Startup nonprofits, nonprofit newbies, umbrella organizations, community foundations, mentors… there are a lot of ways people may think about or refer to fiscal sponsorships, even if they’re unfamiliar with the term “fiscal sponsorship.” Fiscal sponsorship started in 1959, although it gained in prominence starting in 1993 when Greg Colvin published the first edition, Fiscal Sponsorship: Six Ways to Do It Right.
While it’s estimated to only represent 2% of the current nonprofit landscape, fiscal sponsorship is poised to completely reshape the nonprofit space and level the playing field for groups historically underrepresented because it removes several barriers to entry.
What is fiscal sponsorship?
Put simply, fiscal sponsorship is an alternative method to obtaining tax-exempt status. The traditional method for nonprofits to obtain tax-exempt status is by filing as a 501(c)(3). With fiscal sponsorship, individuals and organizations can bypass the complicated 501(c)(3) application process, saving time, money, and a lot of effort.
In fiscal sponsorship, organizations are “sponsored” by an existing nonprofit. This nonprofit becomes what’s known as a “fiscal sponsor” for the new organization, project, or program, lending their tax-exempt status in the process.
Fiscal sponsors generally take on the responsibility of oversight, managing and distributing funds, and other back-office tasks for the organization they sponsor. In exchange, the sponsored organization is able to operate as a nonprofit, primarily through receiving tax-deductible donations, allowing them to focus on mission-critical work.
There are seven different models of fiscal sponsorship to choose from, each with its own guidelines, rules, and regulations. At Ribbon, we help established nonprofits manage their fiscal sponsorships while also connecting charitable individuals to potential fiscal sponsors. Our platform helps nonprofits and individuals save time, money, and effort by providing banking, accounting, fundraising, and collaboration tools all centered around the fiscal sponsorship model.
Here are just some of the many benefits of fiscal sponsorship:
Fiscal sponsorship saves time
Ask any nonprofit and they’ll tell you the same thing: it takes a lot of time to start a new nonprofit! On average, new nonprofits can expect to spend around 6 – 12 months filling out complex forms, hiring outside experts, and waiting on IRS approval. During this waiting period, new organizations are unable to receive tax-deductible donations and have increased personal liabilities and responsibilities for the work they do. Many nonprofits simply aren’t able to work on their mission until they achieve 501(c)(3) status.
Fiscal sponsorship helps new organizations by cutting down on long wait times. When a new organization enters into a sponsorship agreement with its fiscal sponsor, they’re able to immediately start raising funds that are tax deductible for donors.
Using a platform like Ribbon allows you to cut this process down into days or weeks, not months. Once a fiscal sponsor is found, new organizations are immediately given the banking, accounting, collaboration, and fundraising tools they need all designed to work specifically with the fiscal sponsorship system.
Fiscal sponsorship saves money
New nonprofits spend a lot of money establishing themselves. On average, new nonprofits can expect to spend $2,000-$20,000 formalizing a nonprofit. Most of this expense goes to outside experts like lawyers, accountants, or nonprofit consultants needed to help new organizations navigate the 501(c)(3) application process. Additionally, new organizations are required to pay an application fee of $275-$600, to apply with the IRS.
For new organizations, this is a huge commitment. Before receiving a single tax-deductible donation, new organizations are already being asked to pay thousands of dollars in fees. For many organizations, these high startup costs alone prevent them from ever establishing their charitable organization.
Fiscal sponsorship helps reduce these initial startup costs. In a typical sponsorship agreement, new organizations rarely pay the costs upfront. Instead, they agree to pay monthly or annual administrative fees to their fiscal sponsor. The fiscal sponsor then provides help with administrative tasks like accounting, financial, and organizational management.
Ribbon, our fiscal sponsorship platform, helps new organizations reduce costs even further by providing software for banking, accounting, fundraising, and collaboration. Rather than outsourcing these tasks to paid consultants, Ribbon saves new organizations money by giving them the tools they need to handle administrative or back-office tasks effortlessly.
Fiscal sponsorship helps organizations get started sooner
Many charitable organizations get their start by helping with time-sensitive causes. For these types of organizations, the ability to raise funds as soon as possible is a critical part of their mission. Unlike other nonprofits, there might be start and stop points to their fundraising efforts. Because of this, these types of organizations can rarely wait 6 – 12 months before raising funds.
A great example of this type of time-sensitive fundraising comes in the aftermath of a natural disaster like a wildfire or hurricane. Local community members or charitable individuals will work together to raise funds for those affected. Many times these funds are raised by an individual, not a charitable organization. This leads to increased personal tax liability, complex legal arrangements, and lots of extra time and effort spent distributing and managing funds.
With fiscal sponsorship platforms like Ribbon, these local groups can establish fiscal sponsorships in days, not months. They’ll also be able to start receiving tax-deductible donations immediately, increasing the amount of good they can provide their community while decreasing personal tax liability. Additionally, unlike traditional 501(c)(3)s which have strict requirements for disbanding or dissolving their organization, fiscally sponsored projects can end the moment they’ve accomplished their mission.
Fiscal sponsorship helps organizations stay on mission
Many nonprofits worry about mission creep. It’s understandable why: the types of people that start and work at nonprofits want to help people however they can! This usually leads to nonprofits taking on more work than they can handle, distracting them from their primary cause.
Smart nonprofits use fiscal sponsorship to avoid mission creep. For example, say a nonprofit is dedicated to providing afterschool programs to middle school students. During their day-to-day work they realize many of their students lack food security and that’s impacting their afterschool performance. Wanting to do the most good, they might start a new program dedicated to providing free school lunches to middle school students.
These two missions might be pretty similar, but they likely require two different approaches to fundraising or programming. In the end, the free school lunch initiative could distract or take away resources from their primary mission: providing afterschool programs.
However, there’s a way to do both! Using a platform like Ribbon a nonprofit could choose to fiscally sponsor a local group already working to provide free school meals to middle school students. By working together with a group already dedicated to this mission and sponsoring them, they’re allowing the new group to quickly raise funds and tackle this new mission, without draining their own resources!
This type of coalition building makes it easier for both organizations to accomplish their mission. The sponsored organization is able to quickly start helping students in need, while the fiscal sponsor provides the necessary back office support already in place to streamline operations.
Wrapping it all up
Fiscal sponsorship comes in many different shapes and sizes. Some organizations stay as fiscally sponsored programs as they accomplish their mission. Other organizations use fiscal sponsorship a bit like they would training wheels: to get acclimated to nonprofit life before transitioning into full 501(c)(3) status.
Ultimately, fiscal sponsorship offers charitable individuals and organizations many benefits. Whether that’s saving time, money, and effort, helping groups and projects get started faster, or helping established nonprofits get more done in an efficient and effective way.
At Ribbon, our platform is built around the fiscal sponsorship model. We provide nonprofits with an all-in-one platform to manage or start new fiscal sponsorships. We also help individuals looking to start new charitable groups, projects, or programs, get started faster by partnering them with high-quality fiscal sponsors. With tools for banking, organizational management, fundraising, and more you’ll get everything you need to succeed, wrapped up with Ribbon!
We’re currently searching for organizations with fiscal sponsors looking to Beta test our software, if that interests you please get in touch with us!