In this blog, the NNSI team untangles a new tip for network instigators: Fiscal Sponsorship. This tip, like all the “Tips & Tools for Network Instigators,” is straight out of Michelle Shumate and Katherine R. Cooper’s book, Networks for Social Impact.
Fiscal sponsorship is a resource management technique for new networks that allow networks to operate as a program of another organization, delaying the need for them to have their own 501(c)3 status in the United States. Many networks start as fiscally sponsored projects of member organizations. Some eventually become their own nonprofit, but others remain a fiscal sponsee.
What is the purpose of Fiscal Sponsorship?
In the United States, networks have a few legal options when they want nonprofit status. They can either gain their own 501(c)3 status–a legal status that allows nonprofit organizations to be tax-exempt and donations to the organizations to be tax-deductible–or they can be fiscally sponsored by another organization that has that legal status. Often a member organization will fiscally sponsor the network during its incubation, allowing the network to receive tax-preferred status before it files its application.
Networks find fiscal sponsorship to be desirable for several reasons. First, the process of obtaining a 501(c)3 can take between nine months and one year. While waiting for approval, a network would be ineligible for certain grants, and donations to the network would be taxable. A fiscal sponsor offers an alternative route that allows operations to continue during approval processing. Secondly, a fiscal sponsor provides certain resources–such as a person to deal with the audit or sign the lease or get insurance–that can help an emerging network get its feet underneath them. By providing these hard to achieve resources upfront, fiscal sponsors offer unique value to new networks. Finally, some new networks are still working out what exactly they want to look like. Fiscal sponsors allow these networks to conduct a trial run before finalizing the documents.
What does Fiscal Sponsorship look like?
Adapted from National Council of Nonprofits “Fiscal Sponsorship: Who Does What?,” Infographic, accessed March 9, 2022, https://www.councilofnonprofits.org/sites/default/files/images/fiscal-sponsorship-infographic.png.
The most typical users of fiscal sponsors are new networks. These new networks operate under an existing established nonprofit organization that then receives donations and provides financial oversight to the emerging network. Typically, the fiscal sponsor gets 10-20% of the gross income from the new program. This is meant to cover overhead and other costs, but this money can also act as a way for fiscal sponsors to diversify their revenue streams. Acting as a fiscal sponsor to a network that has a mission and goals in line with the fiscal sponsor’s mission and goals can also offer fiscal sponsors the opportunity to extend their impact beyond their natural domain. Additionally, the fiscal sponsor can claim this extended impact as their own because they are funding it. For further information, The Council of Nonprofits (https://www.councilofnonprofits.org/tools-resources/fiscal-sponsorship-nonprofits) offers a great additional resource to understand the ins and outs of fiscal sponsorship.
What tips should I consider when entering a fiscal sponsorship?
- Find the right match. For many networks, the right match is an organization whose mission is aligned with the network. If that’s not possible, you might consider the tips from Candid (https://learning.candid.org/resources/blog/find-a-fiscal-sponsor-that-fits/). Consider your potential partners, determine if there is a good fit, and consider if the organization has the capacity for fiscal sponsorship.
- Develop a detailed fiscal sponsorship agreement. Linked below is an example of a sample fiscal sponsorship agreement. Note that the terms of the agreement are determined prior to the partnership. Additionally, note that in part 1 that the fiscal sponsor agrees to aid in “administrative, programmatic, financial, and legal responsibility for the purpose of funding organizations”. https://www.coloradotrust.org/wp-content/uploads/2021/10/Fiscal_Sponsorship_Agreement_Sample.pdf
- Develop systems to ensure regulatory compliance and fiscal oversight. The National Network for Fiscal Sponsors has some detailed suggestions https://static1.squarespace.com/static/5e5e9444031f011bf0e6a0f8/t/5ee917c54cad2a63a46c1cc6/1592334279022/NNFS+Guidelines+for+Comprehensive+Fiscal+Sponsorship.pdf. Ultimately, the fiscal sponsor assumes the legal and fiscal risk associated with the network, so good systems are necessary to mitigate those risks.
We have Fiscal Sponsorship! What are the next steps?
Fiscal sponsorship is typically a temporary commitment. Most emerging networks will apply for legal status once their feet are under them. Still, some networks will choose to maintain a long-term fiscal sponsor. It follows that the terms of the sponsorship should be agreed upon prior to the mutual agreement to the commitment.
Overall, fiscal sponsorships can add value to both networks (specifically emerging networks) and willing sponsors (specifically sponsors that have social goals and missions in line with the network partner). Fiscal sponsorship can be a helpful tool to have in the pocket of emerging nonprofit networks.