Starting a Nonprofit? Consider a Fiscal Sponsorship Agreement
There are a lot of nonprofit organizations in Oklahoma and across the United States. Some are well-established and extremely successful, while others struggle through their first few years and eventually close down completely. As nonprofit lawyers, we know that nonprofit failure isn’t due to lack of heart.
People who start nonprofits are passionate about their cause, and that’s a wonderful thing. But not every charitable idea should be turned into a nonprofit organization. In some cases, it makes more sense to seek out an established organization and support them financially rather than start a new nonprofit.
Another option to consider is a fiscal sponsorship approach while you get your nonprofit off the ground. A fiscal sponsorship is when you start out as a program operating within an established nonprofit organization. The new program can borrow the tax exempt status and some operational support of the existing organization until they’re ready to break off and form their own 501(c)(3).
Benefits of a fiscal sponsorship
Starting a 501(c)(3) can cost thousands of dollars in legal fees to properly obtain tax-exempt status, and there are lots of reporting requirements to maintain that status. Many new nonprofits have big ideas and big plans, but they don’t have experience with the record keeping and reporting that’s required.
There are additional startup costs beyond the legal fees, too. In general, we tell people that you should have between $15,000 and $20,000 in funding to get a nonprofit off the ground.
A fiscal sponsorship leverages the resources and experiences of the parent nonprofit, and it drastically reduces the funding you need to get started. If you have the financial support and the resources to create a sustainable infrastructure, then you might be fine to go ahead and start as your own 501(c)(3). But if you don’t, fiscal sponsorship can help provide resources, experience, and funding.
Key considerations for fiscal sponsorships
A fiscal sponsorship is typically not meant to be a permanent arrangement. It’s a starting point for the new nonprofit and a way for them to learn critical lessons before they go out on their own someday.
When entering into a fiscal sponsorship, think through the eventual end of the sponsorship and what that might look like. Negotiate the terms of the separation up front, rather than at the time of separation when emotions can make things more difficult.
“Negotiate the terms of the separation up front, rather than at the time of separation when emotions can make things more difficult.”
While the parent nonprofit and child program may be in alignment at the beginning of the fiscal sponsorship, things can get more difficult down the road if the program is successful and is bringing in lots of money and awareness. The child program could be ready to establish their own 501(c)(3), but the parent nonprofit may be reluctant to see those assets go. On the other hand, if the child program isn’t successful, the parent nonprofit might need to initiate the separation.
How a fiscal sponsorship agreement helps
A fiscal sponsorship agreement is similar to a prenuptial agreement—it’s signed before the two parties enter into partnership and details what will happen if a separation occurs. We know it’s not fun to think about, but it’s critically important to protect both organizations.
The agreement should stipulate that if and when the child program decides to establish its own 501(c)(3), the parent nonprofit will give them all of the assets raised on their behalf. It’s a contract that outlines the specific details of how the separation will work, and it can be negotiated like any other contract. Then when the time comes to separate, for whatever reason, the process goes much more smoothly.
A fiscal sponsorship agreement also protects both parties from more legal fees at the time of separation. Creating a contract that outlines separation procedures on the front end allows both sides to save money and time, which keeps more resources in the community they both are trying to help.
What to include in a fiscal sponsorship agreement
As a new program entering into a fiscal sponsorship, you will want as much flexibility as possible so you can leave when you decide it’s time. If you are the parent nonprofit, you will want more control over when and how the program leaves. In most cases, a parent nonprofit is more willing to negotiate up front and be flexible because they don’t yet know how successful the new program will be.
Terms vary from agreement to agreement, but stipulations may include a specific amount of assets the program must have before leaving, how long in advance the program must notify the parent organization, or even things like requiring that a board member from the parent nonprofit serve on the board for the newly established nonprofit. The advance notification can be particularly important to the parent nonprofit so they have time to get assets in order before the transition.
Fiscal sponsorships are a wonderful opportunity for your program to grow assets and gain experience before taking on the full responsibility of a 501(c)(3) organization. Protect yourself and your future resources by having an experienced nonprofit lawyer help you negotiate a fiscal sponsorship agreement before you enter into the relationship.
