Comparing Two Routes: 501c3 vs. Fiscal Sponsorship

Deciding between starting your own 501 (c) 3, or going nonprofit with a Fiscal Sponsor is a big decision. Here are some key points to consider.

Comparing the two:
New Independent 501(c)(3)
Fiscal Sponsorship

1. Which route is best overall?
Obtaining your own New Independent 501(c)(3) is possibly best for a charitable project with funding already in place; when the program has proven track record, with administrative and financial staff in place
Fiscal Sponsorship is possibly best for a new, emerging, or grassroots projects wanting administrative and financial management support; also projects looking for grant funding to begin, and projects waiting for IRS determination

2. How to start
Incorporate in a state. Complete IRS Forms 1023 and SS-4, state registration forms, and attachments
Fiscal Sponsorship is a great place to start learning about fiscal sponsorship and check out different organizations

3. Basic Governing documents
Articles of Incorporation and Bylaws
Mission Statement and Fiscal Sponsorship Agreement

4. Oversight and governance
Board of Directors
Your nonprofit creates an independent Advisory Committee, operates under the Fiscal Sponsorship’s Board of Directors

5. Wait time before donors and grantors can make tax-deductable donations
3 to 6 months or more to receive IRS determination letter, after Form 1023 submitted
No wait time! Once your program has a contract with the Fiscal Sponsor, contributions are immediately tax-deductible

6. Who’s in Control?
The nonprofit is independent and autonomous
Fiscal Sponsor has ultimate legal control and oversight, but much operational authority is retained by the nonprofit.

7. Fees to begin
Up to $10,000 or more in attorney fees, IRS filing fee of $850
Each Fiscal Sponsorship has their own fee structure -usually there is a start-up fee and then a % of revenues (5-14%)

8. State Fundraising and Solicitation Registration
For nonprofits seeking to file charitable registration forms in all the states where registration is required, the cost of filing fees plus labor for preparation of the forms can be between $5,000 and $10,000
The Fiscal Sponsor is registered in all states that require registration

9. Annual forms to file
IRS Form 990, financial audit, state forms, payroll forms
Annual activity reports to Fiscal Sponsor. No IRS filing for the nonprofit. The Fiscal Sponsor files Form 990, and conducts annual financial audit

10. Charitable purpose required

11. Must pass the public support test (1/3 of support comes from the public) to meet / avoid private foundation status

12. Donations and grants are payable to:
The nonprofit
The Fiscal Sponsor, to be used entirely in support of your project’s purposes

13. Who raises money?
The nonprofit, in its own name
The nonprofit, because your signed Fiscal Sponsorship Contract and the IRS status of your fiscal sponsor affords you that benefit

14. Who pays the bills?
The nonprofit handles all bookkeeping, accounting and record keeping
The nonprofit manages their own accounts payable, though many fiscal sponsors provide office support services

15. Who hires staff and handles payroll and benefits?
The nonprofit
The nonprofit chooses their own staff, the Fiscal Sponsor takes care of payroll

17. Who is liable for project debts and claims?
The nonprofit
The Fiscal Sponsor

18. Insurance provided by
The nonprofit
The Fiscal Sponsor provides insurance

19. Administrative and technical support
You are on your own
In addition to financial administration, the Fiscal Sponsor provides HR, organization development advice, funding resources, and educational guidance. Program Managers can login to see account balance and transactions

20. If project fails
Must dissolve corporation, complete all required government filings, etc
Simple closure of the project account

21. If project succeeds
Corporation grows
Project may transfer assets and liabilities to its own, new, separate nonprofit corporation

by Gregory L. Colvin