Why does BCYF care about fiscal sponsorship?
BCYF is committed to supporting a wide array of community based programs and organizations serving Baltimore youth.
One persistent barrier to efforts led by Black people and people of color is having the an established 501(c)(3) organization that are able to receive funding. Often times, it is cost prohibitive, logistically challenging and time-consuming for local Baltimore programs to spend the resources to establish the organizational infrastructure to serve young people.
The reason for this is due to the historic lack of investment in the capacity of our own communities to be self sufficient. The nature of the system of racism/white supremacy is to stifle the ability for communities to provide for themselves and – in effect – keep marginalized communities dependent on mainstream institutions to survive. This context is important because we should not attribute the lack of capacity to Black pathology – but as a result of structural barriers designed to keep our communities from thriving.
Fiscal sponsorship is one tool that BCYF sees as an opportunity to increase the capacity of our communities and to serve Baltimore’s young people more effectively.
Fiscal Sponsorship in Baltimore
A discussion on the state of Baltimore’s fiscal sponsorship ecosystem and what we will need to strengthen the fiscal sponsorship landscape to better serve grassroots organizations.
Investing more money into community based organizations requires a strong fiscal sponsorship ecosystem. This ensures that resources flow to grassroots organizations who doing the work to make our communities better.
Fiscal sponsorship is often necessary for grassroots organizations in order to take advantage of funding opportunities.
Moderated by Dayvon Love – Brazen Consulting and Accounting
Danielle Torrain – OSI Baltimore
Changa Onyango – Fusion Partnerships
Candace Chance – The VPI Firm
An important discussion of advancing fiscal sponsorship models that build the capacity of grassroots organizations.
Strong fiscal sponsor relationships can be transformative when they enable grassroots organizations to carry out their projects with the least burdens and the most support possible. Fiscal sponsor relationships can take different forms.
We will discuss forms of fiscal sponsorship and work through this central question: What are some best practices and cautions to consider as grassroots organizations start, grow, and end fiscal sponsor relationships?
What is a fiscal sponsor?
Why choose fiscal sponsorship?
Fiscal sponsorship is often used by newly formed nonprofits that need to raise money during the start-up phase, before they are recognized as tax-exempt by the IRS. Using a fiscal sponsor enables a program or organization that does not itself qualify as tax-exempt to attract funding for its operations that will — through the fiscal sponsor – be tax-deductible to donors.
Therefore fiscal sponsor arrangements benefit organizations or programs that are not tax-exempt by providing a flow-through pathway for revenue that the organization may not otherwise be in a position to receive.
- Donors are not able to claim a tax deduction unless they itemize deductions and donate to an organization that is recognized by the IRS as tax-exempt pursuant to IRS Code Section 501(c)(3). See IRS Publication 557.
- Additionally, the guidelines of most private foundations explicitly require grantees to be recognized as tax-exempt by the IRS. Consequently, groups that are not formally recognized by the IRS as tax-exempt are generally not eligible for grants from private foundations.
- Fiscal sponsorship might be chosen by a newly formed nonprofit that seeks to test-drive its ideas to determine whether there is a market or a desire among the public to fund the end product.
- Some organizations/programs remain in a fiscal sponsorship relationship for a long time, deciding that their mission can be achieved in that structure without creating a new entity.
- Some organizations – including those that are tax-exempt – find that utilizing a fiscal sponsor to outsource administrative responsibilities, whether back-office tasks, or those relating to fundraising and disbursement of funds, is the right business model for them. This structure might be particularly well-suited for all-volunteer organizations.
How To Find A Fiscal Sponsor
The most important criteria when entering into an agreement with a fiscal sponsor is mission fit. The mission of your project must further the mission of the fiscal sponsor.
It is also important to remember that the fiscal sponsor must exercise control of the funds that it receives on behalf of the project and must ensure that the project is providing a charitable purpose that is in alignment with the fiscal sponsor’s tax exempt status.
As a project, you need to know the scope of your work so you can select a fiscal sponsor that offers the appropriate services for your project’s needs.
For example, if your project will have employees, you will likely require a Comprehensive fiscal sponsor, and if you are working in the arts, a Pre-Approved Grant Relationship fiscal sponsor may better suit the work of your project.
Questions You Should Ask a Fiscal Sponsor
This depends on the fiscal sponsor and on the extent of your current financial and contractual relationships. Each fiscal sponsor has a process for approving new projects, and can explain that to you. In addition, you will need to transfer (“assign,” in legal language) or terminate your existing contracts. Grant funds which have not been fully spent out will need the permission of the funder to be moved to the new sponsor.
To cover the costs of their services, most fiscal sponsors add an administrative allocation to your expenses. This is usually calculated as a percentage of either project revenues or expenses, and should be part of your written agreement with the sponsor.
These percentages vary depending on the types of services included, requirements of the project, the sponsor’s policies, and other factors, but in general the range is between 9% and 15%. It is common for fiscal sponsors to charge a higher percentage to administer government grants.
One of the main benefits of fiscal sponsorship is ease of entry and exit.
Some projects may choose to be sponsored for an interim period while they consider the pros and cons of independent incorporation; others may remain as sponsored projects indefinitely. (Note: studies have shown that the financial break-even point for independent status vs. fiscal sponsorship is an annual budget of approximately $2 million).
Experienced fiscal sponsors have well-tested processes for intake and spin-off and will assist projects with those transitions, but be sure to discuss this with your fiscal sponsor during the intake process
It is the responsibility of individual projects to raise funds, prepare annual budgets, and design and carry out their programs.
You determine how your money can be spent. Fiscal sponsors maintain internal control and compliance systems to assure that adequate funds are available and are allocated properly according to the approved budget.
In addition, there are a few constraints, which are pretty much the same constraints you are bound by even if you are not fiscally sponsored:
- Expenditures have to comply with the terms of grants and contracts you have received, as stipulated by the foundation or awarding agency.
- Expenditures have to comply with laws, regulations and accounting standards governing the use of nonprofit funds.
Fiscal sponsor policies vary regarding interest on advance funding. Some sponsors retain the interest to help cover their administrative costs; others reserve it for the use of the project.
All projects of a comprehensive fiscal sponsor are legally part of that sponsor’s mission-related activities. They therefore fall under the sponsor’s Chapter 501(c)(3) public charity status, and receive financial management services, payroll and benefits administration, employee relations assistance, liability and other insurance, inclusion in the annual audit and other technical assistance in the same way as other programs within a nonprofit organization.
In a Pre-Approved Grant Relationship, the sponsor is only responsible for charitable funds and the project maintains a separate legal entity for employment and liability purposes.
In addition to these basic services some sponsors provide a suite of additional services (consulting, executive coaching, IT services, meeting space, etc.) either at no cost or for an additional fee.
Possibly. The Internal Revenue Service has published guidelines for determining if an individual should be paid as a benefited employee or an independent contractor. Many states have their own rules which can often be even stricter.
This decision is a matter of law, not an individual choice. Companies found to have violated the law are subject to severe penalties. Responsible fiscal sponsors will have a clear policy about this and will communicate it during the project intake period.
any fiscally sponsored projects depend on volunteers and interns to support their work. If you are engaged in a relationship with a Comprehensive fiscal sponsor, the sponsor’s human resources staff should be well versed in volunteer stipend and reimbursement related regulations as well as the federal and state requirements for time tracking, criminal record checks, etc. If you are engaged in a Pre-Approved Grant Relationship, the responsibility for volunteer issues will remain with the sponsored project.
The Board of Directors of the sponsor has legal oversight and fiduciary responsibility for all sponsored projects. However, fiscal sponsor boards typically delegate strategic and programmatic decisions to projects’ Advisory Boards and senior staff.
In most comprehensive fiscal sponsorship arrangements, the sponsor is the owner of all assets, including intellectual property, for the duration of the relationship. Well-drafted fiscal sponsorship agreements address this important area and typically provide that while fiscally sponsored, the sponsor will hold the asset for the exclusive benefit of the project and if the project leaves to become an independent 501(c)(3) or operate under a new sponsor, the intellectual property, along with all other assets, will go with the project. In the Pre-Approved Grant model, intellectual property typically stays with the artist or organization that is engaged with the fiscal sponsor. In this case, the fiscal sponsor is responsible only for the administration of charitable funds, and not of materials that are developed by the project itself.
Not if you are entering into a relationship with a Comprehensive Fiscal Sponsor. Revenues and expenses for your project will be accounted for separately within the sponsor’s accounting system but you will not have a separate bank account.
You MAY have a separate bank account if you are engaged with a Pre-Approved Grant Relationship Fiscal Sponsor, but this is not universally the case. Revenues and expenses for your project will be accounted for separately within the sponsor’s accounting system but you will not have a separate bank account.
You MAY have a separate bank account if you are engaged with a Pre-Approved Grant Relationship Fiscal Sponsor, but this is not universally the case.
What are your responsibilities?
The fiscal sponsor relationship requires ongoing active participation from both parties.
Regular communication, attention to detail, and holding each other accountable are critical.
A project under sponsorship is responsible for understanding and conducting ethical business practices consistent with IRS regulations, all applicable laws, funder restrictions, and fiscal sponsor policies and procedures.
Projects typically carry out programmatic activities that contribute or relate to the mission of the fiscal sponsor. If a project’s mission changes, it is imperative that the new mission also have a charitable purpose that remains compatible with that of the sponsor.
Myths About Fiscal Sponsorship
Although many start-ups are nurtured and grow under a fiscal sponsor, transition to independent status is becoming the exception rather than the rule.
Results from the most thorough survey of fiscal sponsors to date indicate that fewer than half of the projects of large fiscal sponsors have sought to become independent 501(c)(3) nonprofits. The rate of retention is as high as 80-90% with some organizations. Project Directors frequently cite the rapidly shifting regulatory environment and the time administrative processes take from programmatic work as reasons to remain under the umbrella of a fiscal sponsor.
An appropriately structured fiscal sponsorship agreement or Memorandum of Understanding should address the possibility of a split on the front end to avoid complications down the road.
Established 501(c)(3) organizations increasingly partner with fiscal sponsors as they present an attractive option; offering a more efficient back office and a “safe haven” for merger-leery nonprofits, preserving their missions while providing high-level administrative support and the time and space to regroup.
Essentially, when a 501(c)(3) is fiscally sponsored, all operations are carried out and reported under the fiscal sponsor while the existing 501(c)(3) “hibernates.”
A fiscal sponsorship relationship is the converse of an agency arrangement, in which a principal is in control and directs an agent to carry out activities on its behalf.
In Comprehensive Fiscal Sponsorship, the sponsor and the project are both part of the same legal entity and the sponsor must exercise final authority by only signing off on contracts and other encumbrances that further the charity’s exempt purposes and comply with all applicable laws.
In a Pre-Approved Grant Relationship Fiscal Sponsorship, the fiscal sponsor exercises expenditure responsibility for all charitable funds.
Effective fiscal sponsors delegate certain operational authority to Project Directors, providing the project with the autonomy needed to pursue its purposes.
To comply with IRS dictates and assure accountability, the sponsor plays the role of steward, allowing a great deal of project autonomy while exercising final authority by only signing off on contracts and other encumbrances that further the charity’s exempt purposes and comply with all applicable laws.
A review of the differences between donor advised funds and fiscal sponsorship makes it apparent that these are very different tools with vastly different purposes.
A donor advised fund is a charitable giving vehicle administered by a public charity and created to manage charitable donations for a single organization, family, or individual to multiple projects or grantees.
By contrast, fiscal sponsorship allows a single charitable project to leverage donations, grants, and contributions from mulitple supporters.
Because of the total assumption of legal and financial liability, sponsors must exercise great care in screening potential new projects. Likewise, any group searching for a fiscal sponsor should perform their own due diligence to ensure they are partnering with a reputable, stable organization. This process should not be rushed and may take weeks or even months to finalize.