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Want to Start a Nonprofit? Consider Fiscal Sponsorship

“How do I start a nonprofit?” is one of the top three questions that visitors ask us. This is not surprising: With more than 23 million pages online to answer this question (including ours), the massive amount of info quickly becomes overwhelming.

Why? It’s not an easy process that one can simply describe in one page. Whole books are written on this topic, and even they just scratch the surface. Yes, the process itself is pretty straightforward, and you can find many checklists for starting a nonprofit. But some steps in that process can be daunting, like creating an effective board, business plan, or fundraising strategy. Whole books are written on each of those topics, too. This doesn’t even consider application fees, the IRS’s 3-12 month review period, ongoing requirements to maintain exempt status, fundraising...or the actual project that made you want to start a nonprofit in the first place.

What’s more important to you?

What’s more important to you: Doing the good work, or having your own org to do the good work?

Sometimes, visitors unwittingly reveal that they want to start a nonprofit because they think they can get grants (i.e., free money) for startup costs or to pay themselves a salary. If this describes you, stop now and find another option. Realistically, most nonprofit startups aren’t ready or eligible to get grants. “Prepare to be broke...most founders and early staff don’t take salaries for at least the first year of the start-up’s life-cycle. Sometimes longer,” says Becky Straw, who has helped to start two nonprofits.

If your priority truly is to do good in your community, several alternatives exist that can help you achieve your charitable dreams at far less cost and paperwork. For example, you could volunteer, raise funds, advocate and increase awareness, or work for a charity that shares your cause. If you have little to no experience with working in nonprofits or the specific field, most if not all of these alternatives will build your skills, knowledge, and professional connections.

If you’ve developed a project, fiscal sponsorship is another alternative. This is a formal arrangement in which a public charity sponsors nonexempt projects that further its mission. This allows your nonexempt project to operate essentially as a public charity, without all of the administrative requirements for standalone nonprofits. Namely, you can solicit tax-deductible contributions and apply for grants that are limited to 501(c)(3) orgs.

Many fiscal sponsors also provide administrative “back-office” services and/or facilities. Projects can stay in fiscal sponsorship for a few years, then move on to become separate orgs. They also can be sponsored indefinitely, depending on their long-term goals and the sponsor’s rules. Fiscal sponsors must exercise oversight to ensure that the project “behaves” and stays true to its mission, so they charge a fee of 0-15% of the project’s income or expenses. Other than that, most projects operate with a high degree of autonomy.

For more pros and cons of setting up your own tax-exempt entity versus fiscal sponsorship, see "Comparison of Starting a New 501(c)(3) Organization with Using a Fiscal Sponsor (Model A)," which was prepared by Gregory Colvin, who wrote THE authoritative text on this subject, Fiscal Sponsorship: 6 Ways to Do It Right. (This book is available in most Foundation Center and Funding Information Network locations.)

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Focus on what will have real impact

One commenter wrote that our article on starting a nonprofit was “discouraging because you are telling people to just use a nonprofit organization that has the same mission, instead of pursuing their own.”

Generally, we take a neutral stance on most topics. But on this one, we are huge supporters of fiscal sponsorship and other alternatives. Running a nonprofit project, much less a nonprofit org, takes work. Even if you’re considering fiscal sponsorship, it’s not for the faint-hearted, as Jonathan Spack said in our live chat earlier this year. He should know: Jonathan is the co-founder and board member for the National Network of Fiscal Sponsors, and the executive director of Third Sector New England, the nation’s oldest fiscal sponsor, dating back to 1959.

You still need to show the sponsor that you’re serious about your project. This means you need to do a market and community analysis to demonstrate need for your project, then figure out how it’ll happen, who’ll do it, how to pay for it, and how you’re going to measure your results to show that you actually made a difference.

So if you’re serious about making the world better, we WANT you to start on that work with minimal distraction and delay. Volunteering, fundraising, spreading the word about your favorite cause, fiscal sponsorship -- all of these can help you do that, and you can start almost immediately. So yeah, I guess you could say that we are discouraging you from forming a new org, but only because our goal is to point you to info and resources to help you work smarter, not harder.

Browse our Fiscal Sponsorship gallery for videos, webinars, live chats, podcasts, and articles to learn more. You'll find answers to how to choose fiscal sponsors, how to approach them, how to find them, and more.

--Sandy Pon

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