How Fiscal Sponsorship Works

A Sturdy Start for Your Nonprofit Idea

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Active Voice Lab turns media into a powerful force for change by creating community screenings for documentaries

Without Active Voice Lab, a social issues documentary might just be a one-off affair, soon forgotten. Instead, this project has created action plans for acclaimed films such as "Food Inc.," "Welcome to Shelbyville?" and the "Visitor."

But Active Voice Lab does not operate on its own.. Instead, it works with a fiscal sponsor called Community Initiatives in San Francisco.

Thousands of organizations throughout the US and even abroad have chosen to work with fiscal sponsors.

Fiscal sponsorship has come into its own in recent years. At one time, the concept was more opaque than clear, and some experts even warned against them.

But, thanks to some forward-looking organizations and a lot of work on the part of fiscal sponsors themselves, a set of best practices has emerged, and fiscal sponsorship is proving its worth.

The History of Fiscal Sponsorship

I asked Melanie Beene, executive director of Community Initiatives and a leader in the fiscal sponsorship field, to help me understand how fiscal sponsorship works and how an organization might choose to engage in a fiscal sponsor arrangement rather than go it alone.

Community Initiatives was originally a part of the San Francisco Community Foundation. That organization saw the need for some way to "incubate" nonprofit projects that might go on to become full-fledged nonprofit organizations in their own right.

There were already other fiscal sponsors around the country, most notably the Tides Center, Community Partners, and Earth Island Institute, all in California; the Colorado Nonprofit Development Center; and Third Sector New England in Boston.

A large group of fiscal sponsors joined together in 2004 to form the National Network of Fiscal Sponsors.

The Network has held conferences across the country and collaborated on guidelines and best practices that now influence more than 140 fiscal sponsors.

What Fiscal Sponsorship Is and Isn't

Beene first wanted to clear up some misconceptions about fiscal sponsorship: mainly that fiscal sponsors provide funding or can find funding for a project seeking fiscal sponsorship. That isn't what fiscal sponsors do, she said.

Anyone who has investigated the road to nonprofit status knows that it is not easy.

Beene says that fiscal sponsorship, "...is a cheaper, faster, easier, and more efficient alternative to launching your charitable activity than trying to set up a 501(c)(3) corporation yourself. A fiscal sponsorship arrangement can give you time to see if your idea works, and it can also provide confidence to potential funders who are often reluctant to provide support to brand new nonprofits."

A fiscal sponsor can be any established 501(c)(3) that agrees to accept the financial responsibility for your project.

But there is an advantage to being with an organization that is dedicated to fiscal sponsorship, and that has many projects in its portfolio.

Such organizations can provide economies of scale when it comes to securing things such as insurance. They can provide valuable guidance about governance, help with filing of reports and keeping records.

A fiscal sponsor can become an efficient and cost-effective back office for a new project, allowing it to focus on its mission and programs.

Fiscal sponsorship originally was thought of as a stop-gap measure for new groups just getting started. However, now it can be a short, medium or long term arrangement.

How to Find the Right Fiscal Sponsor for Your Project

What should you think about if you're considering a relationship with a fiscal sponsor? Beene says to look for these clues to a good fit:

  • Look for a fiscal sponsor that is a good mission fit. Fiscal sponsors typically work within certain parameters. Some like arts groups while others have expertise in human services. Find one that is a good fit to your mission.
  • Check out the cost of working with a fiscal sponsor. Beene says that 10% of yearly income is common, but it might be more for government grants that have to be audited, and/or when they are reimbursable grants, meaning the project must spend the money and then get reimbursed by the grantor. Fiscal sponsors may be put in the position of floating the upfront money. Also, many government grants are audited by the grantor agency each year.
  • Look for active sponsorship...not just a pass through, which is illegal. An active sponsor should provide financial and programmatic oversight and may even provide educational opportunities and networking events.
  • Does the sponsor follow best practices? Does it provide regular financial reports? A written contract? Check out the industry's Comprehensive Guidelines and the Guidelines for Pre-Approved Grant Relationship Fiscal Sponsorship.
  • Look at other services provided by the fiscal sponsor. It should do financial management and grant supervision, and provide a way to buy insurance. Some fiscal sponsors offer office space, co-location, and access to bulk purchasing. Most provide a way for you to raise funds online. Does it offer training? Is it conveniently located? How often do they run checks? And what is its personality and reputation? What do its other projects say about them?

What Fiscal Sponsors Want From You

Beene points out that the fiscal sponsor will be looking at you as well. They will look for these signs:

  • Does your project have a legitimate nonprofit purpose? Would the IRS think this is a legitimate nonprofit activity if you applied for nonprofit status? Fiscal sponsorship is not a way around nonprofit requirements.
  • Does your project have enough traction to get funding for this idea? Have you talked to funders? Do you have a core of dedicated individual donors? Have you identified revenue sources and started exploring those pathways?
  • Fiscal sponsors do not find money for you and don't accept projects that aren't ready. For instance, Community Initiatives requires projects to have a minimum of $24,000 of income, while the Tides Center has a floor of $100,000. Also, a fiscal sponsor does charge for services. Can you meet the fee requirements?

The point, Beene says, is that fiscal sponsorship is not a way for a weak idea to see the light of day, nor is it a way for a group to find financial support that it hasn't been able to find on its own. Fiscal sponsorship can lend credibility to your project, but only if you have a good idea and the ability to persuade a funder to invest in your idea.

Where Do You Find Fiscal Sponsors?

There is a fiscal sponsor directory that lists fiscal sponsors in 32 states, Washington D.C., and Ontario, Canada. The fiscal sponsors in the directory are home to nearly thousands of projects, and manage charitable funding of up to $1 billion. You can also look around your community and ask other nonprofit projects about their fiscal sponsors.

Resources about Fiscal Sponsorship:

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