By Hadassah Gomez
Hadassah Gomez, CDC Fellow Spring 2023
Charitable organizations are often born out of passion, goodwill, a desire to advance a worthy cause and make a positive contribution to society. Unfortunately, these virtuous aspirations are often stifled by the tedious, expensive, lengthy, and complicated legal process of registering as a non-profit. Under the Internal Revenue Code 501(c)(3), (non-profit) status applies to organizations that are organized and operated exclusively for charitable and other specified purposes. A charitable cause or project stands to benefit from non-profit status through tax exemptions, grant eligibility and increased legitimacy which all control the ability to secure funding and efficiently manage the organization’s finances. Charities are a unique business entity, in that they are motivated by altruism as opposed to profits, and they depend on donations, grants and other forms of philanthropic funding, therefore, it is imperative that a charitable organization seeks optimum financial efficiency.
Unfortunately, the non-profit registration process is a legal bureaucracy, likely to deter even the most impassioned organizers of charitable causes. Between state and IRS filing fees, applications for non-profit status can cost upwards of $1000 and take up to six months to be approved. In addition to the application process being pricey and lengthy, it involves extensive and complex paperwork which may necessitate the enlisting of legal or other professional assistance thus adding even more to the expense and wait time.
In this case, what options do charitable ventures have? Must they succumb to the legal bureaucracy that is filing for non-profit status, or do they forego the invaluable benefits said status provides?
The answer to each of the aforementioned questions may be found in a Fiscal Sponsorship Arrangement.
According to the National Council for Non-Profits, a fiscal sponsorship arrangement offers a way for a cause to attract donors even when it is not yet recognized as tax-exempt under Internal Revenue Code Section 501(c)(3). In such an arrangement, a non-profit organization may agree to serve as a fiscal sponsor by providing fiduciary oversight, financial management, and other administrative services to support the activities of charitable entities engaged in work that furthers the fiscal sponsor’s mission. Essentially, an entity that is not officially registered as a non-profit, may still reap the benefits of the status by aligning with an appropriately registered entity. Under this arrangement, the fiscal sponsor assumes legal and financial responsibility for the unregistered sponsored organization. The sponsor may apply for grants and fundraise on the sponsored entity’s behalf. The sponsor may also handle administrative services such as bookkeeping and providing donor receipts for tax-deductible contributions made in the name of the sponsee. This arrangement not only benefits entities that find it impractical to file for non-profit status, it is equally convenient for entities that have filed or plan to file for non-profit status but need operational assistance in the interim.
Similarly, temporary charitable projects that are meant to be short-lived and only exist through the completion of a one-off project, event, or task may find filing for non-profit status impractical. In these cases, a fiscal sponsorship arrangement may be an appropriate solution.
At face value, a fiscal sponsorship arrangement appears to disproportionately benefit the sponsored organization, however, the fiscal sponsor also stands to benefit from said relationship. A fiscal sponsorship arrangement is typically between parties with similar or aligning missions, therefore, the fiscal sponsor is able to extend its reach and further its mission through the work of the sponsored organization. The sponsor may also be able to achieve some of their organizational goals, such as diversity efforts, through the work of the sponsored organization. Where the sponsored organization would have otherwise been a “competitor” of the fiscal sponsor, the arrangement effectively eliminates the competition through collaborative effort. The fiscal sponsor may also leverage the relationship with the sponsored organization for publicity and increased notability. Lastly, the fiscal sponsor may also financially benefit as it is common for a fiscal sponsor to ask administrative and other fees in exchange for the services provided under the arrangement.
Even though a fiscal sponsorship arrangement is an exceptional alternative to registering as a non-profit, there are some downsides that both parties to the arrangement should consider. For the sponsored organization, there is the risk of losing autonomy as the arrangement by nature cedes some degree of control to the sponsor. Furthermore, there is the risk that the sponsored organization may neglect its duties, misuse funds, or otherwise act inappropriately.
For the sponsor, some disadvantages include exposing itself to reputational risk. Even if the fiscal sponsor diligently vetted the sponsored entity prior to entering the arrangement, there is no guarantee that the missions of both parties will always align, and that any controversy associated with the sponsee would not affect the sponsor given their affiliation.
It is also important to note that a fiscal sponsorship arrangement may be governed by some sort of agreement. It is imperative that both parties contractualize the relationship to clearly define what is expected of each party. The agreement may also be comprehensive enough to include the extent of either party’s authority, the expectations for financial management, the procedure for terminating the agreement and the method of dispute resolution in the case of conflict.
In conclusion, a fiscal sponsorship is a valuable technique to circumvent the non-profit registration process, while still being able to access the benefit of non-profit status. Altruism need not die at the hands of legal bureaucracy and fiscal sponsorship might just be a lifesaver for some charitable agendas. Acknowledging that the arrangement has inherent risk, parties may protect their respective interests through a well-executed Fiscal Sponsorship Agreement. Therefore, charitable entities in the start-up or pre-registered phase may benefit from considering Fiscal Sponsorship as a vehicle to access non-profit benefits without going through the hurdle of non-profit registration.