BlogFundraising 2024 Guide to Nonprofit Fiscal Sponsorship: Models, Agreements & More! Fundraising 2024 Guide to Nonprofit Fiscal Sponsorship: Models, Agreements & More! Author: Marlena Moore February 6, 2024 Contents 🕑 8 min read In the nonprofit landscape, the rising tide lifts all ships. Looking for the best way to support fellow charitable causes and organizations? Then fiscal sponsorship might be for you! In this post, we’ll explore: What nonprofit fiscal sponsorship actually means for sponsors and projects The 3 most common fiscal sponsorship models The pros and cons of sponsorship How to become a fiscal sponsor Let’s get started! What Is Fiscal Sponsorship for Nonprofits? Fiscal sponsorship is a relationship between an established nonprofit and another organization or project that doesn’t have its own tax-exempt status just yet. In this arrangement, the fiscal sponsor provides administrative support that lets the sponsored project operate under its sponsor’s nonprofit status. Organizations that might seek fiscal sponsors include: Emerging arts or cultural festivals with a tight budget Small programs led by individuals Projects that are one-time, or expected to last for under 3 years Niche microcharities Fiscal sponsorship lets younger, smaller initiatives benefit from the infrastructure of an established nonprofit. Instead of getting sucked into the process of starting an organization from scratch, they can focus entirely on their mission and decide if going the full nonprofit route is right for them. Sponsors and their organizations often have similarly aligned missions, meaning the cause can only benefit! How Does Fiscal Sponsorship Work? Where corporate sponsorships provide financial support to nonprofits, fiscal sponsorships center knowledge and administrative resources. A nonprofit fiscal sponsorship provides sponsored projects with: The perks of tax exemption. Even though sponsored organizations aren’t tax-exempt, having a sponsorship means all donations will be tax-deductible for donors. Sponsorship also opens the opportunity for these organizations to receive grants! Administrative support. Financial management, legal compliance and other paperwork-heavy things can be overwhelming for small projects or young organizations. Sponsors help cover the technical stuff so projects can focus on their mission. Mentorship opportunities. Every nonprofit has a story about the hard lessons they had to learn. Being able to learn from colleagues gets projects started on the right foot! Financial oversight. Keeping the numbers clean is essential when it comes to fiscal sponsorship. Larger nonprofits take responsibility for making sure both organizations stay transparent and accountable. Visibility. When nonprofits pair with new projects, they’re basically making an introduction to their entire supporter base! This is an excellent way for new organizations to make their mark. Fiscal sponsorship can be temporary or ongoing, depending on the goals and structure of the sponsored project. Some projects may eventually seek their own tax-exempt status, while others may continue to operate under the fiscal sponsor. 3 Common Nonprofit Fiscal Sponsorship Models Different organizations have different needs, which is why there are several different fiscal sponsorship models! Here, we’ll go over the three most common models. As you read this section, we’ll refer to sponsored projects or organizations exclusively as “projects” to avoid confusion! Comprehensive Fiscal Sponsorship Comprehensive sponsorship essentially means that the nonprofit sponsor adopts the project as one of its own programs. This means that anyone involved in the project is considered a staff member. In this model, the sponsor receives all donations and grants for the project and reports them on their taxes. They’re responsible for all the project’s financial management, including government forms, fund disbursement and all reporting. As a result, the sponsor has control over all of the project’s funds. This is an excellent option for projects led by people who would prefer to pass off the financials and focus entirely on the mission. Independent Fiscal Sponsorship While independent fiscal sponsorship still gives sponsors fiduciary responsibility over the project, the sponsor’s staff does not run projects. This model frames projects more like independent contractors than child organizations. Independent sponsorship also increases projects’ access to certain grants! Pre-approved Grant Relationships Of all the fiscal sponsorship models, pre-approved grant relationships are the most hands-off for sponsors. The sponsor still has some financial oversight to ensure the project complies with IRS rules, but mostly it’s there to receive and disburse grant funds to the project. How to Become a Fiscal Sponsor in 7 Steps Interested in having your organization become a fiscal sponsor? Here are seven steps to simplify the process! Pick your fiscal sponsorship model Above, we reviewed three of the most common types of fiscal sponsorship models. If you’ve decided to try out fiscal sponsorship, it’s important to figure out what the logistics would look like for your organization! When you review this idea with your board of directors, put these questions on the table: How involved do you want your organization to be? Do you have the resources to take on a new program? How much are you comfortable being liable for? Do you want this sponsorship to be short- or long-term? Finally, oversight has to be run by members of your team. Doing a check-in about who wants to own this project early on will help everyone stay accountable! Set your administrative fees There is time, energy and some financial burden that goes into being a fiscal sponsor. Including administrative fees in your fiscal sponsorship agreement (more on that below!) helps you cover those costs. Administrative fees will look different depending on the level of support you’re providing, and can be structured in a few ways: Percentage of income Flat fee Tiered fee structure Fees for specific expenses (payment processing, legal services, etc.) Custom models, depending on the project Knowing your fees will help interested organizations figure out if your organization is a good fit as a fiscal sponsor. Formalize an application process Just like you’d set up a membership application form, put together an application process for interested projects or organizations! We recommend using a form so you can get all of the necessary information in one place. Include some data fields like: The name of the project The people involved A description of the goals and mission Rough timelines What they hope for in a sponsorship Why they reached out to your organization To build up your credibility and have interested sponsors find you, consider joining the Fiscal Sponsor Directory! Research the organizations you’d be sponsoring The information you receive in the applications is essentially a sponsorship letter. Just like sponsors would assess your organization before offering support, you’ll want to assess prospective projects closely. Your credibility (and finances!) will be tied to the projects you sponsor, so ask yourself: Do the people seem professional and good to work with? Does the mission sound solid and aligned with my nonprofit’s? How will my own nonprofit benefit from this partner? Am I excited to work on this project? Don’t be afraid to do some research on social media and LinkedIn, or check in with folks in your network. When it comes to fiscal sponsorship, it never hurts to have more information! Hold a board vote Once you have an idea of who you’d like to sponsor, bring the information to a board meeting. This is one more chance to iron out your logistics and make sure that absolutely everyone is on board. Plus, once the sponsorship is set, they can join you in giving the project leaders a big welcome! Create a fiscal sponsorship agreement Contracts, contracts, contracts! Once you’ve confirmed interest with the applicant, it’s time to hand over your fiscal sponsorship agreement for signing. We highly recommend having as much on paper as possible to prevent future legal disputes. A few things to have in your agreement include the: Introduction and background, identifying the sponsor and sponsored project Terms of the agreement Start date and duration Scope of services provided Financial arrangements (including the fee structure!) Budget and reporting information Compliance and legal obligations Intellectual property Amendment processes Termination clause Confidentiality and data protection agreements Insurance requirements Dispute resolution processes Representation and warranties Acknowledgement of entity Miscellaneous provisions Signatures We highly, highly recommend seeking legal support when you draft your fiscal sponsorship agreement! This will help you make sure it’s aligned with local laws and regulations, and adequately protect both parties. Keep communicating & stay compliant! Check ins are the way to go when it comes to your relationship with sponsored organizations. Circumstances and needs change sometimes, and hearing about those changes early can help you amend your agreement as necessary. Remember: it’s the fiscal sponsor’s responsibility to keep both parties legally compliant, or you can risk losing your own tax-exempt status. A nonprofit lawyer or legal counselor is good to have on hand for any questions and concerns that arise! Benefits & Risks of Fiscal Sponsorship for Nonprofits If you’re still uncertain about whether nonprofit fiscal sponsorship is right for your organization, we suggest weighing a few pros and cons. Benefits While it might seem like fiscal sponsorships are mostly for the sake of sponsees, there are several benefits for nonprofits. Becoming a fiscal sponsor can help your organization: Expand its network and build partnerships with the leaders of the future. Enhance the impact of its mission—and without directly managing it, if you go the independent route. Strengthen the health of the nonprofit sector as a whole by sharing resources. Attract your own financial sponsors with your community impact. Gather some extra revenue through administrative fees. Become leaders in your field and gain visibility. Ultimately, nonprofit fiscal sponsorship is its own charitable initiative. If you have the time and resources, this is an authentic way to make an impact! Risks Fiscal sponsorship has plenty of benefits, but it also comes with its own risks, including: Legal and financial liability for any challenges that arise. Damage to your reputation if any controversies arise from the sponsored project. The loss of your tax-exempt status if any 501c3 violations occur. Financial losses on the part of your organization if funds are mismanaged. Mission drift between the sponsor and sponsored project. While all of these risks exist and have real consequences, there are many things you can do to prevent them from arising. Clear legal agreements, strong communication, financial transparency and due diligence before accepting a sponsored project can mitigate most risks. Supporting Your Community as a Sponsor Nonprofit fiscal sponsorship is one of the most significant gifts you can give to emerging nonprofit organizations. Whether you’re supporting a one-time project or helping a young organization take its first steps, sponsorship extends your community impact for years to come. Curious about the tools that can help you manage sponsorships (and beyond!) more efficiently? Connect with us today to learn about how WildApricot’s award-winning membership management software can reduce administrative burden as you continue to grow! Related Fundraising Articles Fundraising 🕑 6 Min Read The Ultimate Guide to Legacy Gifts Marlena Moore Feb 12, 2024 Fundraising 🕑 8 Min Read The Moves Management Guide for Nonprofits: 6 Simple Steps + Top Tips Marlena Moore Jan 30, 2024 Fundraising 🕑 8 Min Read How to Plan a Fundraising Gala: 12 Planning Tips + 5 Elegant Ideas Marlena Moore Jan 25, 2024 The Membership Growth Report: Benchmarks & Insights for Growing Revenue and Constituents Get the report now!