Starting with a Fiscal Sponsorship
Fiscal sponsorship is a formal arrangement whereby a 501(c)(3) tax exempt organization financially supports another organization, Individual or a project that may not have a tax exempt status.
The organization that agrees to provide fiscal sponsorship is called the ‘sponsor’ or the ‘fiscal agent’
From the point of view of many organizations, sponsoring is a good idea as many tax exempt organizations have viable projects in hand, but don’t have support staff to execute these projects independently. Thus this serves as a kind of delegation or outsourcing to other individuals or organizations that are willing to take them up.
From the point of the individuals/projects (the grantee), this is a very popular alternative to starting a nonprofit which allows them to enjoy all the benefits of tax exemption without having to bother about complying or reporting to the IRS.
The sponsor generally charges a fees ranging from 1% to 10% of the amount of sponsorship depending on the extent of services offered – which could range from simply granting of funds to also managing and administering the paperwork or even providing in house resources, support and guidance.
A fiscal sponsorship is a good alternative to starting a non profit organization if –
1) The members do not propose to enter into this sector on a full time basis.
2) The founders want to test waters before committing full time involvement.
3) The proposed objectives of the organization are likely to be met in a year or two.
4) The founders do not want to or are not equipped to meet all statutory obligations that need to be complied by a typical nonprofit organization.
5) An organization has applied for tax exempt recognition, but is yet to recieve its recogintion from IRS.
Finding a Fiscal sponsor
The first step is to locate all possible fiscal sponsors with similar mission and objectives as the IRS requires that a sponsored Project to be consistent with the mission of the sponsorer. This can be done by searching through several fiscal sponsorship directories. The IRS directory of Tax Exempt Organizations (Publication 78) should be the first place to begin the search. You can also obtain this data by calling the IRS office at 800-829-3676. www.guidestar.org is another exhaustive directory where you can search for fiscal sponsors from across the United States.
This is to be followed by drafting a project report to present the project as deserving case. (see ‘project report section’ for details on this).
The project report is to be circulated amongst all probable sponsors by personally meeting and explaining the case to the representatives of these organization inquiring about the possibility of sponsorship.
The proposal for establishing a fiscal sponsorship relationship needs to be approved by the board of the sponsoring organization.The inprinciple approval by the board is to be followed by working out the finer details of the proposal.
Details to be worked out would include –
1.Consitency factor -This involves formally establishing the consistency of purpose between the sponsoring organization and the sponsored projects to safeguard and justify the relationship with the IRS.
2.Scope of Sponsorship
3. The tenure of the relationship – Will include beginning and the end date and the possibility of renewal of relationship. In the beginning it is a good idea to keep the duration short – (say 6 months) as it provides felxibility to both the parties to reconsider their involvement.
4. The method of evaluation – This is perhaps one of the most important aspects to be finalized when starting a fiscal sponsorship relation. The evaluation process should be quantifiable to the extent possible to ensure objectivity.
5. Accounting – This involves deciding issues like the account where the funds would be disbursed, the books to be mainatined and the vouching method to be applied by the sponsored project.
6. Disbursement procedure – Includes finalizing issues like who is authorized to request disburesement, the procedure to be followed at the sponsor’s end at the time of disbursemnt, the mode of disbursement -(whether one-time or several part disburesements) and the documents to be submitted before every disbursement.
7. IRS reporting – This involves fixing of responsibilities towards preparation of reporting documents and the responsibilities of furnishing timely data for preparation of the reporting documents. Penalties for delays in compliance should also be clarified in the very beginning.
8. Audit – An audit might be a good option when the amount of fiscal sponsorship is considerable. The agreement between both the parties should clearly specify the scope, the tenure and the processes allowed when an audit is conducted by the sponsoring organization.
9. Fee payment – The fiscal sponsorship agreement must clearly specify the fee structure payabble by the sponsored project. This section should also clarify the deadlines by which fee must be paid by the sponsored project.
A sample Fiscal sponsorship agreement is available for download on this website.