FISCAL SPONSORSHIP

ore than 1.5 million U.S. charitable nonprofits are described in section 501(c)(3) of the Internal Revenue Code. These organizations are incredibly diverse in mission, scope and impact and can range in size from local grassroots to large national organizations. Among the largest charitable organizations are a number of private and public foundations. While the term “foundation” has no firm legal definition, it is an organization created to fund other organizations or individuals for charitable purposes, often through grants.

No matter the size, all nonprofits are faced with risk management, complex regulation compliance and varied reporting requirements. Having the right systems

Mand expertise to manage these can be costly and often burdensome for smaller and local nonprofits. As a result, these organizations often face additional challenges investing in administrative capacity.

One potential solution to this problem is fiscal sponsorship. Fiscal sponsorship has been around for over 50 years but has recently been gaining more attention as an effective way for smaller nonprofit organizations to share administrative support, expertise and technology. Accordingly, fiscal sponsorship becomes a way to address the inequities and power imbalances inherent in the sector.

Fiscal sponsorship is not defined by law. Thus, Fiscal Sponsorship: 6 Ways to Do It Right, by Gregory Colvin, has become an informative guide, outlining six models of fiscal sponsorship often cited by nonprofit advisors.

One of these models supports a charitable project or startup nonprofit as the fiscal sponsor becomes the administrative home. In this model, the fiscal sponsor is a

501(c)(3) organization that allows a charitable project or startup organization to solicit tax-deductible donations without having to acquire its own 501(c)(3) status. Donations are given to the fiscal sponsor, so they are tax deductible for the donor. The fiscal sponsor generally accounts for the donations and expenses for the project or startup using fund accounting, as the fiscal responsibility lies with the fiscal sponsor.

One example of this is a startup that had a mission and vision but minimal resources to get started. The founder worked with a fiscal sponsor for the first 18 months. During that time, the founder was able to obtain independent 501(c)(3) status, build a donor base and develop an effective governance board. Five years later, the organization is flourishing and experiencing significant mission impact.

Lisa Dugdale, executive director of Center for Community Stewardship, a Madison-based fiscal sponsor, notes, “This is a good example. We find that almost all of our organizations stay for three to five years; some stay with us forever.”

In this model, the fiscal sponsor is generally performing the daily accounting as well as financial management and reporting, fiduciary oversight, development of resources, human resource management and other administrative services. In return for these services, the fiscal sponsor charges an administrative fee. Typically, this fee is a percentage of the total budget. The fee is a cost-effective way for smaller nonprofits, startup nonprofits or charitable projects to benefit from the tools, technology and expertise of the fiscal sponsor.

Some fiscal sponsors concentrate on a specific area of focus, such as social justice, health care advocacy, elder care, or arts and culture, as a way of expanding the benefits of sharing resources. This is important, as not all nonprofits serve the same audience or have the same risks to manage. Funding sources and applicable laws may also vary. Focusing on a specific nonprofit program niche provides more specific tools, technology and expertise specialized to the unique operations of the niche, allowing projects, startups and smaller nonprofits to improve mission impact. A relatively new organization is working to provide support and expand fiscal sponsorships specializing in a nonprofit niche.

During the pandemic, the arts and performance organizations struggled. This renewed the conversation about how to bring the arts and performance organizations to a broader audience and less densely populated areas. By sharing common administrative management and expertise, several smaller organizations have been able to remain in operation.

Another model is the grant relationship. In this model, the charitable project or startup applies to the sponsor for grant funding. This model is often used for arts organizations. Fractured Atlas is an example of this focus. They have been serving as a fiscal sponsor for the arts for over 20 years.

Another benefit of fiscal sponsorship is the sponsor keeping abreast of the ever-changing nonprofit legal and compliance landscape so individual projects or organizations can focus on mission, programming and fundraising. In complex situations where professional judgment may vary, the fiscal sponsor can provide a different perspective in analyzing the appropriate direction.