Why should we use a model C fiscal sponsor? The main benefit of a model C fiscal sponsor is to open up funding sources to its sponsored partners. There are many funding sources that are only available to 501c3 nonprofits. A vast number of grants, private foundations, and individual donors will only work with 501c3s. Unlocking these sources can rapidly grow your organization’s budget above what you could otherwise reach on your own. You have two main options to reach this funding: create a 501c3 charity, or seek out a fiscal sponsor. While becoming and sustaining a nonprofit has variable costs and expanded demands on your time, fiscal sponsors typically use a flat cost-sharing percentage to provide their administrative support. 

What costs are we sharing with a fiscal sponsor? When you become a sponsored partner, you’re not just getting access to more funds. A fiscal sponsor has already built up and takes on the administrative and IRS requirements to maintain nonprofit status, letting you focus your time and energy on the mission. Splitting off operational tasks conserves resources, reduces duplication of personnel, and simplifies organizational functions. It can take months or even years to get 501(c)(3) status, and setting up the systems and governance structures of a nonprofit take time and continual maintenance. This time commitment has already been absorbed by the sponsor.

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This backbone means a fiscal sponsor can act as a proving ground for a new idea or a new organization, lifting a group off the ground before they’re ready to take on the red tape. Should the sponsored partner thrive, they are able to scale quickly and meet urgent needs instead of being slowed down by building their administrative staff. Staff at fiscal sponsors also serve as a knowledge base, approving projects and helping ensure the people doing the work don’t run afoul of the law. Some partners “spin off” into their own nonprofits once they know how to deal with its administration. Others stay connected to their sponsor because they value the support and don’t want to take on the headache of back office work. Still others are in response to a short-term need and naturally end when the charitable venture is complete.

 

As a sponsored partner, you’re also gaining history. You leverage the sponsor's established grantor relationships and history to gain credibility and access to an even wider variety of grants than would be feasible for a brand new nonprofit. Fiscal sponsors are already familiar with grant reporting and can dot the i’s for you that you may miss.

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Wouldn’t it be better to do the work yourself and incur exactly the costs you use? Probably not. Nonprofits typically have overhead ratios of around 20%, which will vary over time with your needs. A flat rate far below that average is generally a good way to control costs and ensure the lion’s share of your funding and your time goes directly to programming. Mind you, some very large sponsored partners may “overpay” the exact amount of time and resources they use with their sponsor, but this is uncommon. Most fiscal sponsors actually don’t sustain their operations from the cost sharing they receive from their sponsored partners alone. Other funds raised by the sponsor, as well as any large partner’s “overpayment”, are used to fill their administrative deficits. 

Why would a sponsor purposely take on a deficit? Fiscal sponsors are cognizant of equitable distribution. Asking a $10,000 grantee to pay the actual cost of hours worked by their sponsor’s operational staff would be unfeasible and an antithesis to the point of fiscal sponsorship. Partners, whether big or small, should be given the opportunity to thrive and grow with their sponsor.

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Which activities by a group are not eligible for fiscal sponsorship: 

• Designed primarily to financially benefit an individual or business (non-charitable) 

• International activities involving financial transactions 

• Raising funds through charitable gambling (such as raffles or bingo fundraisers) 

• Licensed mental health care, medical services, personal care, or childcare as a direct service. Education and/or support services that do not require special licensing are allowed. 

• Organizations that require exceptional governmental oversight and licensing 

• Organizations that have already received their federal 501(c)(3) tax-exempt status from the IRS