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Fiscal Sponsorship -- An Alternative to Launching a New Nonprofit

When social entrepreneurs consider ideas for making a difference in their community and world, often the first thought is to start a new nonprofit. But this may not always be the best option. Organizing a new nonprofit requires a substantial commitment of time, work and money long before any actual charity work is done. And, some projects, especially short-term ones, may not benefit from establishing an entirely new entity. One alternative option to consider is fiscal sponsorship.

Fiscal sponsorship is defined as the practice of existing nonprofit organizations providing their legal and tax-exempt status to groups that engage in activities related to the existing organization's mission. That is, an existing nonprofit basically hosts a separate group under their legal and IRS status umbrella so that they can get to work without the delay and effort of organizing a new nonprofit corporation. The agreement usually includes fees charged to the startup organization (the project) in exchange for the use of the sponsor's authority, space, and sometimes even administrative staff.

The most common types of projects that work under fiscal sponsorship agreements are short-term missions, such as adding a wing to the art museum or sprucing up the schools and parks in a particular area. A group of interested people, separate from the sponsoring organization's board and staff, step in to focus on that particular project, and use the reputation and resources of the sponsor to help along the way. Fiscal sponsorship saves the work involved in establishing a new organization and allows the project to get started right away. As an added bonus, most fiscal sponsorship agreements include provisions for the project to use some or all of the administrative resourced of the sponsor -- office space, equipment, and sometimes even staff.

Sometimes, new nonprofits looking to develop slowly secure fiscal sponsorship with an experienced organization with a similar mission. Under these partnerships, the new nonprofit founders have an opportunity to work closely with experienced nonprofit leaders in developing their organization. They can build their own reputation on the back of the experienced nonprofit, and master the critical competencies necessary for the organization to eventually stand on its own.

Over the last decade, a number of organizations whose sole purpose is to serve as fiscal sponsors have sprung up across the country. These nonprofit incubators typically focus on fairly broad areas -- the arts, environmental causes, human services -- and are in business purely to assist new nonprofit in getting on their feet. Eventually, the fiscal sponsorship is dissolved and the new nonprofit splits off. These can be excellent opportunities for would-be founders to see what they are in for -- volunteering for one of these incubators could provide excellent experience in how the whole process works.

There are some potential disadvantages to fiscal sponsorship to be aware of. First, sponsors must be selective in who they sponsor. The project should clearly fit within the sponsor's mission and the project should have all the features that would allow it to qualify for nonprofit status on its own. The IRS scrutinizes these relationships to ensure that no unqualified projects take advantage of the nonprofit status without merit. An additional potential problem is that actual control of the project falls to the sponsor -- they may be legally responsible for operations and activities of the project -- so they get the final say if the new organization and the old organization disagree.

Fiscal sponsorship is a viable, potentially advantageous option for many nonprofit ideas. Of course, the key is to do your homework and get to know a sponsor organization before you contract with them. Like any other business decision, doing your due diligence can be the difference between resounding success and crushing failure.

About the Author

LaunchX.com is dedicated to training entrepreneurs to turn their good ideas into great companies. The LaunchX System provides step-by-step education in the mindset and skill set entrepreneurs need to succeed. Our program includes intensive seminar training, key business software, and specialized workbooks that teach you the fundamental skills you need to achieve your financial and worklife goals through entrepreneurship. Register today for our introductory course and see what LaunchX can do for you!