Fiscal Sponsorship vs. Nonprofit Formation: A Comprehensive Guide
Suppose you're a business owner who happens to spend your time dreaming about how your business could help your corner of the universe improve just a little big. You know you want to make a difference in a very specific way (for example, helping clean up plastic on San Diego beaches).
But how? Should you form your own nonprofit or partner with an established one through fiscal sponsorship?
This crossroads is where many changemakers find themselves. Grappling with the decision of fiscal sponsorship vs. nonprofit formation can feel overwhelming, especially if you’re already juggling other business functions or job duties.
If that’s you, you've come to the right place.
This guide will help you make choices that resonate with your mission and will best serve your next social mission. We're here to chat through the ins and outs and the ups and downs, and help you navigate this decision!
What is Fiscal Sponsorship? A Basic Overview
Fiscal sponsorship is when a nonprofit sponsor invites a charitable project to operate under its tax-exempt status. This arrangement allows the charitable mission to focus on fundraising and community service, while the sponsor handles administrative responsibilities, from financial management to HR operations. Fiscal Sponsorship can be a helpful tool for charitable missions, because it offers a streamlined way to access charitable funds and operate efficiently.
There are two primary models of Fiscal Sponsorship – Model A and Model C. Model A offers a comprehensive solution, where the sponsor handles all administrative tasks, allowing the project to concentrate solely on its mission and fundraising. Model C, which is more financially oriented, is when the sponsor receives and re-grants funds to the project. Each model caters to different needs and scales of operations.
Fiscal Sponsorships are cost-effective, reducing the administrative burden and risks associated with running a nonprofit, while also enhancing credibility and access to funds. For a deeper understanding of Fiscal Sponsorship and how it can benefit social ventures, read our blog about fiscal sponsorship benefits and costs.
How to start a Nonprofit 501(c)(3): The Essentials
Starting a nonprofit as opposed to finding a fiscal sponsor can be a fulfilling way to make a difference in your community or support a cause you're passionate about, but the process involves several key steps to ensure legal compliance and set the foundation for success. (By the way – just because you’re “not doing it for the money” does not automatically mean you should start a nonprofit! Read: debunked myths about setting up fiscal sponsorship.)
If you’re sure you want to start a nonprofit, here are some condensed steps to help you start the journey:
Identify Your Mission: Clearly define the purpose, goals, and target audience of your nonprofit. This mission statement will guide all your future activities.
Research and Plan: Conduct thorough research to understand the need for your nonprofit in the community. Develop a business plan detailing your vision, strategies, and how you plan to achieve your goals.
Choose a Name: Select a unique and meaningful name that reflects your mission and complies with state naming regulations.
Incorporate Your Nonprofit: File articles of incorporation with your state’s corporate filing office. This step legally establishes your nonprofit.
Apply for Federal Tax-Exempt Status: Obtain an Employer Identification Number (EIN) and file IRS Form 1023 to apply for 501(c)(3) tax-exempt status. This is crucial for tax benefits and to receive donations.
Draft Bylaws and Form a Board: Create bylaws to outline how your organization will be governed and operated. Recruit a board of directors to oversee and guide the nonprofit.
Register for Fundraising: Depending on your location, register with state and local authorities to legally fundraise.
Set Up Financial Systems: Establish a bank account and accounting system tailored for nonprofits to manage finances effectively and transparently.
Build Your Team: Hire staff or recruit volunteers who share your vision and can contribute to your nonprofit’s growth.
Launch and Market: Officially launch your nonprofit and use various marketing tools to raise awareness, attract donors, and start your operations.
Your fiscal sponsor takes on the fiscal and administrative responsibilities, so you don't have to worry about the red tape.
Comparing Differences: Fiscal Sponsorship vs. Nonprofit Formation
When considering the best approach to take for your charitable mission, it's important to weigh the pros and cons of fiscal sponsorship versus nonprofit formation.
Here’s a table that breaks down key attributes of each:
| Attribute | Fiscal Sponsorship | Nonprofit Formation |
|---|---|---|
| Legal Status | Operates under the legal umbrella of an existing 501(c)(3) nonprofit. | Requires obtaining independent 501(c)(3) status. |
| Start-Up Time | Faster to start, as legal and operational infrastructure is already in place. 4-6 weeks | MUCH longer, involving incorporation, IRS filings, and setting up operations. 9-12 months |
| Control and Autonomy | Limited; the project is subject to the sponsor's rules and oversight. | Full control over operations and decision-making. |
| Risk | Limited; the Fiscal Sponsor takes on nearly all risks associated wth your work | High; As you maintain full control you also assume full responsibility and all risks associated with your work |
| Financial Management | Handled by the fiscal sponsor, reducing administrative burden. | Requires setting up and managing own accounting and financial systems. |
| Fundraising Abilities | Can receive tax-deductible donations immediately under the sponsor's status. | Can receive tax-deductible donations after IRS approval, which can take time. |
| Administrative Support | Provided by the fiscal sponsor, often including HR, compliance, and financial management. | Must be self-managed or outsourced, potentially increasing operational costs. |
| Costs | Typically involve a percentage fee of the funds raised or budget. | Initial setup costs and ongoing operational expenses are borne by the organization. |
| Long-term Viability | Dependent on the continued relationship with the fiscal sponsor. | Independent and permanent, as long as compliance with legal requirements is maintained. |
| Reporting Requirements | Fiscal sponsors handle most of the reporting requirements. | Required to file independent tax and regulatory filings, including IRS Form 990. |
| Brand and Identity | Operates under the shadow of the sponsor’s brand to some extent. | Has the freedom to develop and promote its own brand identity. |
Pros and Cons of Fiscal Sponsorship vs. Nonprofit Formation
When choosing between fiscal sponsorship and nonprofit formation, there are many benefits to weigh against the negatives. To sum it up: fiscal sponsorship offers a quick setup, lower administrative burdens, immediate tax-exempt status for fundraising, and organizational support. However, it also means less control, reliance on the sponsor, and fees.
| Factor | Fiscal Sponsorship | Nonprofit Formation |
|---|---|---|
| Control | Limited | Full |
| Setup Time | Quick | Longer |
| Administrative Load | Reduced | High |
| Fundraising Readiness | Immediate | After IRS Approval |
| Long-term Sustainability | Dependent on Sponsor | High |
Fiscal Agency vs. Sponsorship Jargon
You may have heard jargon like “fiscal agency” and “fiscal sponsorship” being used at informational sessions, networking happy hours, or as you do your own research.
But what do these terms mean, and what’s the difference? Here’s what you need to know.
Fiscal Agency:
A legal relationship where the agent (nonprofit) acts on behalf of the principal (project) in financial transactions.
The project retains control and independence.
Purely transactional in nature.
Limited scope of financial and administrative services.
Not what Mission Edge does and is actually totally against best practice in the eyes of the IRS and fiscal sponsors nationwide.
Fiscal Sponsorship:
A more comprehensive relationship where the sponsor (nonprofit) encompasses the project under its organizational structure.
The sponsor provides extensive support including financial management, compliance, and administrative services.
The project operates under the sponsor's tax-exempt status.
Ideal for long-term projects seeking a broader range of nonprofit benefits.
What Mission Edge does to operate compliantly according to IRS regulations for nonprofit organizations.
Fiscal Sponsorship vs. Nonprofit Formation Finances: Costs, Fees, and Taxes
When evaluating fiscal sponsorship versus nonprofit formation, understanding the financial implications is key. Fiscal sponsorship often involves costs, typically a percentage of the project's revenue, to cover the comprehensive support provided by the sponsor. This cost structure aligns with the project's scale, making it a flexible and cost-effective option for many initiatives.
In contrast, forming a nonprofit requires upfront investment in legal, filing, and setup costs, with ongoing expenses for operations and compliance. While this offers autonomy and long-term stability, it also demands a more significant commitment of resources and time and often increases your fixed costs month over month.
Risk Management: Sponsorship vs. Self-Run Nonprofits
Fiscal sponsors assume risks by taking on legal and financial responsibilities for their sponsored projects. This arrangement is beneficial as it provides a safety net, especially for new or smaller projects that might not have the resources to manage these risks independently.
The sponsor ensures compliance with tax laws, manages finances, and oversees operations, which can be a substantial undertaking.
The duties of a fiscal sponsor include maintaining the nonprofit’s legal status, overseeing the project's activities to ensure they align with the mission, and providing administrative support.
Finding the Right Fiscal Sponsor for Your Organization
Finding the right fiscal sponsor is crucial for the success and sustainability of your social mission project. First, you should start by thoroughly understanding your project's specific needs, objectives, and the unique value it offers. Then you should research what various fiscal sponsors can provide in terms of support, resources, and alignment with your project's vision.
Here are some key questions to consider when searching for the right fiscal sponsor:
Mission Alignment: Does the sponsor’s mission align with your project's goals?
Services Provided: What range of services does the sponsor offer?
Cost Structure: How are the sponsor's fees structured?
Success Record: What is the sponsor’s track record with similar projects?
Exit Strategy: Is there a clear process for transitioning away from the sponsor if needed?
Communication and Support: How does the sponsor communicate with and support their projects?
Mission Edge’s Fiscal Sponsorship is here for you
Here at Mission Edge, we offer fiscal sponsorship to help organizations make an impact in their communities – and we have years of experience and case studies to prove it. (Read one of our success stories here).
If you’re interested in:
Making an authentic difference in your community
Restructuring your nonprofit to simplify operations
Accessing mentorship from the nonprofit pros
. . . Our fiscal sponsorship program might be a great fit for you.
