Erin Bradrick‘s article on fiscal sponsorship published by the American Bar Association’s Business Law Today was made available online last week. Read it here.

For lawyers who work with nonprofits and exempt organizations or individuals with philanthropic aspirations, “I want to start a nonprofit” may be the single phrase they hear most frequently. However, the most valuable advice an attorney can give to a client seeking counsel on starting a nonprofit might be to not do so. While forming a nonprofit corporation and applying for income tax exemption will be the right choice for some clients, there are often alternatives that may more efficiently and effectively allow a client to achieve his or her charitable goals. Fiscal sponsorship is one such alternative.

Fiscal sponsorship is a contractual relationship that allows a person or organization that is not tax-exempt to advance charitable or otherwise exempt activities with the benefit of the tax-exempt status of a sponsor organization that is exempt from federal income tax under Internal Revenue Code (IRC) Section 501(c)(3). When done correctly, fiscal sponsorship can be a great tool for fulfilling a client’s charitable goals without necessarily requiring the formation a new nonprofit entity, application for tax-exempt status, or compliance with ongoing filing and registration requirements. However, when fiscal sponsorship is done incorrectly, the Internal Revenue Service (IRS) can view it as a mere conduit relationship. This can lead to problems for both the sponsor organization and the sponsored project, as well as for donors.

This is a particularly valuable article for attorneys who are representing (1) founders of new charitable projects and/or (2) fiscal sponsor organizations. We’ve written much on the subject of fiscal sponsorship and continue to be advocates of fiscal sponsorship when set up correctly. Unfortunately, in our experience, there are many nonprofits dabbling in the role of a fiscal sponsor without the proper structures, oversight, agreements, policies, knowledge, and legal guidance. Self-regulation will go a long way in preventing additional laws and regulations that harm this valuable vehicle for promoting multiple charitable efforts without all the burdens of setting up, maintaining, and monitoring a new entity for each one.