Every nonprofit starts with a spark. Sometimes it’s addressing an unfulfilled need or a new way to fill one that has been around for ages. Other times it comes from a group of people with a shared passion or vision. In many cases, the team will immediately file for tax-exempt organization status. But some visionaries get their nonprofits off the ground through fiscal sponsorships: contracts that allow them to begin raising funds quickly through a partnership with an established nonprofit. Once the emerging nonprofit has matured, the team can apply for tax-exempt status without missing a beat.
I’ll walk you through how fiscal sponsorships work and what it takes to move beyond that relationship to form an independent tax-exempt organization of your own.
How Fiscal Sponsorship Works
The startup nonprofit finds a tax-exempt sponsor whose mission aligns with theirs. They enter into a contract that allows the nonprofit to raise funds under the tax-exempt status of the sponsor. The sponsor provides administrative support in exchange for a percentage of donations (usually 10 to 20 percent). The parties have a lot of flexibility in how much support the sponsor will provide and how much the administrative charge will be. However, the agreement must meet two Internal Revenue Service (IRS) requirements:
Mission Fit: Mission fit is the most important criteria when entering into an agreement with a fiscal sponsor. The mission of the sponsored nonprofit must further the mission of the fiscal sponsor.
Control: The fiscal sponsor must exercise control of funds raised by the sponsored nonprofit. The sponsor must ensure that the nonprofit is providing a charitable purpose that aligns with the fiscal sponsor’s tax-exempt status.
Is Fiscal Sponsorship Right for You?
In the past, achieving tax-exempt status was a very time-intensive and arduous process. Nonprofits tended to remain under fiscal sponsorships for longer periods. More recently, with the advent of the fast-track 1023-EZ tax filing option from the IRS, more nonprofits are opting to incorporate and apply for tax-exempt status. Founding a tax-exempt organization makes sense for nonprofit teams that:
- Want to retain control over how funds are spent
- Want to be able to put all of their donations toward their mission and operations
- Are prepared to manage administrative tasks on their own
Choosing a Fiscal Sponsor
If you decide to pursue fiscal sponsorship, choose one that offers the appropriate services for your needs. For example, if your nonprofit will have employees, you will likely require a comprehensive fiscal sponsor, which provides a lot of administrative support. If you are working in the arts, a pre-approved grant relationship fiscal sponsor may better suit your project.
In our experience, fiscal sponsorships are most successful when they are founded on personalized relationships and collaborations. This is due to the cultural fit and the level of the mutual trust they require. Neon outlined pros and cons to fundraising under a fiscal sponsorship in a recent blog.
Declaring Your Independence: What Will You Need to Do?
Forming a nonprofit involves choosing a name, appointing initial directors, designating a registered agent to receive legal documents, and filing incorporation documents with the secretary of state. To become a 501(c)(3) tax-exempt organization, you will further need to register with the IRS. In the past, nonprofits waited months and sometimes even years to receive their 501(c)(3) determination letters. Today, with a little guidance and the right tools in hand, it can be a surprisingly fast process. At Harbor Compliance, we have a 100 percent success rate with our applications. Notably, many of our clients receive determination letters from the IRS in under two weeks.
In addition, you’ll need to investigate state charitable registration and reporting requirements and meet the requirements wherever you are asking for donations. In 41 states, nonprofits must register with the attorney general or secretary of state. 25 states require specific disclosure language in all fundraising materials. (Tip: If you’re soliciting funds via email lists or online platforms such as social media, crowdfunding sites, or a “donate” button on your website, you may need to meet applicable registration requirements throughout the U.S.).
There are additional considerations such as appointing a registered agent and potentially obtaining a certificate of authority to conduct business outside of your state of incorporation. You will also need to plan for annual reporting and renewals.
A Trusted Partner
A fiscal sponsor can provide a tremendous leg-up to nonprofits in the early stages of their lifecycles. Stepping away from a supportive relationship like that can be daunting, especially when federal tax laws and state regulations are involved. Many nonprofit leaders look at the requirements to get it all started and see either a black hole of staff time or a lot of dollar signs. Compliance shouldn’t require either.
In fact, most nonprofit leaders who come to us at this early stage are surprised to learn that they can turn over all of that paperwork to us and even register nationally without putting a dent in their fundraising budget.
Are you ready to step out and incorporate your nonprofit? Want guidance on where to register to fundraise and what it costs to get it all done? We’re happy to help. We’ll walk you through the process step by step and present your options in simple, bottom-line terms. Simply contact the compliance specialists at Harbor Compliance, or give us a call at 1-888-995-5895. We’ve helped thousands of visionaries build nonprofits on a firm foundation. It would be our pleasure to get you started.
Position Your Nonprofit for Success
Taking the administrative reins from a large, established nonprofit can be quite an adjustment for nonprofit teams. One of the most important things you can do to ensure a smooth transition is to give your staff the best tools available. A customer relationship management (CRM) platform built specifically for nonprofits can put your staff immediately in the driver’s seat. A great example of this is Neon’s CRM. It lets you build your own networks of donors and volunteers, manage events and fundraising, and handle administrative tasks with less time and effort. It lets you stay focused on the spark and the passion that started it all.
If you would like to talk to a Neon team member about tools for managing your growing nonprofit, call 1-888-860-6366. Our partners would be glad to help.