Sponsoring fundraising groups

FiscalSponsor umbrella

Hello Carol!

We have a question about fundraising and sponsoring subgroups.  Our homeschool group is planning on filing for 501c3 soon (if we can’t figure it out, we are hiring you!).  We have a subgroup (Destination Imagination, comprised of a few smaller groups of kids) that wants to raise money by working basketball games themselves but use our insurance and have us deal with paperwork and money.

We will have a clear understanding of who gets what money and when before we vote on it. They have proposed we keep 5% for our trouble. We are all wanting to say yes, but as president, I need to make sure it’s okay rule/law-wise.

Can you think of a reason not to allow this?

Kristen in Oklahoma

Kristen,

Good luck in your 501c3 application. I can also review the application you fill out. It’s a less expensive option.

What you are proposing is called “fiscal sponsorship” or sometimes “fiscal agency.” It means that one nonprofit organization  acts as a sponsor for a project or group that does not have its own tax-exempt status. And as you spelled out, it is typical for the sponsor to charge a fee (5% in your case) for managing the  other project or group.

Google “fiscal sponsorship” to get a better idea of what’s involved.

I would recommend you wait until you have tax exempt status (or at least have applied for it) before considering a fiscal sponsor arrangement.

Also put the agreement in writing, so all parties know what is required of the and the length of the agreement (at most one year and renew it every year). Sounds like you were going to do that.

Make sure the arrangement doesn’t put you over any IRS threshold. For example, if your gross annual revenue is more than $50,000/year, you will need to file the Form 990-EZ or 990, not the simple online Form 990-N. If Destination Imagination income causes  you to hire someone to prepare the more complex Form 990-EZ/990, are you making enough from DI to cover that added expense?

Carol Topp, CPA

 

How to use another nonprofit’s tax exempt status (legally!)

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Hi Carol,
I run a support group that encourages homeschoolers to engage in STEM competitions. We have had students win prize money in the past and we would like to have be able to open a checking account to receive that prize money. Some organizations will give directly to students, others require an educational organization with a W-9. We are considering a DBA  or an LLC, where any prize money would be granted to the group and then distributed via an application process to homeschoolers who start STEM groups.

I am willing to personally take on the prize money as income to me if someone wins and deduct then the tax amount. Since we do not collect any dues, we do not want to file for 501 tax exempt. There is no money to pay the fee. If no one wins anything, we have no income to report.

Would you suggest either the DBA or the LLC, or do you have another suggestion?

Thank you for any assistance.
Blessings to you!

Kathryn

Kathryn,

Thank you for contacting me. You are doing a wonderful thing for homeschoolers!

From what you described, I don’t think a DBA (Doing Business As name registration for a business) or an LLC (a for-profit business) would be the best arrangement. My concern would be that grantors of the prize money would not award funds to an LLC/for-profit business.

Additionally,  accepting payments in your name might not qualify as an “educational organization” to the grantors.

Instead, you probably need to establish an official nonprofit organization (I can help with that) or find another nonprofit organization to take your STEM program under their umbrella. They let you use their tax exempt status and it’s easier than setting up a new nonprofit organization. It’s called fiscal sponsorship and it’s legal, if done correctly.

Learn more about Fiscal sponsorship

Carol Topp, CPA

Fiscal sponsorship: What is it and how can it work for your homeschool group?

FiscalSponsor umbrella

“Fiscal sponsorship generally entails a nonprofit organization (the “fiscal sponsor”) agreeing to provide administrative services and oversight to, and assume some or all of the legal and financial responsibility for, the activities of groups or individuals engaged in work that relates to the fiscal sponsor’s mission.”(Source: http://www.fiscalsponsors.org/pages/about-fiscal-sponsorship)

Fiscal sponsorship is an agreement for one nonprofit (the sponsor) to  to help another nonprofit (the project), usually in a temporary agreement. It means the sponsor lets the project come under their umbrella for an event, project or activity.

I think it’s a great idea and something your homeschool group should consider.

If you’re a large homeschool group with 501(c)(3) tax exempt status already granted, consider helping a small start up homeschool group in your local area. Agree to let them come under your tax exempt status umbrella for a set time period. This is an excellent arrangement to help a Lego team, a temporary event, a sports team or a new start up co-op.

If you’re a small homeschool group, just getting started, ask a larger, established homeschool group if you could work out a temporary arrangement to use their tax exempt status while you get up and running. Work out the details in a written agreement. Perhaps you can offer to pay the parent organization a small amount in return for being allowed under their umbrella.

Learn more about fiscal sponsorship:

http://fiscalsponsorship.com/

http://www.fiscalsponsors.org/pages/about-fiscal-sponsorship

Fiscal Sponsorship: 6 Ways to Do It Right by Gregory Colvin describes six models of sponsorship that have been approved and accepted by the IRS. It details how the models work and why, how they differ and how they are similar.

Summary of the book and its six models of fiscal sponsorship by the author: http://www.fiscalsponsorship.com/images/WCTEO_Gregory-Colvin.pdf

After reading up on fiscal sponsorship, you might have a few questions. I’d be happy to set up a phone consultation. Contact me.

Carol Topp, CPA