What is Fiscal Sponsorship?

Maybe you’ve heard the term ‘fiscal sponsorship’ come up in conversation in nonprofit circles, at conferences or in articles you’ve read, but just haven’t been exactly sure what is meant. This article will break down the meaning of ‘fiscal sponsorship’ and what the benefits and risks are.

A fiscal sponsorship is when a nonprofit organization provides financial oversight and administrative support to carry out social impact projects, lending newly-forming organizations the benefits of a 501(c) organization. For someone trying to start their own nonprofit, fiscal sponsorship allows them to seek grants and tax-deductible donations through their sponsor’s tax exempt status. In essence, this partnership serves as an alternative to forming a nonprofit public corporation while also benefiting from a sponsor’s services, support, and infrastructure.

Donors give contributions through the fiscal sponsor, who can then distribute the donations to the project or program. For a clearer picture, think of the fiscal sponsor as an administrative home for the project or program, providing support and oversight. Using a fiscal sponsorship is a way for a social impact project to gain the interest of new donors when it just starting to build awareness, or it does not yet have a tax-exempt status from the government.

Fiscal sponsorship plays a vital role in the world of social innovation and driving change. Social impact projects can succeed and thrive due to the support, oversight, and administrative services that a fiscal sponsor can provide. Grantmakers also tend to give to organizations rather than an individual, which can lead to more funding opportunities for a budding project or program. Having a fiscal sponsor can help an organization start their project more quickly while gaining the support needed to succeed. Heluna Health is an example of a fiscal sponsor that works solely within the population health field to achieve this kind of funding mechanism.

How a Fiscal Sponsorship Works

What is a fiscal sponsorship arrangement, and how does it work? A fiscal sponsorship exists when a group or project that lacks 501(c)(3) status contracts with the fiscal sponsor to meet particular financial requirements. The most common benefit the fiscal sponsor provides is to accept, manage, and allocate donations or funds for the project. Some fiscal sponsors take on an even larger role and perform administrative duties or capacity building functions.

In return for their service and investments in infrastructure, a fiscal sponsor will charge a fee for their administrative services. This fee is usually a percentage of the project or program’s budget to cover the administrative fees. This still falls within the IRS nonprofit requirements for tax exemption because fiscal sponsors have a legal responsibility to manage the donor contributions.

Why Organizations Choose to Have a Fiscal Sponsor

Fiscal sponsors are utilized by developing nonprofits, or even by individuals or consortia that do not have a form of self-identification and are thus not tax-exempt yet. Fiscal sponsorship allows for donors to claim a tax deduction when they donate to causes that are not recognized by the IRS. In addition, private foundations are not allowed to donate to causes that are not tax-exempt, however, they are allowed to do so if a project is contracted with a fiscal sponsor. In other words, a fiscal sponsor gives social impact projects access to potential funds that they would not legally have a right to otherwise.

On the other hand, some developing nonprofits will use fiscal sponsorships to test out new projects and their potential to earn tax-deductible donations without first going through the process of achieving tax-exempt status. In addition, some developing nonprofit organizations find that the fiscal sponsorship model works for their cause in the long-term, or that the benefits of having the fiscal sponsor performing administrative duties work well for their program.

For example, Heluna Health supports clients with a team of contract managers, accountants, and human resource specialists to help them execute population health projects. These services can strengthen the capacity of a developing nonprofit that may want to focus on its mission rather than administrative and operational logistics. There can be many positive financial and programmatic outcomes in contracting with a fiscal sponsor.

What Are the Different Types of Fiscal Sponsorships?

Now that you know what fiscal sponsorship is, it’s time to define the two most common types, which depend on the requirements of the project. The two most common forms of fiscal sponsorships include the grant model and the direct model.  

The Grant Model

The grant model allows projects to have more independence from the sponsor but may require the project to maintain its own tax liability. This is because the project is not completely managed by the fiscal sponsor. Instead, the sponsor and the project retain a grantor-grantee relationship throughout the duration of the partnership. To begin this process, the project will write a grant request to the intended sponsor, outlining the requirements needed for the project. At this point, the sponsor has to approve the project before moving forward. Once the project has been approved, the fiscal sponsor can then accept donations and disperse these funds to the project accordingly.

When discussing the grant model, it’s important to note that this type does not hold the sponsor legally liable for all actions of the project, but they are financially liable for the project’s actions. This means that the fiscal sponsor must manage and distribute the funds appropriately when managing donations for the project. The sponsor may receive a single grant or set up an ongoing relationship for a project.

In the grant model, the project is still responsible for its own tax compliance. These projects must comply with regular tax reporting requirements that the government sets for their particular organization. These requirements will depend on the actual legal status of the project at hand.

The Direct Model

Unlike the grant model, a project that leverages the direct model of fiscal sponsorship actually becomes part of the fiscal sponsor’s organization. This type is the most common form of fiscal sponsorship used today. The direct model creates a united entity between the project and the sponsor, making them legally bound to one another. The fiscal sponsor receives contributions for the project, and then the receipt for these donations will later be reported when the sponsor files its taxes with the IRS.

This partnership is more of an employer-employee relationship, while the volunteers and staff become part of the team of the employees for the fiscal sponsor. Contrary to the grant model, the sponsor is legally and fiscally responsible for the actions of the project. Because of this, the fiscal sponsor must carefully regulate the performance and actions of the project more closely.

Potential Benefits of Having a Fiscal Sponsor

Finding a fiscal sponsor that matches your project needs and aligns with your mission can be extremely helpful. Many fiscal sponsor organizations exist with specific visions in mind and their advice can greatly increase the success of certain projects. Heluna Health is an example of a fiscal sponsor that seeks to further their mission of improving the health and well-being of communities by partnering with professionals in the population health field. Well-established fiscal sponsors like Heluna Health have experience managing a variety of transactions in their fields and are able to help manage financial oversight. They can manage financial tracking, reporting, and budgeting, while program professionals can direct their focus primarily to the project’s mission and goals.

In addition to the basics, having a fiscal sponsor can be extremely helpful, if not essential, in navigating the complex world of grants and contracts management. Fiscal sponsors can help not only with contract development and negotiation but also make sure that grant compliance and reporting are streamlined. When the time comes, fiscal sponsors can also be a big help in achieving grant renewals.

All of the technical support aside, the true value that comes with finding a suitable fiscal sponsor for a project is the fact that the sponsorship aligns with what the project or program’s mission and unique needs. Finding a fiscal sponsor with a similar mission to one’s own cause can be a fruitful endeavor on many levels.

What are the Potential Disadvantages of a Fiscal Sponsorship?

Depending on the type of fiscal sponsorship chosen, the project may need to share decision-making power with the fiscal sponsor. The fiscal sponsor may be fiscally and legally responsible for the decisions and actions of the project. If the sponsor has this responsibility, they will practice greater control over the allocation of the funds, ensuring that grants and donations are distributed properly. To protect themselves against legal complications, the sponsor may closely monitor the performance, activities, and operations of the project. In some cases, the project officers and fiscal sponsors leadership may have conflicting views on decisions that are made.

It can also be challenging for the project to separate themselves from the sponsor depending on the type of fiscal sponsorship chosen. Furthermore, if the project is not a corporation, they may lack legal rights to separate from the sponsor while still bound in the partnership. This can further restrict the project from operating independently.

If you are the one managing the project, it’s important to know that the sponsor will be charging a fee for their administrative services. This fee is usually a percentage of the project or program’s budget. Depending on the type of fiscal sponsorship, this fee may be higher if the project is using the sponsor’s staff, facilities, and professional services.  

How to Find a Fiscal Sponsor That’s Right for Your Cause

One of the easiest things to do when launching into your search for a fiscal sponsor is to research organizations or foundations that are similar to your own. It is important to get a feel for the industry or field you are working in before making a decision. Once you have an idea of how similar organizations are operating and who their fiscal sponsors might be, it’s time to research fiscal sponsor directories. There are plenty of resources and support services online that can help in your search, especially if you already have an idea of the type of fiscal sponsor you are looking for.

When approaching a potential sponsor, there are a few things to keep in mind. First, have a clear portrayal of your cause’s purpose and vision. Theoretically, you are finding a sponsor who has a similar mission to yours at its core, so it’s good to have a description of your project to match up to. In addition, you want to be able to describe how having the fiscal sponsor will advance the mission you are trying to achieve. Finally, any other added benefits that may come to the fiscal sponsor in the result of a partnership are also worth the mention.

What to Include in a Fiscal Sponsorship Proposal

In most situations, an organization or project has to make submit a written formal proposal for why they need fiscal sponsorship. The key elements of a fiscal sponsorship proposal should include:

  • Project goals
  • Project objectives
  • Overall method
  • Method of project evaluation
  • Project staffing
  • Project budget
  • How the sponsorship furthers the nonprofit mission
  • Added benefits of associating with this project

It always helps to show that a nonprofit cause is organized and well-prepared. In addition, fiscal sponsors highly value those who have purpose-driven solutions that apply social innovation.

What Projects Should Consider a Fiscal Sponsorship?

Projects that are either time-sensitive or short-term are great candidates for a fiscal sponsorship. If a project is trying to hit the ground running, a fiscal sponsorship can help them do precisely that. As said before, grantmakers are more likely to donate to an organization rather than an individual person. Having the support, administrative services, and infrastructure of a sponsor can help immensely when trying to get a project started right away.

Another project that will benefit from this partnership is if the program is waiting to obtain a 501 (c)(3) status. Having this tax-exempt status can be detrimental to an organization, which is why some projects may require a fiscal sponsorship while waiting for approval.

If a project does not have a sufficient amount of staff, a fiscal sponsorship may be a helpful solution. When working with a sponsor, the project won’t have to worry about administrative duties and therefore, can put all of their time and energy into executing the project. Having a sponsor handle all administrative tasks and technical aspects can help a great deal when a project needs complete devotion to their goals.

A fiscal sponsorship is an excellent solution for many social impact projects; however, it is still important to know the facts before engaging in this type of partnership. As long as you educate yourself on the impacts and identify the main reasons a project would benefit from this sponsorship, you can make the best decision on whether or not the arrangement is a fit for your project or program.

Visit Heluna Health’s website to see if Heluna Health may be the right fiscal sponsor for your population health project. Heluna Health is one of the nation’s largest and most well-established fiscal sponsors that provides an array of services ranging from fiscal sponsorship, client support, and grant management services. By working with Heluna Health, your team can further its mission to improve the health and well-being of your community.