Four Guidelines for Selecting a Fiscal Sponsor

Navigating the nonprofit sphere can be daunting, especially when it comes to getting your 501(c)(3). You may consider fiscal sponsorship as a means of gaining access to tax-exempt funds while your nonprofit organization is without official tax-exemption. It is important to make sure the fiscal sponsor you choose, like any other service provider, will fit your needs and the needs of your organization. Here are a few guidelines to keep in mind while selecting a fiscal sponsor to partner with.

 

1. Align Your Vision

 

Many fiscal sponsors have a specific purpose in mind when they look for clients. Before you seek a relationship with a particular fiscal sponsor, it is essential that you take their mission into consideration to ensure they will be effective in assisting you. Humanitarian Social Innovations specializes in humanitarianism and social entrepreneurship, sponsoring projects that make the world a better place for a sector of humanity. However, there are over 200 fiscal sponsors in the United States that are involved in issues from the arts to international affairs.

2. Transparency

Transparency is the key to a good sponsor-client relationship. It is vital to keep track of what funds your sponsor holds on your behalf, to know how much of that money goes to administrative fees, and to have a general knowledge of what the administrative fees are covering. Your sponsor should be willing and able to provide you with any relevant information you request. If the sponsor does not readily respond to your inquiries, it may be a red flag.

3. Competency and Accountability

Competency and accountability are important when selecting a fiscal sponsor

Two of a fiscal sponsor’s responsibilities to their clients (other than providing the sponsorship, of course) are maintaining their tax-exempt status and staying in business. A good fiscal sponsor will demonstrate networking abilities, have a working knowledge of the grant system, and be capable of handling funds wisely in the face of a fluid economy. They will also be well informed on the non-profit industry and be on top of filing taxes and paperwork necessary to keep their 501(c)(3) status.

 

4. Know Your Model

The two most common models of fiscal sponsorship are the comprehensive fiscal sponsorship (Model A) and the pre-approved grant relationship (Model C). In Model A, the fiscal sponsor takes responsibility for the program’s assets and activities, managing the liabilities while the creator of the program remains free to run the program as they see fit. In Model C, the fiscal sponsor will provide a structure in which an incorporated project can access tax-exempt donations and grant funds, but the non-profit is otherwise a separate entity from the sponsor. When selecting a fiscal sponsor, you should determine which model aligns best with your goals and make sure your contract appropriately follows the guidelines for the model you have chosen. In a pre-approved grant relationship, a fiscal sponsor should not try to take ownership of assets or activities aside from those designated for fundraising. Humanitarian Social Innovations practices both Model A (Acceleration) and Model C (Certified Grantee). 

The world of fiscal sponsorship may be a bit overwhelming at first, but once you have been taken safely under the wing of a trustworthy sponsor that meets your specifications, you will be able to turn your focus away from administrative worries and back to making the world a better place. 


Should You Use the 1023-EZ to Get Your 501(c)(3)?

          Back in July of 2014, the Internal Revenue Service saw a need to address a growing backlog of applications for tax exempt status. Their solution was to introduce a new, shorter application (the 1023-EZ) aimed at small-revenue charity applicants. Although the 1023-EZ sounds like an organization’s dream, there are some drawbacks when compared with the original long form. Let’s take a look at some pros and cons, and determine if you may be eligible for this EZ form. 

Eligibility to Complete Form 1023-EZ

  • You are not eligible to use the 1023-EZ form if your organization:
    • has received more than $50,000 in its previous three year existence.
    • is projected to receive more than $50,000 in the next three years,
    • has accumulated more than $25,000 in assets.
    • was formed, or has a mailing address, outside of the United States.
    • is a limited liability company (LLC).
    • is a church, school, college, or university.
    • has replaced a for-profit organization.
    • is a private operating foundation.
  • A complete eligibility worksheet can be found at the end of the Form 1023-EZ instructions at this link.

Rationale for Using Form 1023-EZ:  Pros

  • Shorter and easier to complete

Instead of filling out the 26-page application, the new EZ application is only 3 pages.Planning a nonprofit The IRS estimates that it takes 19 hours to complete this form. However, this is mainly due to preparation hours, which they consider will take up to 10 hours. If you’re prepared it should only take you 4-5 hours to complete. In contrast, the estimated completion time for the long Form 1023 is 105 hours.

  • More rapid determination and notification of status

Normally the determination process can take anywhere from 6 months to a year and a half. With the 1023-EZ, the IRS gives you an approval or denial letter within 2-4 weeks of completing the application. We have even heard of organizations receiving notification within 3 days.

  • Less costly

Because the new application is fairly easy and self-explanatory, you will not have to hire legal counsel to assist with the form.

The filing fee for the 1023-EZ has been reduced to $275 as of July 1, 2016, whereas the filing fee for IRS Form 1023 is either $400 of $850, based on your organization’s projected income.  

Basis Against Using Form 1023-EZ:  Cons

  • Lack of IRS backing for donors

 From the perspective of donors, the Form 1023-EZ process transfers the responsibility for attestation of appropriate organizational materials from the IRS to the signer of the Form 1023-EZ. IRS Revenue Procedure 2014-40  clearly states,

“a determination letter issued to an organization that submitted a Form 1023-EZ…may not be relied upon, if it was based on any inaccurate material information submitted by the organization.”

Inaccurate material is rather subjective in this instance, as this could pertain to your organization’s projections, exemption purpose, conduct of prohibited and restricted activities, or even organizational documents. Form 1023-EZ, does not provide the IRS with as much information as the original application does, so there is less verified information to make a determination on the attestations the signer made.

  • Signer Liability

There are numerous liabilities the signer of the 1023-EZ Form takes on because the statements and representations penalty-of-perjurymade in the application fall under penalties of perjury should the statements be shown false.

For instance, the signer is accountable for any false information on the application. The signer also must attest to conditions he or she may not be qualified to fully understand. Some of these, but not all, include the verification of the organization’s charitable purpose, the existence of the proper founding documents, and that the founding documents contain the appropriate wording to ensure that the organization will be obeying laws regarding political activity, inurement of funds, and dissolution to name a few.

The form’s instructions do not mention any of these liabilities, only that the signer must check the box “penalty of perjury.”

  • Research Findings

The Taxpayer Advocate Service, (TAS) in its 2015 Report to Congress, stated,

“analysis of a representative sample of Form 1023-EZ applicants that obtained exempt status: 37% of the organizations in the sample did not satisfy the legal requirements for exempt status.”

In that same report, the TAS provides the following graphic showing that normally 95% of 1023-EZ applications are approved for exemption, however when the documentation is requested from a representative sample, only 77% of organizations are approved.

Should we be concerned that those running fully one-third of the 1023-EZ organizations are not aware of the requirements on 501(c)(3) organizations?

Read the full report here

Boiling it Down

     Generally speaking, the 1023-EZ application seems to best-fit smaller nonprofits looking to quickly get on the grid and not spend a huge sum of money. However, if you’re an organization who decides to go down this avenue, proceed with caution. This is a fairly new process, with some contradictions and confusing consequences. Perjury is as serious as it sounds. You will want to consult a knowledgeable source before proceeding.

Andrew MengelContributed by Andrew Mengel

HSI Intern, Summer ’16


The Importance of Core Values

Identify your organization’s core values.

Is this just one of the boxes on the business start-up checklist installed in the entrepreneur’s thoughts by well-meaning friends, professors or small business development office folk?  Or is it a vital step in developing a thriving organization?

DeathtoStock_Desk2All entrepreneurs – take a note from the name of the task. Core values are the center, or core of the organization. Too many entrepreneurs skip the process of intentionally developing these concepts that anchor their new organization.  After all, the reasonable founder has a good internal sense of values. It is tempting to put off the task until the commotion of startup activities settles down a bit.

Dont’ do it! Before the entrepreneur takes on board members, writes a mission statement or even begins to develop programs, he or she must take a moment to ponder these values in order to have a depth of focus on which to build all else.  So what are core values, and how should they be exhibited within the organization?

Identify your core values

There are three tests to determine whether the values you are considering can be elevated to the stature of the core value.  The value transcends time.  Will this value be just as important 100 years from now? The value transcends the organization. If you leave your organization and found another, will this value still be important and relevant to you?  The value transcends economic considerations. If someone offers you a large amount of money to betray this value, will you refuse the offer in favor of this value?

Define your core values

IMG_0383Once you have identified your core values, be sure to define them and consider the behaviors that members of your organization should have as a result of that value.  For example, at Humanitarian Social Innovations our first core value is respect.  We have defined respect as “Having a high esteem for the worth of each person’s qualities and abilities, no matter how like or different we perceive them from our own.” Two behaviors that stem from this core value are consistently assuming positive intent from others, and always thanking when assistance is given.

Use your core values

So get to it!  Roll up your sleeves and write those core values, entrepreneur!  Or maybe you just want to look up those old core values and test them out to see how core they really are to your organization.

Once you do, you are ready to build your programs, your culture, your staff, your board on the core values you have identified.