A match game: What to look for before becoming a fiscal sponsor

More and more these days, smaller nonprofit organizations, or groups of individuals who aren’t tax-exempt, are asking larger, more senior nonprofits to sponsor a project. What should you consider before agreeing to become a fiscal sponsor?

Understanding the concept

With a fiscal sponsorship, a 501(c)(3) organization — usually, a large, established charity — assumes control and responsibility for another group’s charitable project. Donations and grants are made directly to the fiscal sponsor, which enables donors to deduct their contributions. In the comprehensive sponsorship model, the charity takes care of the nonexempt group’s accounting, bill paying, auditing, insurance coverage and tax reporting, among other functions.

Sometimes fiscal sponsorships are confused with fiscal agencies. But fiscal agents act only as a legal representative of the smaller organization and don’t have discretion or control. A fiscal agent accepts donations on the project’s behalf, but donors don’t qualify for charitable deductions.

Aiding fledgling organizations

Sponsorship can provide a fledgling nonprofit with the infrastructure and fiscal management needed to pursue a project. Specifically, it makes it possible for donors and grant makers to fund the project as a program of the larger tax-exempt organization. It also helps the group to jump-start its efforts when applying for tax-exempt status. Pure and simple, an established charity can lend credibility to the project.

Such relationships are more common in certain nonprofit sectors. Arts and culture, for example, is the most popular type of sponsored project. Education, youth development, and services for children and families are also frequent sponsorship participants. Projects that are temporary or periodic, too small to have staff or much infrastructure, or are based outside the United States (and, thus, need a U.S. nonprofit to receive donations) also benefit from them.

Weighing the pros and cons

When you choose to become a fiscal sponsor for a project that shares your mission and basic objectives, it can enhance your own program offerings and exposure with little monetary outlay. For example, an established theater company might sponsor an edgy upstart company and attract that theater’s younger audience to some of its own productions.

Sponsorships aren’t intended to be a source of income. But you can charge a nominal fee, based on the project’s revenues or expenses, to offset overhead costs. Some charities also charge a small application fee.

But becoming a sponsor comes with some risks. To minimize the chance that a fiscal sponsorship will harm your organization’s finances and reputation, carefully screen any applicants. Ask for — and check — references and perform background checks on the group’s leaders. You also may want to consider purchasing directors and officers liability insurance.

When you decide to sponsor a project, thoroughly discuss expectations with your charitable partner and outline start and termination dates. Because nothing leads to conflict like money issues, include in your written fiscal sponsorship contract:

  • The sponsor’s fees and policies,
  • The restricted nature of the donations received,
  • The sponsor’s rights to determine the use of the funds, and
  • How disbursements and audit and reporting requirements will be handled.

Be aware that adding new activities can cause your organization to exceed state thresholds for an audit requirement.

Additionally, it’s critical to ensure that your nonprofit has the human resources to properly administer the project given its scope, location and funding. Such activities tend to evolve over time, and what starts small could quickly become overwhelming. Plan to regularly review a project’s progress and your relationship with the sponsored group.

Get advice

Becoming a fiscal sponsor is a decision you shouldn’t make hastily. Your CPA and attorney can help you decide if that arrangement would be a sound move for your organization.