Last month, I suggested it may be all too easy to bring another nonprofit into our world, one that may not be equipped to flourish in the increasingly competitive marketplace of public charities.
Small nonprofits often can find increased efficiency and provide improved operational continuity by pooling their resources, including financial resources, employees and volunteers.
This means increased resources targeted to the programs and services provided by the organization. So how do you go about operating as a tax-exempt organization in this collaborative manner? One way to benefit from this “strength in numbers” is by entering into a fiscal sponsorship with an existing tax-exempt organization.
How does it work? A fiscal sponsorship is a relationship between two organizations, one (the “sponsor”) is a not-for-profit corporation that has received recognition from the IRS and state agencies as a tax-exempt organization.
The other entity is typically an unincorporated association interested in operating as a tax-exempt organization (the “program”). The two organizations enter into an agreement whereby the sponsor accepts grants and tax-deductible contributions on behalf of the program. The sponsor then makes a grant to the program for the contributions and grants so directed. Typically, the sponsor does this by serving as the administrative agent for the program.
Such sponsorships can be appropriate for many situations including:
• A new organization that is raising money for start-up expenses;
• As a nonprofit “business incubator” to test-drive new ideas;
• A short-term charitable purpose such as disaster relief;
• To outsource administrative duties.
The sponsor and program should have consistent missions, because a sponsor should always be allocating resources to activities that further its own mission. Additionally, some sponsors serve as incubators for new organizations and that is part of their mission.
How does this benefit sponsor? Typically, the sponsor will charge an administrative fee based on a percentage of budgeted or actual revenues received for the program. Additionally, the sponsor may accomplish its own goals and objectives through this relationship.
If you are considering a fiscal sponsorship, first and foremost, seek legal counsel to prepare an appropriate agreement. This is very important as only the sponsor and not the program is the recognized legal entity. The program administrators should always ensure appropriate fund accounting by the sponsor to ensure their resources are appropriately segregated for accountability. Do your research to ensure that your potential sponsor is compliant with the requisite governmental agencies, has a reputation in the community for good governance and is properly insured.
Lastly, remember that, under most circumstances, the program is not a separate entity for reporting purposes. That means the program should not file its own information returns, federal form 990 and Illinois form AG990-IL.
The revenues and expenses related to the program will be incorporated into the returns of the sponsor (an exception to this rule would be if the program has an application for tax-exempt status pending with the IRS).
So, if you are considering a new nonprofit, remember to consider the benefits of a fiscal sponsorship arrangement. A sponsor can accept tax-deductible charitable contributions while you are waiting for approval from the IRS. If you are a very small organization, a sponsor can provide a long-term relationship as an administrative agent. Either way, a fiscal sponsorship may help you to operate more efficiently.
Often my work as a CPA will intersect with legal advice, as in this column. Thank you to my friend, colleague and fellow Northwest Herald columnist, attorney Ryan P. Farrell of Zukowski, Rogers, Flood and McArdle for his contribution to this column.
• Nancy Gonsiorek is a Certified Public Accountant providing audit, tax and consulting services to nonprofit organizations. Her firm, Nancy L. Gonsiorek CPA LLC, is based in Crystal Lake. She can be reached at 815-455-9462 or email@example.com.