Often I hear comments about the financial cost (service fees) of being a fiscally sponsored project. I hear organizations say that they could do the work more cheaply themselves. That they could save money by keeping all of the accounting and compliance work in-house. I hate to burst your bubble but for the overwhelming majority of organizations it’s simply not true. Before an organization decides whether to go down the fiscal sponsorship path or start their own nonprofit, here are a few things to consider.
Fiscal sponsors shoulder a big burden, legally and financially. They are responsible for complying with all laws pertaining to nonprofits. And to all laws pertaining to receiving, reporting and acknowledging charitable donations. That is a tall order. Because there are a lot of laws, rules and regulations.
In addition to the federal government, every state possesses laws that apply to nonprofits. Some states, like California and New York, require the annual filing of information returns in addition to the annual federal form 990.
Completing these forms and complying with the rules and regulations compel many nonprofits to retain attorneys and accountants to file these forms accurately. These services cost money and take time.
That’s why fiscal sponsors charge a service fee to cover their costs for the risk and the requirements. And to process, record and maintain all of the donations, large and small, that arrive on their doorstep.
Removing your fiscal sponsor doesn’t mean you pocket the service fee. Instead, you’ll now be spending your staff time and money hiring lawyers and accountants and doing audits and complying with all the laws and regulations that your fiscal sponsor used to handle for you.
Most organizations have a sponsor so they can save their time and money for the fun work. The work that gets their juices going. The work that keeps them alive. For example, defending the rights of immigrants, protecting a creek or watershed area from development, advocating for increased funding for public schools.
There are two other potential benefits to having a fiscal sponsor. If your organization does lobbying [and if you’re trying to create social change, you need to!], being a project of a larger fiscal sponsor can mean you can do more lobbying without worrying about hitting IRS limits.
If you have only a few large funders, being a project of a larger fiscal sponsor can help you avoid the dreaded “tipping point” issue. Basically, not having enough sources of public support so that the percentage of your income coming from public support is too small [less than 33.3%] and “tips” you in the IRS’ eyes from being a public charity to a private foundation for tax purposes. This is another benefit of having a fiscal sponsor.
So if you’re starting a new project and need a fiscal sponsor or are shopping for a new sponsor, I’ve created a list of questions to ask a potential sponsor. And I’ve given you a sense of what the answers should be so you find a good sponsor.
Please share with us your thoughts and experiences as a fiscally sponsored project or as a fiscal sponsor. What works? What doesn’t? What do you hate? What do you love?
And thank you fiscal sponsors for taking care of the accounting and compliance work for the organizations that need to go out and raise hell!
If being a fiscal sponsor appeals to you, stay tuned for next week’s blog that will provide you with tips about what you need to do to prepare for a new life as a fiscal sponsor.