By: Jose Escamilla, Audit Senior
Whether you are passionate about a certain cause and would like to advocate for it or would like to be a facilitator of change in your community, there are many reasons for starting a nonprofit. Now, having the ambition and entrepreneurship is a fantastic first step but how do you tackle the real issue of obtaining funding to start operations? One possible solution is to find a fiscal sponsor.
A fiscal sponsor is an already established tax-exempt nonprofit that you enter into an agreement with in order to obtain donations while your own tax-exempt status is in the process of being granted by the IRS. This lends credibility to your organization, making it more attractive for people to donate and thus generating revenues you would have much more difficulty in obtaining as a new organization. The donors also benefit as their contribution is still considered tax-deductible since it was given to the fiscal sponsor.
If you decide this is a route you would like to take, it is best practice, as with all agreements, to formally and explicitly outline the responsibilities of both parties as well as other aspects in writing. The question now becomes, what are some of the responsibilities and who is ultimately accountable for those items?
As hinted earlier, the fiscal sponsor agrees to accept contributions on your behalf. This is often done in exchange for an administrative fee. Once the contributions are obtained, they are required to perform certain oversight actions to ensure their compliance as a fiscal sponsor. The first of which is the retention and control over how to use the donated contributions. This may seem counter-productive since your main goal is to fund your own operations. However, it serves the important purpose of upholding the donors' trust that their donation is being used appropriately. To this end, the second oversight item is that the sponsor will request records and reports to justify and confirm compliance.
Your responsibilities mirror the sponsor's. While they are accepting contributions, you are honing in on your mission and what projects will be the most impactful to meet it. The end goal should be to establish yourself to the point where you no longer need to rely on another to continue your operations. As you pay your administrative fee, you are also receiving "flow-through" funds from the sponsor. One of the major advantages of entering into this type of agreement is that these funds could also include grants from either a foundation or the federal government. In any case, the sponsor is responsible for how the contribution is used and will therefore require you to create and update recordkeeping reports to track that you are in compliance.
One of the final things to consider is that constant communication from both parties is key to retaining a healthy and advantageous relationship. Not just from an oversight and compliance standpoint but you could also utilize their experience in a "mentor" capacity and gain insight to what processes are most efficient while they could benefit from any new ideas you could bring to the table. How you handle the initial steps of your newly formed nonprofit organization could set the tone of its future and utilizing a fiscal sponsor is a great option to assist in laying that foundation.