Fiscal Sponsorship vs. Starting a 501(c)(3): Which Is Right for Your Project?

You have a mission-driven project and you need tax-exempt status to receive tax-deductible donations. You have two paths: find a fiscal sponsor or file for your own 501(c)(3) designation with the IRS.

Both are legitimate. Both have trade-offs. This guide breaks down the decision so you can choose the right path for your project's stage, budget, and goals.

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. Donors give to the fiscal sponsor with your project designated, and the sponsor manages the financial administration — receiving donations, disbursing funds, filing taxes, and ensuring compliance.

For a deeper look at how fiscal sponsors manage their portfolios, see our fiscal sponsorship software guide. The legal basis for fiscal sponsorship comes from IRS Revenue Ruling 68-489, which established that a tax-exempt organization can receive contributions earmarked for a specific project and maintain its own exemption, provided it retains discretion and control over the use of funds.

The National Network of Fiscal Sponsors (NNFS) defines six models of fiscal sponsorship, with three being most common:

• Model A (Direct Project): Your project operates as a program of the fiscal sponsor. The sponsor has "variance power" — legal discretion over how funds are used. Your staff may technically be employees of the sponsor.
• Model C (Pre-Approved Grant): The sponsor makes grants to your organization (which may be an LLC or unincorporated association). You have more operational independence, but the sponsor must approve expenditures.
• Model F (Group Exemption): Multiple organizations share a group exemption letter from the IRS. Each org operates independently but under the umbrella of the central organization.

What Does Starting a 501(c)(3) Involve?

Filing for your own 501(c)(3) status means:

1. Incorporating as a nonprofit corporation in your state
2. Drafting bylaws and articles of incorporation with required IRS language
3. Forming a board of directors (most states require at least 3)
4. Filing IRS Form 1023 or 1023-EZ for tax-exempt recognition
5. Waiting for IRS determination (3-6 months for 1023-EZ, 6-18 months for full 1023)
6. Registering for state solicitation in every state where you fundraise
7. Ongoing compliance — annual Form 990, state filings, board governance

The Decision Matrix

Factor	Fiscal Sponsorship	Own 501(c)(3)
Time to start fundraising	Days to weeks	3-18 months
Upfront cost	$0-500 (sponsor application fee)	$2,000-5,000+ (legal + filing fees)
Ongoing cost	5-15% of revenue (sponsor fee)	$500-2,000/year (compliance, accounting)
Control over funds	Shared with sponsor (Model A) or supervised (Model C)	Full control
Board requirement	No (sponsor's board governs)	Yes (3+ independent directors)
Tax filing	Sponsor files (your project is included)	You file Form 990 annually
Donor perception	Varies — some donors prefer direct giving	Generally preferred by institutional funders
Exit complexity	Must negotiate asset transfer	N/A — you own everything

When Fiscal Sponsorship Makes Sense

You're Testing a Concept

If your project is in its early stages and you're not sure it will become a permanent organization, fiscal sponsorship lets you fundraise immediately without the commitment of incorporation. If the project doesn't work out, you haven't spent $5,000 on legal fees and IRS filings.

You Need to Fundraise Now

The IRS determination process takes months. If you have a time-sensitive fundraising opportunity — a matching grant, a community crisis, a seasonal campaign — fiscal sponsorship lets you accept tax-deductible donations within days.

You Don't Want Administrative Burden

Running a 501(c)(3) means board meetings, annual filings, state registrations, and compliance obligations. If you'd rather focus entirely on your mission, a fiscal sponsor handles the back office.

Your Budget Is Under $100K

For small projects, the sponsor fee (5-15% of revenue) is often less than the cost of maintaining your own 501(c)(3) — accounting software, tax preparation, legal compliance, and board administration.

You're a Collaborative or Collective

Loosely organized groups — artist collectives, community coalitions, mutual aid networks — often don't fit the traditional nonprofit board structure. Fiscal sponsorship provides tax-exempt status without requiring formal governance.

When Your Own 501(c)(3) Makes Sense

You're Raising Over $250K/Year

At higher revenue levels, the sponsor fee becomes significant. 10% of $500K is $50,000/year — far more than the cost of running your own compliance. The break-even point is typically $150K-300K in annual revenue, depending on your sponsor's fee structure.

You Need Full Control

Under Model A fiscal sponsorship, the sponsor has legal discretion over your funds. If you need complete autonomy over spending decisions, hiring, and program design, your own 501(c)(3) provides that.

Institutional Funders Require It

Some government grants and foundation programs require applicants to be independent 501(c)(3) organizations. While many funders accept fiscally sponsored projects, some do not.

You're Building for the Long Term

If you're confident this will be a permanent organization with growing staff, programs, and revenue, starting your own 501(c)(3) avoids the eventual transition from fiscal sponsorship — which can be complex and disruptive.

The Transition Question

Many projects start with fiscal sponsorship and later transition to their own 501(c)(3). This is a well-established path, but it requires planning:

• Asset transfer — Negotiating the transfer of funds, donor records, and intellectual property from the sponsor to your new entity
• Donor communication — Informing donors of the change and updating recurring gifts
• Grant transfers — Working with funders to reassign active grants
• Timeline — Plan for 6-12 months of overlap between filing for your 501(c)(3) and completing the transition

How Software Fits In

Whether you choose fiscal sponsorship or your own 501(c)(3), you'll need software to manage finances, donors, and operations.

For fiscal sponsors managing multiple sponsored projects, purpose-built fiscal sponsorship software is essential. Each sponsored org needs its own completely private space with consolidated reporting at the sponsor level.

For new 501(c)(3) organizations, all-in-one nonprofit software that combines fund accounting, donor CRM, and volunteer management eliminates the need to cobble together multiple tools from day one.

Alignmint serves both paths — fiscal sponsors use the Enterprise plan to manage all their organizations from one account, while independent nonprofits use the Starter (free) or Pro plans.

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Related:

• Fiscal Sponsor Management Software — Purpose-built for managing multiple organizations from one account
• The Complete Guide to Fiscal Sponsor Management Software — What fiscal sponsors need from software
• How to Choose a Fiscal Sponsor — A guide for projects seeking fiscal sponsorship
• Fiscal Sponsorship Fee Structures Explained — Understanding sponsor fees