Do you have a great idea for a charity or other non-profit organization but you just aren’t ready (financially, mentally, etc.) to go the non-profit route yet? Chances are, you haven’t heard of a nifty alternative solution called Fiscal Sponsorship!
Ok, what is it?
It means that you can enter into an agreement with a non-profit that, upon meeting certain requirements, allows you to receive tax-deductible donations for your cause!
Fiscal sponsorship broadly refers to the contractual relationships that arise when a person or group (a “Project”) wants to get support for its charitable idea from private foundations or a government agency, or tax-deductible donations from individuals or corporate donors. However, donors usually only make donations to organizations with 501(c)(3) tax status. Thus, the Project looks for a tax exempt Sponsor (“Fiscal Sponsor”) to receive the funds and pass them on to the Project, which is not itself a public charity.
So what are my options?
Fiscal sponsorship may take two forms: a comprehensive fiscal sponsorship or a grantor/grantee sponsorship.
Comprehensive fiscal sponsorship refers to when a tax-exempt organization takes on the Project as the “Fiscal Sponsor.” In this situation, the Project does not become a separate legal entity because the Fiscal Sponsor, non-profit organization controls the program and assumes the Project’s assets and liabilities. Accordingly, persons working on the fiscally sponsored project serve as employees, volunteers, or other agents of the Fiscal Sponsor. Usually the non-profit organization agrees to the fiscal sponsorship relationship because your Project’s goals align with the organization’s charitable purpose. Typically, the organization charges an administrative fee for the burdens and costs associated with maintaining the Project that becomes part of the restricted fund dedicated to the project’s charitable purpose.
Under the Grantee-Grantor fiscal sponsorship relationship, you form a separate, non-exempt legal entity around the Project and then enter into a grantor/grantee relationship with a Fiscal Sponsor who accepts your proposal in exchange for an administrative fee (typically between 5-15%). After executing a written fiscal sponsorship agreement (or grant), the project becomes the non-profit’s sponsored project or fund, but here the sponsoring organization maintains less financial and legal responsibility than in the comprehensive model.
How does the Grantee-Grantor Sponsorship work?
Depending on the Fiscal Sponsor’s policies, either the Fiscal Sponsor or the Project identifies and solicits contributions from donors, ultimately accepted by the Fiscal Sponsor. Typically, the Fiscal Sponsor then grants these funds to the Project on the condition that the Project must report to them exactly how the grant funds were used. The Fiscal Sponsor then reports these contributions as grant payments on the Fiscal Sponsor’s Form 990. (Consult a qualified CPA for all tax considerations.)
The Caveat: Where Trouble may Arise Under the Grantor/Grantee Model
The IRS strictly forbids “conduit” arrangements, which refers to the situation when A donates to B (Sponsor), but designates B to give the money to C (Project). In reality B acts merely as a middle man for A’s donation to C, and if C does not qualify as a 501(c)(3) tax exempt organization, then A cannot deduct its gift as a contribution and therefore is unlikely to contribute in the first place. Therefore, the IRS requires that B, the Sponsor, have complete discretion and control over the funds, which means that B has the ultimate authority to redirect the funds to a different recipient for the same charitable purposes, or to hold the funds itself and spend them directly for the specified charitable purposes.
How do I avoid the IRS “conduit” label?
Beyond making sure the Sponsor maintains complete discretion and control over the funds, you can also make sure two agreements are in place before your Project receives contributions from your Fiscal Sponsor. First, ensure your written sponsorship agreement with your Fiscal Sponsor explicitly acknowledges the non-profit’s discretion and control over the funds raised. Second, urge the Fiscal Sponsor to enter into an agreement with all contributors, which also acknowledges the Sponsor’s discretion and control over the funds raised for specified charitable activities.
By doing so, the IRS will be more likely to respect the fiscal sponsorship relationship and treat a donor’s contribution to the Sponsor and a Sponsor’s transfer to the Project as two separate transactions.
A Project can save time and money through fiscal sponsorship because it eliminates the costs and burdens of creating and administering a non-profit organization. Fiscal sponsorship can also paint a more accurate picture of whether your Project will raise enough money to justify forming a tax-exempt organization in the future. In short, fiscal sponsorship lawfully implemented provides charitable projects a great alternative to non-profit status or at least a great starting point for forming a non-profit down the road. Check out this helpful directory to find fiscal sponsors in your field.
- Are You Ready to Start A Nonprofit?
- Are You A Private Foundation or Public Charity?
- Nonprofit FAQs – Getting to Tax Exemption
Disclaimer: Although this article may be considered advertising under applicable law and ethical rules, the information in this article is presented for informational purposes only. Nothing should be taken as legal advice. Reading this article does not form an attorney-client relationship with us. An attorney-client relationship is formed through a signed engagement agreement. If you would like further information, wilkmazz pc would love to help you out! Feel free to reach out with any questions.