Fiscal sponsorship, at its core, is when a nonprofit organization extends its tax-exempt status to select groups engaged in activities related to the organization’s mission. Most often, fiscal sponsorship is used by organizations, individuals, or collaborations who are doing charitable work but who want an alternative to becoming a 501(c)(3) organization with the IRS. In a fiscal sponsorship arrangement, the sponsor accepts tax deductible donations and grants on behalf of the sponsored project/organization. The sponsor accepts responsibility for the use of those funds and ensures their application toward charitable purposes, along with any additional donor restrictions. To ensure this is not merely a pass-through of charitable dollars from the 501(c)(3) to the project, the IRS requires that the sponsor have “complete discretion and control” over the funds.
Sponsorship can be an empowering tool that can help get projects off the ground that otherwise wouldn’t make it. But it does mean that the relationship needs to be carefully considered.
After ensuring you fully understand potential risks involved, ask yourself the following questions:
- Why are we doing this? Does it make sense to get other forms of support instead? Are we doing this for the right reasons?
- What is our relationship with the fiscal sponsor, and their organization’s funders or other involved parties?
- Do we have any conflicts of interest that need to be reviewed?
- How fiscally responsible is the potential fiscal sponsor?
- How transparent will they be with funds being held for our fiscally sponsored projects, both internal and external?
- Under what circumstances do we terminate a fiscal sponsorship relationship?
- Do we fully understand the requirements and implications of the sponsorship?
Making sure you have done due diligence in screening your fiscal agency is important and part of your responsibility as a leader of the organization you serve.
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