Fiscal Sponsorship for New Projects: Skip the 501(c)(3) Paperwork
Not every mission-driven project needs its own 501(c)(3). If you want to start raising tax-deductible donations this month — not six months from now — fiscal sponsorship gets you there.
This guide explains how fiscal sponsorship works, the different models, when it makes sense versus filing for your own exemption, how to find and evaluate a sponsor, what it costs, and how to transition out when you're ready.
What Is Fiscal Sponsorship?
Fiscal sponsorship is a formal arrangement where an existing 501(c)(3) organization (the "fiscal sponsor") extends its tax-exempt status to your project. This means:
- Donors can make tax-deductible contributions to your project through the sponsor
- Your project can apply for grants that require 501(c)(3) status
- The sponsor handles compliance — Form 990 filing, state registrations, financial reporting
- You focus on your mission — programming, fundraising, community impact
The fiscal sponsor is the legal entity. Your project operates as a program of (or in partnership with) the sponsor. The sponsor receives the donations, provides financial oversight, and disburses funds according to your approved budget.
It is not:
- A pass-through arrangement (the sponsor must maintain oversight and discretion)
- A way to avoid all accountability (the sponsor has fiduciary responsibility)
- Permanent (you can transition to your own 501(c)(3) when ready)
Fiscal Sponsorship Models
The National Network of Fiscal Sponsors recognizes several models. The three most common:
Model A — Direct Project (Most Common)
| Aspect | Details |
|---|---|
| Legal relationship | Your project is a program of the sponsor |
| Employment | Staff are employees of the sponsor |
| Assets | Owned by the sponsor on behalf of the project |
| Grants | Made to the sponsor with project designation |
| Donor receipts | Issued by the sponsor |
| Board required? | No — the sponsor's board provides governance |
| Control | Sponsor has ultimate discretion over funds |
Best for: New projects, small organizations, projects without staff, founders who want minimal administrative burden.
How it works: The sponsor opens a designated fund for your project. Donations flow to the sponsor, are deposited into your fund, and you submit budget requests for disbursements. The sponsor reviews and approves expenses, ensures they further the charitable purpose, and handles all tax reporting.
Model C — Pre-Approved Grant Relationship
| Aspect | Details |
|---|---|
| Legal relationship | Your project is an independent entity (or unincorporated) |
| Employment | Staff are your own employees or contractors |
| Assets | Owned by the project |
| Grants | Sponsor makes pre-approved grants to the project |
| Donor receipts | Issued by the sponsor |
| Board required? | Often yes — you maintain your own governance |
| Control | More autonomy; sponsor provides oversight |
Best for: Projects with existing staff, organizations that want more independence, projects planning to transition to their own 501(c)(3) soon.
How it works: The sponsor receives tax-deductible donations on your behalf and then makes pre-approved grants to your project. You operate more independently but must report to the sponsor on how funds are used.
Model F — Financial Management
| Aspect | Details |
|---|---|
| Legal relationship | Sponsor provides bookkeeping, payroll, and financial services |
| Employment | Varies |
| Assets | Owned by the project |
| Grants | Made to the project directly |
| Donor receipts | Issued by the sponsor |
| Board required? | Yes |
| Control | Highest project autonomy |
Best for: Organizations that already have their own legal structure but need financial management support.
Which Model Should You Choose?
| Situation | Recommended Model |
|---|---|
| Brand new project, no staff | Model A |
| Testing a concept before committing | Model A |
| Project with existing team/contractors | Model C |
| Need maximum independence | Model C or F |
| Planning to get own 501(c)(3) within 1-2 years | Model C |
| Want to focus purely on mission | Model A |
When Fiscal Sponsorship Makes More Sense Than Your Own 501(c)(3)
You're testing a concept
You have a mission but aren't sure it will become a permanent organization. Fiscal sponsorship lets you raise funds and deliver programs without the $600+ cost and 3-6 month wait of the full Form 1023 process. If the project doesn't work out, you haven't created a legal entity that needs to be dissolved.
You need to fundraise immediately
A matching grant deadline, community crisis, or time-sensitive campaign can't wait 3-6 months for IRS approval. Under fiscal sponsorship, you can accept tax-deductible donations within days of being approved by the sponsor.
Your budget is under $100K/year
At small budgets, the sponsor's fee (typically 5-10% of revenue) costs less than maintaining your own 501(c)(3):
| Expense | Standalone 501(c)(3) | Fiscal Sponsorship |
|---|---|---|
| Incorporation | $25-125 | $0 |
| IRS Form 1023/1023-EZ | $275-600 | $0 |
| Annual accounting | $1,000-5,000 | Included |
| Form 990 preparation | $500-2,000 | Included |
| State registrations | $0-500/year | Included |
| D&O insurance | $500-1,500/year | Included |
| Annual sponsor fee (at $75K revenue) | N/A | $3,750-7,500 (5-10%) |
| Estimated annual total | $2,300-9,225 | $3,750-7,500 |
For projects under $50K/year, fiscal sponsorship is almost always cheaper. For projects between $50K-$100K, it's roughly comparable. Above $100K, your own 501(c)(3) usually becomes more cost-effective.
You want to focus on mission, not administration
Fiscal sponsorship offloads:
- Bookkeeping and fund accounting
- Payroll processing
- Tax filing (Form 990, state returns)
- State charitable solicitation registration
- Donor acknowledgment letters
- Insurance administration
- HR compliance (for Model A)
Your project is short-term
If your project has a defined end date (disaster relief fund, event, campaign), creating a full 501(c)(3) doesn't make sense. Fiscal sponsorship lets you raise money, deliver impact, and close cleanly.
When to Get Your Own 501(c)(3) Instead
- Revenue exceeds $150K+ per year consistently
- You want full control over governance and finances
- You need to hire staff and manage your own payroll
- Grant funders require you to have your own determination letter
- You've outgrown the sponsor relationship
- Your work is permanent, not project-based
For a detailed side-by-side comparison, see Fiscal Sponsorship vs. Starting a 501(c)(3).
A Recommended Partner: InFocus Ministries
InFocus Ministries is a Model A fiscal sponsor that works with mission-driven projects of all sizes. They provide:
- Tax-exempt umbrella — Accept tax-deductible donations on your behalf immediately
- Financial administration — Bookkeeping, fund accounting, disbursements
- Compliance — Form 990, state registrations, charitable solicitation
- Donor management — Tax receipts and acknowledgment letters
- Insurance coverage — General liability and D&O
- Accounting software — Alignmint-powered fund accounting with real-time reporting
InFocus Ministries is based in the U.S. and sponsors projects in education, community development, faith-based initiatives, arts, and human services.
Get started: Schedule a free consultation to discuss whether fiscal sponsorship is right for your project.
What to Look For in a Fiscal Sponsor
Not all fiscal sponsors are equal. Evaluate potential sponsors on:
| Criteria | What to Ask |
|---|---|
| Model | Which fiscal sponsorship model do they use? |
| Fee structure | What percentage of revenue? Any upfront fees? |
| Services included | Bookkeeping? Payroll? Insurance? Donor receipts? |
| Financial reporting | How often do you receive financial statements? |
| Disbursement speed | How quickly can you access funds once approved? |
| Mission alignment | Does the sponsor support projects like yours? |
| Track record | How long have they been sponsoring projects? |
| Exit process | What happens if you want to leave or get your own 501(c)(3)? |
| Insurance | Are you covered under their D&O and general liability? |
| References | Can they connect you with other sponsored projects? |
Red flags:
- No written fiscal sponsorship agreement
- Fee above 15% of revenue
- No financial reporting or transparency
- No clear exit process
- Pressure to stay in the arrangement permanently
- No oversight of how funds are used (this is actually an IRS requirement for the sponsor)
How to Apply for Fiscal Sponsorship
Step 1: Research Potential Sponsors
Look for sponsors that align with your mission area and offer the services you need. Resources:
- Fiscal Sponsor Directory
- National Network of Fiscal Sponsors
- Your local nonprofit association
- Ask other nonprofit founders in your community
Step 2: Prepare Your Application
Most sponsors require:
- Project description — What you do, who you serve, expected impact
- Budget — Projected revenue and expenses for the first year
- Leadership — Who's leading the project, their qualifications
- Fundraising plan — How you'll raise money
- Timeline — When you plan to launch and any key milestones
Step 3: Sign the Fiscal Sponsorship Agreement
This is a legal document that defines:
- The rights and responsibilities of both parties
- Fee structure and payment terms
- Financial reporting requirements
- How funds can be used
- Termination and exit provisions
- Who owns the intellectual property and assets
Have a lawyer review this agreement before signing. Many local bar associations offer free legal clinics for nonprofits.
Step 4: Begin Operations
Once approved, you can:
- Accept tax-deductible donations through the sponsor
- Apply for grants using the sponsor's 501(c)(3) status
- Begin delivering programs
- Hire staff or contractors (per your agreement)
Transitioning from Fiscal Sponsorship to Your Own 501(c)(3)
When you're ready to stand on your own:
Timeline: Plan for 6-12 Months
| Month | Action |
|---|---|
| 1-2 | Incorporate in your state, draft bylaws, recruit board |
| 2-3 | Get EIN, file Form 1023 or 1023-EZ |
| 3-6 | Wait for IRS determination (1023-EZ: 2-4 weeks; 1023: 3-6 months) |
| 4-7 | Register for state tax exemptions and charitable solicitation |
| 5-8 | Set up accounting, banking, insurance under new entity |
| 6-9 | Notify donors and funders of the transition |
| 7-10 | Transfer assets, grants, and contracts |
| 8-12 | Close fiscal sponsorship account |
Key Transition Steps
- Notify your fiscal sponsor — Most agreements require advance notice (30-90 days)
- Incorporate and get IRS approval — Complete the standard startup process
- Transfer assets — The sponsor transfers your fund balance to your new entity
- Transfer grants — Notify funders and request they redirect future payments
- Update donors — Send a letter with your new EIN and organization name
- File final accounting — Close your sponsored project account cleanly
For the full startup process, see How to Start a Nonprofit or use our Nonprofit Startup Checklist. Take the Eligibility Quiz to determine whether fiscal sponsorship or your own 501(c)(3) is the better path. Either way, fund accounting keeps your restricted and unrestricted funds properly separated.
Ready to get started? Schedule Your Free Consultation | Start Free — Under $100K in Donations
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