: Their track record, their values, what roles you would play, the roles their own staff would play, the level of support they can provide, or costs they’d expect you to cover.
4. Draft a Fiscal Sponsorship Agreement: If both parties are interested, draft a fiscal sponsorship agreement (there are templates online, and the sponsor organization may already have a document they’ve used before!). Review the fiscal sponsorship agreement carefully. Ensure that it outlines the roles, responsibilities, and financial arrangements clearly.
5. Legal and Financial Due Diligence: Conduct due diligence on the fiscal sponsor, including their financial health and legal standing. Check out their tax records online (which are publicly searchable). Consider a background check on their leadership, or getting references from trustworthy community leaders. You want to ensure that you’re entering into a partnership with a stable and reputable organization – and they may vet you the same way!
6. Negotiate Terms: If needed, negotiate the terms of the agreement to make sure they meet the needs of both parties. Be transparent about your expectations and ask questions about any aspects that are unclear. One of the biggest mistakes I’ve seen nonprofits make when partnering with another organization is skipping this step. Even if expectations are high, what is important is presenting them in writing and making sure everyone agrees before starting any new arrangement.
7. Formalize the Partnership: Once you’re satisfied with the fiscal sponsorship agreement, formalize the partnership through a written contract. Make sure it specifies the duration of the sponsorship and any circumstances that would cause either party to terminate the partnership early.
To Fiscal Sponsor or not Fiscal Sponsor
The decision to have a fiscal sponsor or go it alone is an important one. It can significantly impact your organization’s growth, financial stability, visibility, and operational efficiency.
Remember, there’s no one-size-fits-all answer to whether you need a fiscal sponsor when starting a nonprofit. Every nonprofit, mission, and community is different. Take your time to weigh the pros and cons, explore potential sponsors, and make an informed decision you’ll feel happy and excited about!
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