Five Reasons to Consider Fiscal Sponsorships

By Stirling Myles & Geoff Cook, SmartSimple

Fiscal sponsorship has grown in popularity as a viable option for seeding charitable ventures who want to start up quickly without being bogged down by administrative and legal complexities. For the sponsoring organization, this presents opportunities to quickly help projects and programs in a more equitable manner by making funds directly accessible for smaller organizations run by marginalized communities that would otherwise have difficulty gaining those resources in a crowded philanthropic space. In a SmartSimple interview, Zia Maumenee, Grants Manager at Headwaters Foundation, speaks to this point. 

“The challenge for funding arises when more people are in the pool looking for the same amount of funds—some of the smaller organizations get kicked out of the pot because they aren’t as savvy at pulling together those resources,” said Zia. "While it’s more administrative and financial responsibility for the sponsor, fiscal sponsorship provides a simplified avenue for organizations to effectively fund and impact intended communities, especially ones that may be marginalized and have a harder time accessing funds."

Watch the video below to hear from Zia and how Headwaters Foundation implements fiscal sponsorship into the impactful work they do.

How does fiscal sponsorship work?

Fiscal sponsorship is an effective mode of funding new charitable groups, seeding social movements, and delivering on public projects whose activities closely align with the sponsoring organization’s mission. Fiscal sponsorships are led by 501(c)(3) organizations that offer funds, their legal and tax-exempt status, and often administrative services to groups or projects in a fee-based contractual agreement. 

Zia Maumenee states, “Fiscal sponsorship is a great opportunity for sponsored organizations that are in startup mode. They can utilize those administrative resources and funds of the sponsoring organization, and focus more on their mission and less on the administrative burden.” For example, fiscal sponsorships can be a streamlined mode of funding an individual artist creating a mural in the community, or a charitable group holding a volunteer-led fundraising campaign for pediatric cancer research.

Fiscally-sponsored projects can benefit from accessing the resources, experience, and efficiency of the sponsoring organization—including payroll, office space, and fundraising assistance—to enable them to focus on the activities they are looking to effect but may not have the capacity to deal with. 

There are two models of fiscal sponsorship:

1. Comprehensive Fiscal Relationship: This model gives the fiscal sponsor a more managed, hands-on approach to minimize risk by having the sponsee relinquish control over the project. The sponsoring organization assumes many or all of the project’s responsibilities because the impact will advance the sponsor’s charitable mission and ensure the purpose is achieved within the agreed-upon time frame.
2. Pre-Approved Grant Relationship: Using a more trust-based approach, fiscally sponsored groups under this model maintain full or joint ownership of the project but are typically responsible for managing their own tax reporting and liabilities. Zia and the Headwaters Foundation added fiscal sponsorship to their mix so that applications are less tedious and organizations get their money more expeditiously. 

“I can see how—if you’re a small organization and you don’t have a lot of funding—that makes sponsors nervous. I believe in a more trust-based model where general operating funds can go to smaller organizations and it’s helpful for them to get funding from larger foundations when they have the backbone of the fiscal organization who has an audited financial process that they can share,” says Zia.

Here are five reasons why you should consider adding fiscal sponsorship to your foundation's work.

1. Greater focus for projects to achieve their purpose: A fiscal sponsor can oftentimes provide the administrative services needed much more efficiently than less-established groups and individuals can on their own. By providing financial and tax administrative support, this ensures that the sponsor has a transparent, auditable report that mitigates any risk of having fraud or incorrect spending. The economies of scale allow for these services to be more cost-effective and expedient for the sponsored groups than if each group undertook these themselves.

2. Increased equity for communities-of-color-led organizations: Fiscal sponsorship provides more equitable access to funding for communities of color-led groups to effect change and build capacity because of their deep knowledge and unique cultural dynamics. Embracing this direct model of funding may provide more nuanced forms of support that better fit the different cultures and approaches necessary for doing the crucial social justice work.

3. Adds greater transparency and accountability in financial practices: Because fiscal sponsors are larger in size and have more resources in their wheelhouse, they often will be able to hire more-experienced staff to handle technical areas requiring specialized skills, such as due diligence, ensuring a deeper level of accountability and concrete policies to the smallest of organizations.

4. Creates opportunities for collaboration and capacity building: In the crowded nonprofit sector, organizations can have overlapping missions which can create a lack of resources spread out between them. Being under one financial umbrella, this may naturally lead to more coalitions, collaborations, and collective building of power in a community-driven manner instead of funders forcing organizations to collaborate.

5. Enables new ideas to be tested more quickly: Being fiscally sponsored can mean that new, impactful ideas can be incubated, tested, and gain momentum in the community without being held back for months within a more traditional grant application process. This means that delivering on public services can happen faster, especially in times of natural disaster.

This isn’t to say that all groups or projects should be fiscally sponsored, or that it’s a detriment for them to pursue 501(c)(3) status. But with the philanthropic sector evolving towards more innovative and equitable practices, there’s much potential within fiscal sponsorship as a mode of funding to effect change.

This article was underwritten by SmartSimple. For more insights and trends from the SmartSimple on the philanthropic sector, including whether donor-advised funds should be more regulated, check out SmartSimple’s blog and YouTube channel.