Fiscal sponsorship is a fundamental nonprofit strategy that encourages and promotes nonprofit and charitable activity in Illinois. Whether you have a nonprofit idea and charitable endeavor you want to develop, or you have a 501(c)(3) public charity and you want to contribute to a project that may lack exempt status, fiscal sponsorship is a wise idea. Either way, fiscal sponsorship for Illinois nonprofits remains a prominent alternative to starting a nonprofit, allowing you to seek grants and solicit tax-deductible donations under your sponsor’s tax-exempt status.
In other words, fiscal sponsorship is almost like a reassuring wing, where established, 501(c)(3) nonprofits are able to support charitable projects and other endeavors. Often, it gives the project the necessary resources (with the aid of tax exemptions) to get the charitable project off-the-ground. If you are considering fiscal sponsorship, it can be important to get the help Illinois nonprofit attorney James C. Provenza.
With years of experience helping Illinois nonprofits navigate the complicated legal avenues that nonprofits must face, attorney Provenza can provide counsel, legal representation, and more. Call our Chicago IL nonprofit law firm today at (847) 729-3939.
What Does a Fiscal Sponsor Do?
Some 501(c)(3) nonprofits in Illinois seek to encourage and facilitate nonprofit and charitable activity in the state. When taking the fiscal sponsorship role, the sponsor often performs a variety of functions on behalf of the sponsored organization or program. For instance, most fiscal sponsors receive and administer charitable contributions on behalf of the sponsored organization. Other roles can include back-office functions and even pro bono consulting.
It is perfectly acceptable for a fiscal sponsor to charge fees for its services, and some 501(c)(3) organizations solely sponsor other charitable projects throughout the State. However, the Internal Revenue Service (IRS) is very specific with one component regarding fiscal sponsorship: the fiscal sponsor maintains the right to decide, at its own discretion, how the sponsee will use contributions. Maintaining the right to control donated funds (often offered as a grant to the charitable project) is a requirement of a legitimate fiscal sponsor agreement.
Why Fiscal Sponsorship?
In many cases, fiscal sponsorship is used by newly formed nonprofits that are raising money during their start-up phase. Generally, these new nonprofits don’t have their IRS tax-exemption. However, through the fiscal sponsor, the new start-up can attract funds for its operations that are tax-deductible to donors. The start-up, in this common situation in Illinois, can have a flow-through of funding and resources that would otherwise be unavailable.
Additionally, there are several other aspects of fiscal sponsorship that are important to know, including:
- Donors cannot claim a deduction unless they itemize deductions and only donate to an organization recognized by the IRS as tax-exempt. See IRS Publication 557.
- Fiscal sponsorship allows a newly formed nonprofit to test-drive its ideas to determine if there is a desire among the public.
- Some organizations remain in a fiscal sponsorship agreement for a long time, choosing to fulfill their mission without needing to create a new entity.
- Some organizations use a fiscal sponsorship to outsource certain duties, such as administrative responsibilities, back-office tasks, or tasks relating to fundraising and the disbursing of funds.
Working Out a Fiscal Sponsorship Agreement
When considering a relationship with a fiscal sponsor, there are many important things to consider to ensure a good fit, including:
Make sure to find a fiscal sponsor with a good mission fit to your mission. For instance, if your project’s mission involves art, it’s a good idea to find a sponsor who also focuses on this sector.- Consider the costs of working with a fiscal sponsor. For many agreements, 10% of yearly income is a common fee; however, this fee can be higher if the agreement involves the passing of government grants (which have to be audited) or reimbursable grants. Some fiscal sponsors may be in the position to floating the upfront money.
- Look for active sponsorship. Active sponsors typically provide financial and programmatic oversight, and may even provide educational opportunities and networking events.
- Make sure the sponsor follows best practices, such as regular financial reports, written contracts, and more.
- Consider all of the services provided by the fiscal sponsor. A quality fiscal sponsor should provide financial management and grant supervision. It should also provide a way to buy insurance. At the same time, some fiscal sponsors provide office space, co-location, and access to bulk purchasing.
What Fiscal Sponsors in Illinois Expect from You
Remember, a fiscal sponsor agreement is a two-way relationship, meaning that the sponsor has expectations of the sponsee and vice versa. Often, the sponsor will consider the following:
- They will look for a legitimate nonprofit purpose. For example, if you applied for a tax-exempt status, would the IRS consider your purpose as a legitimate charitable endeavor?
- They will make sure that your project has traction for funding.
- Many sponsors won’t work with a project unless the project has a minimum income.
- Most sponsors won’t work with a project unless that project is ready.
How an Illinois Nonprofit Attorney Can Help
Doing a fiscal sponsorship wrong can have long-lasting impacts on your project or charitable endeavor. In some cases, it could mean the end of your project. For this reason, and because of the importance of a quality fiscal sponsorship agreement, it’s essential to get an Illinois nonprofit attorney on your side. With Chicago attorney James C. Provenza, we’ll diligently go through the fiscal sponsorship process with you, helping to make sure a quality and beneficial relationship. Call our Chicago law firm today at (847) 729-3939.
