Fiscal Sponsorship vs. 501(c)3 Status (nonprofit)

“It is more difficult to give money away intelligently than to earn it in the first place.” - Andrew Carnegie

Deciding between fiscal sponsorship and registering for 501(c)3 (nonprofit) status isn’t a difficult decision, but it is one that can change based on where your organization stands at different times.

Typically, newer organizations may enjoy fiscal sponsorship because they can focus on their projects and goals without worrying about filing extra paperwork such as applying for nonprofit status and the relevant accounting necessary to fulfill the criteria necessary for being granted nonprofit status. New organizations may not have the history or precise estimate of their bookkeeping to be able to qualify for this status, and so it is extra work that may not bear the fruit you’re hoping to get.

While it is appealing to be independent with nonprofit status, this is more appropriate when your projects and outcomes have shown proven results and focus. Having fiscal sponsorship makes sense then by allowing your sponsor to calculate and propose budgets and guidelines for you and provide financial guidance for your work, which will save you both money and time in the long term, especially from making decisions that end up being mistakes.

On the flipside, some social entrepreneurs and organizations may insist that they have a better understanding of how to budget and allocate their funds based on their relationship at a grassroots level, especially for communities and other constituents in their target niche; for example, someone who lives in Cambodia trying to convince a Silicon Valley fiscal sponsor why they need more money allocated to mosquito nets rather than digital tablets. This scenario is where independence may be more attractive when the sponsor has certain experiences that may not actually translate well to how they determine the amount of funding to be dispersed and their criteria as to where it is designated for allocation.

When you get to the early or mid-level stages of your organization’s life, this doesn’t mean it’s time to automatically “graduate” from fiscal sponsorship to nonprofit status, as every organization’s mission objectives and niche are different. Likewise, even existing organizations that don’t have nonprofit status and operate as social enterprises may never need to seek nonprofit status, nor do they want to, and having a fiscal sponsor may be more in line with their values.

The key to determining whether you should apply for nonprofit status or pursue fiscal sponsorship begins with making sure you understand your organization’s focus, and if that focus will benefit from independence and the tax benefits of a nonprofit, or if funding, guidance, and a continuing partnership from a fiscal sponsor will save a significant amount of time to compensate for the limitations and criteria your sponsor designates for you, and the commission earned by the fiscal sponsor is small in comparison to the time you save (and in turn more money) by being able to focus on your operations.

As nothing is set in stone, fiscal sponsors may change or pull out, your focus may evolve, and you may decide as a social enterprise that you need neither a fiscal sponsor or nonprofit status! So long as you figure out what works for you at the appropriate time, you can determine which approach to take between the two–if at all–is best for your operations.