“My group wants to become a nonprofit. I’ve heard that we can ‘borrow’ another group’s nonprofit status. Is that true? How do we do it?” – Bob K., Minneapolis, Minnesota
The basic answer to your first question is “yes.” Existing nonprofit groups can take another group under their 501(c)(3) umbrella, if they wish, by acting as a Fiscal Sponsor. Under a Fiscal Sponsorship arrangement a group that is not currently a nonprofit signs a letter of agreement with an existing organization that is already recognized by the Internal Revenue Service (IRS) as a 501(c)(3) nonprofit. The letter, in effect, makes the new group a ‘project’ of the host organization. The advantages for the sponsoree are many. It can receive tax-deductible donations, be exempt from taxes that do not apply to nonprofits, and become eligible to apply for a much broader range of grants than those available to groups that do not have (c)(3) status, among others. The sponsoring group becomes responsible for fiscal oversight of the new group, and it must ensure that its sponsoree adheres to IRS requirements for activities permitted to and not permitted to nonprofits. The sponsoring group often holds the funds of the sponsoree in its own accounts and either reimburses them for expenses incurred by the sponsoree or issues checks to the sponsoree when requested to cover upcoming expenses. It is typical for the sponsoring group to charge a fee of between two and five percent of gross revenues of the sponsoree to cover the cost of administering the arrangement.
The sponsoree maintains its own mission statement and staff as well as its own oversight body, which is often called a Steering Committee while it is under Fiscal Sponsorship. The Steering Committee becomes the group’s board of directors once it has its own independent nonprofit status from the IRS. Sometimes groups that gain nonprofit status under a Fiscal Sponsorship agreement are intended as short-term projects, and they simply cease operations when they have achieved their goals. In such cases the sponsoree does not seek its own 501(c)(3) approval from the IRS. Fiscal Sponsorships are generally short-term arrangements in either case. The sponsoring group should probably stay in touch with its sponsoree concerning their filing of IRS Form 1023 which begins the process of seeking their own nonprofit status. It is important to remember that the sponsor is directly responsible for the conduct of group(s) that it is sponsoring. If they engage in activity prohibited to nonprofits by the Internal Revenue Code the sponsor is answerable to the federal authorities and could suffer sanctions up to and including the loss of their own (c)(3) status.
Groups considering Fiscal Sponsorship should consult with an attorney familiar with this area of nonprofit law. You can read more about Fiscal Sponsorship at the Nonprofit Genie FAQ.
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