hybrid corporation, the IRS wouldn’t allow you to claim your contribution as a charitable gift.
Low profit limited liability companies (L3Cs): The L3C model was designed to better attract capital investments from investors seeking a return on their money, as well as program-related investments (PRIs) from foundations. (PRIs are typically loans from foundations, not grants.) Foundations can count the funds used to provide PRIs toward their charitable-spending requirements as long as the charitable purpose of the project furthers the foundations’ charitable purposes. The governing documents of the L3C are designed to make this approval easier to receive. So far, the IRS hasn’t approved blanket acceptance of all PRIs awarded to L3C companies. Find more information about the L3C hybrid corporation on the Americans for Community Development website (www.americansforcommunitydevelopment.org).
B-Corp organizations: B-Corps must adhere to certain accountability and transparency standards and have positive impacts on society and the environment. The nonprofit organization known as B-Labs (www.bcorporation.net) is leading the B-Corp accountability standards and advocacy efforts toward encouraging state lawmakers to pass legislation establishing this corporate model. B-Labs compares the B-Corp movement to fair trade certification, which ensures that products are produced in an equitable, environmentally sound manner.
Flexible purpose corporations (FPCs): Sometimes called social purpose corporations, this newest form of hybrid corporation is similar to the B-Corp, except that it must have a more specific charitable purpose. Accountability and transparency standards for FPCs are developed internally by the corporations rather than by outside certifying agencies.
Although the notion of doing good in the world while still being allowed to make a profit is attractive, we recommend approaching these new corporate forms with caution. It’s still early in this movement, and it’s difficult to predict how effective these new hybrid corporations will be. If you’re thinking of establishing an L3C or another hybrid organization, consult an attorney who’s knowledgeable in this field before moving forward.
Using a Fiscal Sponsor: An Alternative Approach
If you’re simply interested in providing a service, maybe you don’t want to waste your time with the bureaucratic and legal matters that can complicate a new nonprofit start-up. Or maybe you have a project that will end after a year or two, or you simply want to test the viability of an idea. Why bother to establish a new organization if it will close when you finish your project?
You may not need to start a nonprofit to carry out the program you’re thinking of starting. Instead, fiscal sponsorship may be the best route for you to take. In this approach, your new project becomes a sponsored program of an existing 501(c)(3) nonprofit organization. Contributions earmarked for your project are tax-deductible because they’re made to the sponsoring agency.
A fiscal sponsor is sometimes called a fiscal agent, but this term doesn’t accurately describe the relationship between a fiscal sponsor and the sponsored project. The term agent implies that the sponsoring organization is acting on behalf of the project, when instead the project is acting on behalf of the organization. After all, the project is technically a program of the sponsoring nonprofit.
FISCAL SPONSORSHIP AS A FIRST STEP
Using fiscal sponsorship as a temporary solution while establishing a new nonprofit corporation and acquiring a tax exemption can be an effective approach for the following reasons:
You have an opportunity to test the viability of raising funds for your idea.
You have time to establish an organizational infrastructure and to create a board of directors in a more leisurely manner.
You can pay more attention to building your program services in the crucial beginning stages of your project.
Your fiscal sponsor can provide bookkeeping, human resources, and other types of expertise, enabling you to focus primarily on developing your programs and activities.
You have time to determine whether your program is effectively meeting the needs you intend and can develop benchmarks to support the organization if and when you pursue your own 501(c)(3) entity.
Examining common details of a fiscal sponsorship relationship
Here are some important points to keep in mind and negotiate if you decide to go the fiscal sponsor route:
The mission of the fiscal sponsor must be in alignment with the project. In other words, if you have a project to provide free food to the homeless, don’t approach your local philharmonic orchestra as a potential sponsor. Find a nonprofit that has similar goals in its mission statement.
The board of directors of the sponsoring organization should approve the sponsorship arrangements or delegate the responsibility to a key executive of the organization. The sponsoring organization’s board and leadership are, after all, ultimately responsible.
Both parties should agree to and sign a contract or memorandum of understanding, detailing the responsibilities of each one. See File 2-2 at www.wiley.com/go/nonprofitkitfd6e for a sample fiscal sponsorship agreement.
The fiscal sponsor customarily charges a fee for sponsoring a project. The fee is usually between 5 percent and 15 percent of the project’s annual revenues, depending on the services it provides to the project.
Some fiscal sponsors provide additional services. These might include payroll services, bookkeeping, office space, group insurance coverage, and even management support, if needed. Be sure to ask whether these additional services are included in the fiscal sponsor’s fee.
Contributions to the sponsored project should be written to the sponsor. Add a note instructing that they be used for the project.
