Many community leaders approach Cultivate asking for financial support. Though we cannot give grants or other financial support to people in our program, we do help them find a fiscal sponsor. Fiscal sponsorship is an important aspect for community organizations seeking support from donors in the USA.
Here is a section of our Introduction to Fundraising course which explains what fiscal sponsorship is, and why it is important. Like what you are learning? Take the full course! Learn more and enroll here.
Fiscal Sponsors – Why They Are So Important
For an American to receive a deduction in their taxes, they must prove to the government that the money they gave to a charity was to a legally registered charity. If the charity is not registered with the American government, they do not receive the tax deduction. As a foreign charity, you may be registered in your own country, but you are not registered in the USA. As an American charity, you operate without going through the process of registration. This is common for small programs, especially as they start. In both situations, Americans can give you money, but it is not a tax-deductible donation for the donor, therefore many donors may not choose to give you financial support. For example, you are starting your program and someone you know wants to give you $1000 to help you get started. You have a strong relationship with this person, so they trust you. Whether you are in the USA or outside the USA, the rules are still this same. This person can give you the money, that is their own choice, but when this person completes their annual income taxes, they are not able to use the $1000 donation as a deduction on their taxes. This is the easiest option for small organizations but will drastically reduce the amount of donations you will receive, as almost 100% of donors will expect to be able to count their donation for tax deduction. Therefore, an international program or an American-based program has two options for fundraising in the USA so the donor can receive the tax deduction:
Option 1. You register your program as a 501c3 nonprofit organization. This simply means your program becomes a registered charity (501c3 is the number of the law that pertains to charities in the USA, so that is why charities are often called 501c3 organizations). For your program to register in the United States, it can be an expensive and difficult process, no matter if you are in the USA or outside of it. And once you are registered, there are yearly reports and fees that must be paid. Though you are free to pursue this option, we do not recommend it for a small and young program such as yours, because it is very difficult and expensive. Your program may in the future choose to register, but that is something we suggest you wait to do once you are ready. If you become a registered charity, all donations given to you by Americans are tax-deductible. Here’s a quick summary of the expectations of registered charities:
- The application takes anywhere from a few weeks to several months.
- You will need to pay a $600 (or higher) fee to the IRS (Internal Revenue Service – a federal department that oversees taxes and charities), plus additional fees to the state that you are registering in (which you must be registered in a particular state, or several states depending on their laws).
- You will need a Board of Directors that will manage the organization in its registered state.
- You will need documents such as Articles of Incorporation and Bylaws.
- You will also likely need to register with the state’s Attorney General, Secretary of State, and possibly other departments.
- Each year, you will need to submit financial reports to the IRS and Attorney General, plus renew your registrations with other departments.
- Once you receive donations above a certain level (it varies by state, for example in Minnesota it is $250,000 or more), you must have an independent accountant conduct a yearly audit of all your financial records.
Option 2. You do not register your program and instead find a regranting organization, or fiscal sponsor, who will work with you. A fiscal sponsor is an organization that is already registered in the USA and accepts a program such as yours as part of its organization – whether your program is in the USA or outside of it. The unregistered program receives the benefit of receiving donations through the fiscal sponsor. This allows donors to give donations to the fiscal sponsor and request their donations be designated to your program, and the fiscal sponsor then gives you the donation. However, because the fiscal sponsor is taking on the responsibility for your program, there is much that will be expected from you. For the fiscal sponsor to keep their legal registration, they will need to receive from you receipts, financial reports, and other documentation. There are many fiscal sponsorship organizations that you can ask to accept you, and most have applications and will charge you a fee for this service – usually a percentage of the donations you raise, likely between 5-12%. Most fiscal sponsorship organizations will simply charge you a fee for the service and will not help you do the fundraising, but some may also give you other support. If you choose to work with a fiscal sponsor, it is important that you fully understand what their expectations are of you, what services or support they will offer you, and other important information like contracts and fees.
We suggest that you begin working with a fiscal sponsor in the first years of your organization, rather than trying to register directly. This will save you time and stress, and even money. The fees you pay to the fiscal sponsor will likely be less than the costs of running your own registered organization. The costs that you likely will have in managing your own bookkeeping, handling registrations and audits, employee payroll, and other things that your fiscal sponsor can do for you will quickly become larger than the cost of working with a fiscal sponsor.
American Organizations Seeking Fiscal Sponsorship
US-based organizations will have a much easier time finding a fiscal sponsor than internationally based organizations. To begin, American organizations should look for registered nonprofits in their own communities that have similar missions or programs to what your organization will be offering. These are likely your best option for a fiscal sponsor. Even if the organization does not currently work as a fiscal sponsor for any other programs, it is still a good idea to talk to them about this option. We suggest you learn more here:
- https://grantspace.org/resources/blog/find-a-fiscal-sponsor-that-fits/
- https://grantspace.org/resources/knowledge-base/examples-of-fiscal-sponsorship-agreements/
If you cannot find a fiscal sponsor in your own community, you can look for an organization outside of your community or state that offers this service. Here is a list you can review: https://fiscalsponsordirectory.org
Global Organizations Outside the USA
For internationally based organizations, finding a fiscal sponsor is more complicated. Because of the IRS regulations around sending money internationally, many organizations fear becoming a fiscal sponsor for an international program. Still, it is not impossible to find one. Cultivate has a list of fiscal sponsors that you can view here: https://bit.ly/Cultivate_fiscalsponsors. If you want to get our help in finding a fiscal sponsor, join our program and we can help you out.
Whether you are based in the USA or not, our hope is that someday your organization will be large enough that you no longer need a fiscal sponsor, and that you can become a registered charity on your own. But we recommend that you first take the time to establish your program before you work through the process of registration. That means you receive consistent donations and have extra income to cover the costs of being a registered charity, have enough staff and volunteers, and have relationships with people who are willing to become your Board of Directors. Do not rush the process. Ask us questions and we will be happy to help you when the time is right.
