Advantages of Sponsoring Another Charity

Copyright 2017

Let's say an established not-for-profit organization provides medical services to low-income families.  The organization is approached by a group that wants to serve the same population with periodic reduced-cost dental clinics, and it has already lined up several large donations. The fledgling group, however, doesn't have 501(c)(3) status and wants the established organization to act as its fiscal sponsor.

Is it a good idea? Fiscal sponsorships -- a kind of legal and financial umbrella -- can benefit both  qualified not-for- profits and charitable projects that lack 501(c)(3) status. But before agreeing to sponsor a group, be sure you understand how such sponsorships work, as well as how they differ from similar, less-advantageous arrangements.

Protecting Donor Deductions

In a fiscal sponsorship, the 501(c)(3) sponsor is legally responsible for the charitable project. Plus, it acts as employer to the project's paid workers and manages all of its funds. Donations and grants are made directly to the fiscal sponsor, thus qualifying their donors for a charitable deduction.

Although they may seem similar, fiscal sponsorships are different from fiscal agencies. In a fiscal agency arrangement, the 501(c)(3) organization is merely the project's conduit. The conduit accepts the donations and then transmits them to the intended recipients. The IRS considers the donations to be made from the donors directly to the intended recipients, which means the donors don't qualify for a charitable deduction.

Everyone Wins

It's easy to see why small charitable projects seek fiscal sponsorships. Such relationships can provide much-needed infrastructure and fiscal management to a project. By making it possible to receive charitable donations, sponsorships can make more funds available. Plus, associating with an established charity can enhance the project's credibility.

These arrangements benefit sponsors, too. A sponsorship can provide greater exposure for the 501(c)(3) organization, possibly resulting in new donors for established programs. When you choose a project that shares your mission and basic objectives, it can enhance your own program offerings with minimal monetary outlay. Although it isn't intended to be a source of income, not-for-profits often charge a nominal fee for the sponsorship to offset their overhead costs.

Making Arrangements

Projects that can best benefit from a fiscal sponsorship generally include those that are:

  • Too small to have staff or much infrastructure;
  • Temporary or periodic;
  • Waiting to secure 501(c)(3) status, but that want to operate sooner; or
  • Based outside the United States and need a U.S. not-for-profit to receive donations on its behalf.

When you find a good candidate make sure you thoroughly discuss each partner's expectations and roles. Mutually agree on start and termination dates and decide which group will make decisions about what. Because nothing causes conflict like money issues, be sure to decide on the sponsorship charge (up to 10 percent  is typical), how disbursements will be handled and who will handle audit and reporting requirements.

Both parties must understand the key responsibilities in the relationship. First and foremost, the fiscal sponsor is responsible because the project and its sponsoring nonprofit are legally one entity.

Mitigating risk

Keep in mind that any fiscal sponsorship involves some risk to your organization's finances and reputation. So it's important to discuss your plans with your legal and financial advisors before entering into one of these arrangements.