What is Fiscal Sponsorship? Agreements, Benefits, and Costs
All across the country, social enterprise teams are dreaming about how they can make a more significant difference in their communities. They have innovative ideas and plans to make them happen, but they quickly hit roadblocks.
Raising funds is tough, and the complexities of legal setup, employee management, and financial regulations can be overwhelming. That's when fiscal sponsorship can come in handy.
Fiscal sponsorship allows organizations to operate under the umbrella of an established nonprofit, giving them access to much-needed charitable funds without the hassle of setting up their nonprofit entity.
This means they can focus on what they do best: bringing their social change projects to life.
Fiscal sponsorship is something we do best here at Mission Edge, but for many leaders, it's a confusing topic to navigate. As we explore fiscal sponsorship further, we hope you'll see it as a potential tool to turn your organization's ideas into impactful realities.
Before we get too far into it, let's start with a few definitions so we are all on the same page.
What is Fiscal Sponsorship?
Fiscal sponsorship is a contractual relationship that allows a person or organization to raise funds to further charitable activities under the tax-exempt status of a sponsor organization that is exempt from federal income tax under Internal Revenue Code (IRC) Section 501(c)(3).
Think of your fiscal sponsor as a nonprofit umbrella that you get to operate under.
With our umbrella over you, you can focus on fundraising and serving your community while we handle the administrative workload and provide strategic support to help you scale and grow.
What is a fiscal sponsor responsible for?
Under this arrangement, your sponsor oversees the financial, personnel, and structural aspects of your organization, ensuring compliance with tax laws and regulations – which are tricky to manage internally, especially in the nonprofit sector.
This oversight also includes things like:
Managing donations.
Issuing tax receipts to your donors.
Overseeing the appropriate allocations and uses of funds.
Maintaining compliance with all IRS, GAAP, and audit regulations
Ensuring all employment law is followed
Sustaining a proper and active Board of Directors
Your fiscal sponsor takes on the fiscal and administrative responsibilities, so you don't have to worry about the red tape.
Fiscal sponsorship is more than a transaction.
An excellent fiscal sponsor is far more than a transactional relationship. They should also offer invaluable mentorship and guidance. With deep roots in the nonprofit sector, they can help you refine your strategy, connect you with key stakeholders, and provide insights into best practices for managing your organization. This strategic support is just as crucial as fiscal support – especially when you're looking to scale a project or navigate the challenges of the nonprofit world.
Operating under a fiscal sponsor can also be necessary for your organization and project's credibility because it signals to potential donors and the community that you're serious about your mission and have the backing of an established entity.
As we all know, trust is everything when it comes to garnering donations, so having this credibility can be a game-changer in your fundraising efforts.
Types of Fiscal Sponsorship
There are several types of fiscal sponsorship, but Mission Edge focuses on the two most commonly used models: Model A and Model C. Understanding the nuances between these two types of fiscal sponsorships is like choosing the right tool for a job; each serves a unique purpose and fits different organizational needs.
Model A is the more comprehensive solution to fiscal sponsorship. This is the turnkey option – you bring the vision and drive for your project, and your fiscal sponsor provides everything else. Model A is ideal for grassroots projects or smaller teams without the infrastructure to manage the nitty-gritty of nonprofit operations. With Model A, your focus can remain laser-sharp on fundraising and creating social impact. At the same time, your sponsor takes on the heavy lifting of accounting, human resources, and day-to-day operations.
Then there's Model C, a more financially oriented approach. Under Model C, your fiscal sponsor acts more like a financial steward, receiving donations and then re-granting them to your pre-approved organization to further a specific charitable purpose. This model suits larger, more established organizations with well-oiled operations and systems. In other words, these organizations can manage administrative tasks but need an efficient way to access and manage charitable funds.
The choice between Model A and Model C is a nuanced one that is more complicated than looking at the scale and maturity of your organization and the level of administrative support you need. Deciding which model is right for you is about first determining your organization’s goals and structure and then working backwards to discover which path best supports you in fulfilling your charitable mission.
Understanding these differences and aligning them with your project's needs is critical. It's not a one-size-fits-all scenario; it's about crafting a partnership that best supports your mission. Dive deeper into each model and discover which aligns with your vision and operational capacity in our guide to fiscal sponsorship models.
Why do organizations use Fiscal Sponsorships?
Simply put, using a fiscal sponsor is more cost effective.
Fiscal sponsorship reduces your risks, ensuring charitable funds are managed and distributed according to legal nonprofit requirements.
It elevates your mission by building credibility through a known nonprofit entity, increasing access to funds. Lastly – but most importantly – a fiscal sponsor reduces the administrative burden you might experience when compared to starting your own nonprofit organization. By creating a fiscally sponsored project, you immediately have a support system in place that is dedicated to your success.
Fiscal Sponsorship Benefits
The benefits of entering into a fiscal sponsorship agreement include:
Financial legitimacy and donor confidence: Your project gains instant credibility in the eyes of donors and grantmakers, as it's associated with an established nonprofit.
Administrative Support: From managing donations to handling payroll and bookkeeping, your sponsor takes care of the administrative tasks, giving you more freedom to focus on your project's core mission.
Risk management: The sponsor navigates legal complexities and ensures compliance with tax laws, significantly reducing your project's risk burden.
Capacity building: Many sponsors offer additional support like training, mentorship, and network access, which can be invaluable for growth and development.
| Aspect | Benefits |
|---|---|
| Legal and Tax Status | Access to legal and tax-exempt status without establishing a separate entity. |
| Financial Management | Financial tasks like accounting and bookkeeping are handled by the sponsor. |
| Administrative Support | Reduced administrative burden, allowing focus on mission-related activities. |
| Fundraising | Ability to receive tax-deductible donations and apply for grants. |
| Compliance | Sponsor ensures compliance with tax laws and regulations, reducing legal risks. |
| Credibility | Association with an established sponsor can enhance credibility with donors and grantmakers. |
| Resource Sharing | Access to the sponsor’s resources, networks, and expertise. |
| Cost | Potentially more cost-effective than setting up and maintaining an independent nonprofit. |
| Capacity Building | Opportunity for mentorship and professional development through the sponsor’s support. |
| Flexibility and Growth | Can serve as a stepping stone for a project to eventually establish its own nonprofit entity. |
| Mission Alignment | Sponsor’s experience and alignment with the project’s mission can enhance program effectiveness. |
How Much Do Fiscal Sponsorships Cost?
There is no such thing as a free sponsor. Most Fiscal Sponsorship costs are based on a percentage of revenue. The advantage of this model is that your costs are variable based on your needs and scale. This helps eliminate the need for significant, upfront capital and ensures your expenses do not grow beyond your income. With fiscal sponsorship, you can get started quickly, test your model, scale your impact, and grow over time while reducing upfront costs.
Fiscal Sponsorship Costs
How much of the funds raised a Fiscal Sponsor allocates to itself varies depending on the sponsor and the level of support provided. Here's a general breakdown:
Setup Fee: Some sponsors charge an initial amount to cover the cost of setting up the sponsorship arrangement.
Percentage of Revenue: Most commonly, sponsors take a percentage of the project's revenue, ranging from 5% to 15%, depending on the sponsor and the services provided. This is commonly referred to as an administrative allocation.
Additional Service Costs: There may be costs for other services, like grant writing support, legal consultations, or special event insurance.
It's essential to carefully consider these costs and weigh them against the potential benefits.
A suitable sponsorship relationship should feel like a partnership where the value far exceeds the expense.
People also ask
Q: What is a nonprofit umbrella organization?
A nonprofit umbrella organization (Fiscal Sponsor) is a type of nonprofit entity that extends its legal and tax-exempt status to cover smaller projects or initiatives that may not have their own nonprofit status. This arrangement allows these projects to operate under the nonprofit's "umbrella," providing them with the benefits of nonprofit status without the need to establish a separate legal entity. This setup is commonly used in fiscal sponsorships.
Q: What is the purpose of a fiscal sponsorship agreement?
The purpose of a fiscal sponsorship agreement is to formalize the relationship between the fiscal sponsor and the sponsored project. It outlines the responsibilities, rights, and expectations. Typically, it covers aspects like financial management, reporting requirements, compliance with laws, and the extent of administrative support. The agreement ensures that both the sponsor and the project adhere to legal and ethical standards, providing a framework for successful collaboration.
Q: How does fiscal sponsorship benefit the community?
Fiscal sponsorship benefits the community in several ways:
Encourages Social Initiatives: It enables individuals and groups to launch and operate social projects without the complexities of forming a separate nonprofit, encouraging more community-driven initiatives.
Efficient Use of Resources: By sharing resources and expertise, fiscal sponsorship makes operations more efficient and cost-effective, maximizing the impact of community projects.
Enhances Reach and Credibility: Sponsored projects can benefit from the sponsor's established network and reputation, enhancing their visibility and credibility in the community.
Supports Innovation: Fiscal sponsorship often supports innovative projects that might otherwise struggle to find funding or organizational support, leading to novel solutions to community challenges.
Mission Edge Fiscal Sponsorship
While many sponsors limit their services to administrative support, Mission Edge provides a strategic partnership.
At Mission Edge, we know which social venture models work, which don't, and how to fix them. Since your mission is our passion, we go beyond the transaction to provide strategic support to all of our fiscally sponsored projects to ensure that when you succeed, we all succeed.
