Before you incorporate, Consider a Fiscal Sponsor.

Most people who want to start a nonprofit begin by asking how to form one. A better first question is whether the work needs its own organization yet. For many new projects, a fiscal sponsor is the faster and cheaper way to start.

What a fiscal sponsor is

A fiscal sponsor is an existing 501(c)(3) public charity that agrees to support a charitable project that does not have its own exemption. Because the sponsor is already recognized by the IRS, donors can make tax-deductible gifts to the sponsor for the benefit of the project, and foundations that only fund charities can make grants.

The sponsor is not simply passing money through. It remains legally responsible for how charitable funds are used, which is why reputable sponsors review projects before accepting them and ask for regular reports afterward.

The two common arrangements

Practitioners usually describe two main models.

• Comprehensive sponsorship. The project becomes a program of the sponsor. The sponsor holds the bank account, handles payroll and insurance, and signs contracts. The project's staff may be the sponsor's employees.
• Grant-based sponsorship. The project stays separate, often as its own unincorporated group or corporation, and the sponsor makes grants to it from funds raised on its behalf. The project handles more of its own administration.

The first model gives a new project more support. The second gives it more independence. Which fits depends on whether you want someone else to handle the back office or simply need a way to receive deductible gifts.

What it costs

Sponsors typically charge an administrative fee, usually a percentage of the money that passes through the project. The fee pays for accounting, compliance, insurance, and staff time. Compare it with what those same services would cost an independent organization in its first years, including the Form 1023 user fee, bookkeeping, and annual filings.

Questions to ask before you sign

• Who owns the project's name, website, donor list, and any intellectual property?
• How and how often will you receive financial reports?
• How long does it take to get funds released for an expense?
• What happens if you want to leave, either to join another sponsor or to become independent? Can remaining funds go with you?
• Does the sponsor carry insurance that covers your activities and volunteers?

Get the answers in a written agreement. A good sponsor will expect you to ask.

Where to look

Community foundations and larger local nonprofits sometimes sponsor projects in their region. The National Network of Fiscal Sponsors publishes practice guidelines and a public directory of its member sponsors. Ask any sponsor you are considering for references from projects it currently supports.

When to leave

Projects usually outgrow sponsorship when their budget, staff, or program becomes large enough that the fee costs more than running independently, or when funders begin asking for an independent board. At that point the work of the Nonprofit Playbook begins, with the advantage of a track record already in hand.