“So you’re telling me funders won’t give grant money to brand new nonprofits?”
This question (or some form of it) gets asked in almost every class I teach here at Foundation Center. As participants hear about all the paperwork foundations request with grant proposals, they begin to realize the truth of the answer I give.
“Very few funders will. Most want to see an established track record of success and stability as an organization. They want to make a sound investment.”
The next question is, of course, about how to get funding as a new organization. One option I suggest is looking into fiscal sponsorship. A Fiscal Sponsor is an established tax-exempt entity that agrees to accept donations on behalf of another entity (known as the “Project”). For newly-formed 501(c)(3)s, this arrangement provides the opportunity to build their infrastructure and credibility as an organization while still receiving needed funds to do the work.
In addition to working with these types of Projects, a Fiscal Sponsor could also work with Projects that don’t have tax-exempt status, allowing donations to be tax-deductible. Perhaps a group comes together to coordinate response activities and donations after a disaster. The Project doesn’t need to exist once the clean-up efforts are done, so instead of creating a corporation that would then need to be dissolved, they could work with a Fiscal Sponsor. Another Project example would be individuals seeking grants or donations to create a film or other form of artwork.
So what might a fiscal sponsorship relationship look like?
Gregory Colvin presents a number of options in his book Fiscal Sponsorship: 6 Ways to Do It Right. Two of the most common models are the Direct Project and the Pre-approved Grant Relationship.
In the Direct Project model, the Project belongs to the Fiscal Sponsor and is not a separate legal entity. Here, the Sponsor’s employees and volunteers implement the project. This is different from the Pre-approved Grant Relationship where the Project is a separate legal entity with full responsibility for implementation. In this model, the Sponsor agrees to accept donations (including grant funds) on behalf of the Project.
In addition to handling donations, a Fiscal Sponsor might opt to provide other services including bookkeeping or accounting, insurance, human resources administration, or other administrative assistance such as legal services or office space. Especially for new entities with limited staff resources, these services can be essential for getting a Project off the ground.
What should you consider before pursuing a fiscal sponsor relationship?
- Keep in mind the Fiscal Sponsor has requirements they must meet so as not to endanger their tax-exempt status. First, they can’t just sponsor any Project; the funds they manage must be used in a way that furthers their own mission. Second, the Sponsor must retain supervision and control of the funds, so your sponsorship agreement needs to spell out how the Project will access the funds.
- Be aware of the cons of having a Fiscal Sponsor. The Project will lose some autonomy depending on the model chosen. There are some funders who won’t give grants through fiscal sponsors. Finally, the Sponsor will withhold an administrative fee.
- Make sure the pros outweigh the cons. With a Fiscal Sponsor in place, the Project may have more bandwidth to focus on the program itself, ensuring quality execution and maximum impact. Additionally, the Sponsor can lend credibility to the Project while also providing guidance and support.
If you do decide to enter into a fiscal sponsor relationship, make sure to work with the Sponsor to create a written agreement setting out who is responsible for what. The agreement should cover:
- Whether the Project is incorporated
- How the funds will be managed including their release to the Project
- What services will be provided by the Sponsor
- Required reporting by the Project and by the Sponsor including access to records
- Grant proposal responsibilities including creating reports for funders
- Clarification regarding employment status of Project staff
- Ownership of tangible and intangible assets
- Amount of supervision and control retained by the Sponsor
- Whether the Project can participate in lobbying activities
- Timeline for completing required tasks and consequences if not met
- Duration and termination of the agreement
This is a general overview of the concept of fiscal sponsorship. Much of the information shared here came from a presentation done by our friends at Pro Bono Partnership of Atlanta. You can find more in-depth resources about the legal and tax issues involved with fiscal sponsorship on their website. Other resources are available on our GrantSpace website.