RSS Feed

Posts Tagged ‘start-up’

  1. Fiscal Sponsorship- An Alternative to Non-Profit Organization

    May 16, 2023 by lowens

    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.  


  2. What is a Fiscal Sponsorship Agreement and Do You Need One?

    May 16, 2023 by lowens

    By Austin Gutierrez

    Austin Gutierrez, Community Development Clinic Fellow Spring 2023, pictured in the UMass Law Library

    Fiscal Sponsorship Agreement’s (FSAs) are an effective way of starting new nonprofits, social movements, and providing public services. (i).  These FSAs are fairly common within the realm of nonprofits. In general, a fiscal sponsorship means that a nonprofit organization, the “fiscal sponsor”, agrees to provide administrative services and oversight to, and assume limited legal and financial responsibility for, the activities of groups or individuals engaged in work that furthers the fiscal sponsor’s mission. (ii).

    Typically, when seeking out a fiscal sponsor, the situation is where someone with a new charitable venture or program idea has a relationship with an existing 501(c)(3) organization/public charity, and that organization facilitates the raising of grants and donations for the project. (iii). 

    There are numerous ways to create an FSA but the majority of the FSA’s fall into three different categories: Model A, Model B, and Model C. Model A and Model B generally entail the fiscal sponsor having total ownership/control over the project being sponsored. (iv). The people who want to create the idea go to the sponsor and under a Model A agreement, those who had the idea are typically the employees of the now fiscal sponsor. Model B is similar, but those with the idea will be overseeing the project as independent contractors instead of as employees like in Model A. (v). Between both these models, the project is ran as if the fiscal sponsor is operating the project.

    There is a grantor-grantee relationship that is referred to as Model C. Here, the fiscal sponsor has a more limited role. (vi). They are just receiving funds for the project and making grants to the sponsored organization/project. So instead of having total control of the program, the fiscal sponsor has a more “hands-off” approach. 

    In all of these versions of a FSA, it is important to recognize that the fiscal sponsor ultimately has control of where the funds go for the sponsored project/organization. (vii). This is typically referred to as a variance power. This is where the fiscal sponsor has discretion and control of what happens with the money. 

    Organizations would consider fiscal sponsorship when they cannot do the project on their own. The variance power is the “trade-off”. (viii).  

    The benefit of aligning with a fiscal sponsor is typically because these new projects/organizations don’t usually have 501(c)(3) status. That means, without a fiscal sponsor, the project/organization does not have that immediate access to grant funding from private foundations, government grants, nor tax deductible donations. (ix). This is the benefit the fiscal sponsor provides along with the capacity benefit. Capacity referring to the staffing, administrative expertise, typically know-how of the work environment, and experience the new project generally does not have. (x). 

    The “trade-off” is that the new project/organization is giving up control, a fee of 3-5% on the low end or 15% on the high end. (xi). Without the variance power, the fiscal sponsor is nothing more than, as the IRS states, a “conduit”. (xii). They are just receiving money and passing it along without exercising any control in-between. This would cause consequences for the fiscal sponsor and jeopardize the deductibility of the contributions offered. Parties must know and understand this trade-off. 

    Generally, fiscal sponsors are not made to continue “forever”. So, when a project is successful and works well, that sponsored organization/team will typically go off and form their own organization independent of the fiscal sponsor. Use the knowledge that they’ve gained from the experience of the sponsorship and hopefully go on their own after. 

    Fiscal Sponsorships also work well for the fiscal sponsor when the project does not go as well as they would have hoped. Typically, this can be seen as a test run for the fiscal sponsor and it is easy to “give up” on because they can just shut down the project if it is unsuccessful. (xiii).   One concern, if you are looking to get sponsored, is to vet or at least assure that the possible fiscal sponsor is actually able to provide administrative support. (xiv). There have been situations where fiscal sponsors take on too many projects and leave those seeking to get funded on the backburner. 

    When fiscal sponsorship comes to an end, many fiscal sponsors believe they have a lot more rights than they actually do. Due to the fiscal sponsor’s variance power, the fiscal sponsor has the final say on where the money goes at the end of the relationship. (xv). Typically, the project/organization does not get a say on where the raised money ends up, this is at the discretion of the fiscal sponsor. (xvi). To avoid these awkward situations, one can hopefully establish some planning in the initial agreement when the termination occurs, be that final expenses or other termination matters. But generally, the fiscal sponsor should have the final say in what happens to the funds come the termination of the agreement. 

    On a final note, some FSAs provide a provision that establishes after a certain amount of time, the parties will regroup and reassess the agreement as the project has evolved. (xvii). This allows both parties the option to re-negotiate the agreement and see if they want to “renew” the agreement or part their separate ways. This provision encourages cooperation between the two parties and builds an expectation that the parties will plan their next steps and if it is appropriate to continue. 

     

    ——————–

    (i) Guidelines for Pre-Approved Grant Relationship Fiscal Sponsorship, Nat. Net. Fis. Spon. at 1,https://static1.squarespace.com/static/5e5e9444031f011bf0e6a0f8/t/5ee917ad16f2fa739ca32b8c/1592334254300/NNFS+Guidelines+for+Pre-Approved+Grant+Fiscal+Sponsorship.pdf  

    (ii) Id

    (iii) Benjamin Takis, Q&A #71 – What’s the difference between model A and Model C fiscal sponsorship?, Se4., Aug. 4, 2021, https://www.se4nonprofits.com/blog/qa-71-whats-the-difference-between-model-a-and-model-c-fiscal-sponsorship 

    (iv) Michael Gellman & Benjamin Takis, Video: Fiscal Sponsorship Basics for Nonprofits, Se4., Dec. 17, 2021, https://www.se4nonprofits.com/blog/video-fiscal-sponsorship-basics-for-nonprofits 

    (v) Id


Skip to toolbar