Should your established nonprofit sponsor a smaller project?
During the initial COVID-19 outbreak, a small community group decided to organize grocery deliveries to low-income seniors. Time was of the essence and participants in the fledgling project didn’t have time to file for 501(c)(3) status or build fiscal infrastructure. Fortunately, an established nonprofit agreed to act as a fiscal sponsor — providing a legal and financial umbrella to the project.
Should your not-for-profit consider offering fiscal sponsorship to charitable groups such as this one?
It could help extend your charitable mission and boost your profile. Both parties win in a fiscal sponsorship, a 501(c)(3) sponsor is legally responsible for the charitable project it partners with. It acts as employer to the project’s paid workers and manages all of its funds. Donations and grants are made directly to the fiscal sponsor, thus qualifying donors for a charitable deduction. Such relationships can provide much-needed infrastructure and fiscal management to a small charitable project. By making it possible to receive donations, sponsorships can make more funds available. Plus, associating with an established charity can enhance the project’s credibility. These arrangements benefit sponsors, too. A sponsorship can provide greater exposure for your organization, possibly resulting in new donors for established programs. When you choose a project that shares your mission and basic objectives, it can enhance your own program offerings with minimal monetary outlay. Although sponsorships aren’t intended to provide income for sponsors, nonprofits often charge a nominal fee to offset their overhead costs.
Projects that can best benefit from a fiscal sponsorship generally include those that are temporary, too small to have staff or much infrastructure, or waiting to secure 501(c)(3) status but need to get up and running quickly. Another class of projects are those outside the United States that want to attract U.S. donations. When you find a good candidate, make sure you thoroughly discuss each partner’s expectations and roles. Mutually agree on start and termination dates and decide which group will make decisions about what. Because nothing causes conflict like money issues, be sure to decide on the sponsorship charge (up to 10% is typical), how disbursements will be handled and who will facilitate audits and required reporting. Both parties must understand the key responsibilities in the relationship. Ultimately, the fiscal sponsor is responsible because its organization and the small project are legally one entity.
Legal and financial risks
It’s easy to see why small charitable projects seek fiscal sponsorships, but potential sponsors also have good reason to enter into one. Just be sure to properly vet any prospective partner and work with attorneys and financial advisors to craft an agreement that will help you minimize legal and financial risks.