Why choose fiscal sponsorship?

Why choose fiscal sponsorship?

Fiscal sponsorship is often used by newly formed nonprofits that need to raise money during the start-up phase, before they are recognized as tax-exempt by the IRS. Using a fiscal sponsor enables a program or organization that does not itself qualify as tax-exempt to attract funding for its operations that will -- through the fiscal sponsor - be tax-deductible to donors. Therefore, fiscal sponsor arrangements benefit organizations or programs that are not tax-exempt by providing a flow-through pathway for revenue that the organization may not otherwise be in a position to receive.

• Donors are not able to claim a tax deduction unless they itemize deductions and donate to an organization that is recognized by the IRS as tax-exempt pursuant to IRS Code Section 501(c)(3). See IRS Publication 557.

• Additionally, the guidelines of most private foundations explicitly require grantees to be recognized as tax-exempt by the IRS. Consequently, groups that are not formally recognized by the IRS as tax-exempt are generally not eligible for grants from private foundations.

Other reasons:

• Fiscal sponsorship might be chosen by a newly formed nonprofit that seeks to test-drive its ideas to determine whether there is a market or a desire among the public to fund the end product.

• Some organizations/programs remain in a fiscal sponsorship relationship for a long time, deciding that their mission can be achieved in that structure without creating a new entity.

• Some organizations - including those that are tax-exempt - find that utilizing a fiscal sponsor to outsource administrative responsibilities, whether back-office tasks, or those relating to fundraising and disbursement of funds, is the right business model for them. This structure might be particularly well-suited for all-volunteer organizations. 

(Source: National Council of Nonprofits)