If you work for a nonprofit organization that doesn’t have tax-exempt status, or if you want to start a nonprofit but need help, you may want to consider engaging in a fiscal sponsorship.
At CFE, we’ve been getting a lot of questions about fiscal sponsorships and how they work. One of the most common topics has to do with the various types of fiscal sponsorship and the differences between them. We understand that this topic can be confusing, so here are seven types of fiscal sponsorship we think you should know about.
#1: Direct Project
The simplest type of fiscal sponsorship is one where a nonprofit sponsors its own activities. Since the activities will be carried out by employees, the core relationship is the one between employer and employee.
Donations made to a direct project are controlled by the sponsor. You don’t need to form a separate entity. In other words, the fiscal obligations in a direct project are identical to the obligations you would have for the regular operations of your organization.
#2: Independent Contractor Project
Next, there’s the independent contractor project, which occurs when the project falls under a nonprofit’s regular mission but may be performed by an outside contractor.
The key differences from a direct project are:
- You will have fiscal responsibilities to a third party – the contractor.
- You may have additional tax filing requirements, including 1099 forms if you’re contracting with individuals.
In this model, the sponsor would still retain ownership of any donations as well as to the final result of the project.
#3: Pre-Approved Grant Relationship
In some cases, one organization may apply for a grant from another organization to help them accomplish a stated goal. In that case, you’ll be entering into a pre-approved grant relationship. As you might expect, the key relationship is between the grantor and the grantee
In this fiscal sponsorship model, the sponsor would retain control of the donations and would disburse funds only when donations were collected. The project owner, however, would own the result. This model is most commonly used by 501(c)(3) corporations who need help raising funds.
#4: Group Exemption
Sometimes, a nonprofit organization opens subsidiary companies that it owns and operates. In this case, the entities that fall under the parent may not need to file for separate, tax-exempt status. Instead, they may be granted such status by virtue of their association with the parent.
The key relationship here is between the sponsor and its subsidiary. The project (in this case, the subsidiary) would retain control of both donations and the project results. Usually, the parent organization would file a group tax return and list all subsidiaries accordingly.
#5: Supporting Organization
This model applies to an organization that already has its own tax-exempt status but wants to support the sponsoring organization in its goals. The sponsored organization may, in some cases, owe its public charity status to its support of the sponsor’s mission.
In this case, the relationship may vary. However, donations and the results of the project would be owned by the sponsored organization. The key tax requirement is that the project must apply for its own 501(c)(3) status, but may be considered a public charity even with only one donation.
#6: Technical Assistance
At times, a nonprofit organization may need assistance with any of the following things:
- Tax returns
When that is the case, the nonprofit may choose to partner with a vendor to obtain those services. The specific requirements of the project, as well as the relationships that will govern the partnership, will be laid out in the contract between the two parties.
If you choose this type of fiscal sponsorship, all donations will belong to the project. As the sponsor, you will be required to list any fees you pay to your partner on your Form 990. As the sponsor, you will retain all financial management responsibilities, but the funds will belong to the project.
#7: Wholly-Owned LLC
Occasionally, a nonprofit organization has a project so comprehensive that they choose to form a separate LLC to govern it. This form of fiscal sponsorship is a parent-subsidiary relationship. However, there are two differences you need to understand.
The first is that the sponsor will list the financial activity of the project on Form 990 and when it comes to filing taxes, the LLC is disregarded. That means it files no income tax return of its own.
The second is that it provides some limits to the liability of the sponsoring organization. It won’t completely shield you from responsibility, but it does make it easier for you to sell off a fully-incubated project should you choose to do so.
Financing projects can be tricky. The seven models of fiscal sponsorship we’ve outlined here can help you accomplish your goals.
To learn more about how CFE’s nonprofit checking accounts can help you with your organization’s mission, please click here now.