Fiscal sponsorship: running your project under another charity

This guide is for people with a charitable idea who aren't sure they need to form a whole new charity yet: a neighborhood cleanup that keeps growing, an arts project that needs grants, a group of parents raising money for a reading program. A fiscal sponsor is an established 501(c)(3) public charity that agrees to take your project under its wing. After reading, you'll know who fiscal sponsorship suits, how the two common models differ, what to look for in the agreement, and how to leave when you're ready.

If you're still deciding whether to start anything, read Should I start a charity? first. To compare fiscal sponsorship side by side with forming a nonprofit and other options, try the structure chooser.

How it works

Donors and foundations give to the sponsor, which is already recognized by the IRS as a charity. The sponsor uses that money for your project's charitable work. Because the gift goes to a qualified charity, donors can generally deduct it, and foundations that only fund 501(c)(3) organizations can fund you.

The key idea, in the words of attorney Gregory Colvin, whose book defined the field: "the charity must be in the controlling position, and the nonexempt project must act so as to further the charity's exempt purposes." Your project has to fit the sponsor's mission, and the sponsor keeps final say over the money. That's why you'll hear "fiscal sponsor," not "fiscal agent." A sponsor isn't just a pass-through for your bank deposits.

Who it suits

Fiscal sponsorship often makes sense when:

• you want to test an idea for a year or two before forming a charity
• your project is short-term or tied to one event or effort
• you'd rather spend your time on the work than on payroll, insurance, audits and IRS filings
• you need to accept tax-deductible gifts or grants now and can't wait for your own exemption
• you're an artist or a small group that wants to stay independent but needs a way to receive grants

It may not fit if you want full control of every decision, if your work doesn't match any sponsor's mission, or if you plan to grow large quickly and want your own board from day one.

The two common models

The field recognizes several models. Colvin's book describes six, labeled with letters. The National Network of Fiscal Sponsors (NNFS) says two are used most often in practice.

Model A: comprehensive sponsorship

Your project becomes a program of the sponsor. NNFS describes it as "a fully integrated part of the fiscal sponsor that maintains all legal and fiduciary responsibility for the sponsored project, including its employees and activities." People who work on the project are usually the sponsor's employees. The sponsor handles accounting, payroll, insurance and its annual audit, and your project's money is tracked separately inside the sponsor's books rather than in your own bank account.

NNFS says this model is especially useful for projects that have employees.

Model C: pre-approved grant relationship

Your project stays a separate person or organization. The sponsor approves your project as a grantee, receives donations and grants for it, and then passes the money on to you as grants. NNFS notes that in this model you remain "responsible for managing [your] own tax reporting and liability issues." You may keep your own bank account, and any work you create usually stays yours.

Colvin traces this model to a 1966 IRS revenue ruling. It's common in the arts and for young organizations waiting on their own 501(c)(3) status.

What it costs

NNFS says most sponsors charge an administrative fee as a percentage of the project's revenue or expenses, and that "in general the range is between 9% and 15%." It adds that sponsors commonly charge more to manage government grants. Some offer extra services, like coaching or meeting space, free or for an added fee. Get the fee in writing in your agreement.

What the agreement should cover

A written agreement is essential. Before you sign, make sure it answers these questions, many of which come from NNFS's list of questions projects should ask:

• Which model is this, and what services are included?
• The fee: the percentage, what it's charged on, and any extra charges.
• Control and budgets: who approves spending, and how quickly you'll be paid or reimbursed.
• Reports: how often you'll get financial statements. NNFS says it's your job to read them and catch errors.
• Fundraising: who can ask whom, and whose name goes on grant applications and thank-you letters.
• Interest on money held for you: some sponsors keep it and some pass it on.
• People: how staff, contractors and volunteers are handled.
• Ownership: who owns equipment, materials and intellectual property while you're sponsored.
• Leaving: how either side can end the relationship, and what happens to the remaining money and assets if you spin off or move to another sponsor.

How to find a sponsor

NNFS says the most important test is mission fit: your project must further the sponsor's own mission. Start with local community foundations and charities already doing related work, then look further. Our resource directory lists fiscal sponsor directories that you can search by state and type of work.

Talk to two or three sponsors. Ask other projects they sponsor how fast payments arrive and how easy the staff are to reach.

How the IRS sees donations through a sponsor

The donor's gift is to the sponsor, so the sponsor sends the thank-you letter and receipt, under its own name. See thanking donors the way the IRS requires for what those must contain.

Because the sponsor must keep control, gifts can't simply be passed to whoever the donor picks. IRS Publication 526 says donors can't deduct gifts to specific individuals, even when made through a qualified charity "for the benefit of a specific person." A fiscally sponsored project should raise money for its charitable program, never for a named person.

Donors and foundations will check the sponsor's status, not yours. Make sure your sponsor files its own annual IRS returns on time.

Moving on to your own 501(c)(3)

Many projects leave once they're big and steady enough to run their own organization. NNFS says sponsors expect this and have processes for it. Tell your sponsor early, and:

1. Form your nonprofit in your state and apply to the IRS for 501(c)(3) recognition. The IRS user fee is $600 for Form 1023 or $275 for the shorter Form 1023-EZ, paid through Pay.gov.
2. Plan the transfer. Agree with your sponsor how and when remaining funds and assets move to your new charity.
3. Ask your funders. Unspent grant money will likely need the funder's permission to move. NNFS says the same applies when a project moves to a new sponsor.
4. Move contracts, insurance and staff to the new organization, with a clear end date.
5. Tell donors where to give from now on.

Our founder pathway walks through forming your own charity step by step.

Fiscal sponsorship checklist

• Our project fits the sponsor's mission
• We know whether this is Model A, Model C or another model
• The fee and what it covers are written in the agreement
• We know how fast we'll be paid or reimbursed
• The agreement says what happens to our money and assets if we leave
• Donors know to give to the sponsor, never to a named individual
• We've talked to at least one other project the sponsor supports