Doing Good with Fiscal Sponsorship
Mission-driven people make the world go ‘round. They’re dedicated to furthering the causes that matter to them and making their corner of the world – and ultimately the whole thing – a better place.
We get calls from these kinds of helping humans all the time. They’re the best! But it’s also important to remember doing good and building a good business are not mutually exclusive. We are so thankful to work with people who totally understand that – whether they’re budding non-profit organizations or businesses with clear principles around their work, their community, and their employees.
Often, the first go-to for the big-hearted, mission-minded person/group is to become an official 501(c)(3) tax-exempt organization, but this process takes time, money, and tediousness. Others ask about benefit LLCs or non-profit LLCs. These, too, carry with them often time-intensive administrative burdens. One alternative or starting point is through fiscal sponsorship, which can help new non-profit hopefuls and even for-profit businesses do some good, get started on their work, and collect tax-deductible donations without having to go through the tedious, time-intense process of IRS tax-exempt status. (By the way, if you are a non-profit with its tax-exempt status, check out our free resource around operating a strong non-profit.)
A fiscal sponsor is a nonprofit organization that provides financial management and handles the other administrative needs for charitable projects. The fiscal sponsor takes on a fiduciary responsibility to handle finances responsibly and make sure all laws are being followed surrounding donors, tax exemption, and the management of funds. The fiscal sponsor deals with the IRS reporting and administrative requirements for its organization and the funds that flow through it.
Fiscal sponsorship is an option for organizations looking to test out a non-profit-focused mission without an entity yet, or newly formed non-profits (meaning they have a non-profit corporation already filed and formed with the state) in the start-up phase who haven’t received their tax-exempt status from the IRS. It serves as a “flow-through pathway for revenue” where the sponsor serves as the source of funding. The 501c3 non-profit receives and holds the funds and the fiscally sponsored organization can submit requests for reimbursement or cost coverage for authorized expenses. This is a great way for a new non-profit to learn what is required to maintain tax-exempt status while focusing on getting started rather than administrative burdens and costs. Fiscal sponsors can also be great mentors and teachers about the requirements of a non-profit.
How does a business find a way to pour into something they care about, accept tax-deductible donations for that specific cause, but still function as a for-profit business? Fiscal sponsorship is a great way to make that happen.
For example, say you’re a yoga and fitness studio. As a part of your normal business operations, you provide paid classes to the community through memberships and drop-ins. But your studio is right next to a middle school in a lower socio-economic area, and you’d like to provide yoga and fitness to these kids right after school free of charge so the kids have a fun place to go (plus some really cool teachers to mentor them). You might find a fiscal sponsor who can help you apply for grant funding to fund this program specifically.
The fiscal sponsor can accept tax-deductible donations and/or hold grant funding to be used exclusively for any costs associated with the program. Then, the rest of your business would continue to operate as it is and you don’t have to set up, manage, and deal with the conflict of interest issues of a whole separate non-profit.
Finding a Fiscal Sponsor
Fiscal sponsors range in offerings and mission focus. Some are broad in their missions, accepting projects related to various public benefits. Others are more narrow, focused on specific areas like fighting climate change, helping children, or protecting the arts. Some exclusively offer a means for receiving donations, while others offer other administrative help, help with fundraising, or even provide grant funding. While they’re going to need to be pretty hands-on with the money you receive – that’s one of the requirements of fiscal sponsorship – the sponsor you choose might depend on how hands-on you’d like them to be with your other administrative needs. Finding a sponsor with a specific industry focus might help introduce you to industry groups or insight you might not have found with a more broad fiscal sponsor.
Whoever you choose, we recommend making sure you have a written agreement that clearly outlines the terms and responsibilities for both your organization and the sponsor, how you can end the relationship, and making sure everyone is on the same page.
“Don't ask yourself what the world needs. Ask yourself what makes you come alive, and go do that, because what the world needs is people who have come alive.” - Howard Thurman
DISCLAIMER: This blog post is meant for informational purposes only and does not constitute specific legal advice or create an attorney-client relationship. Readers should discuss their specific situation with an attorney.