Today we are launching a series of posts to help readers better understand the sometimes arcane field of fiscal sponsorship. It is addressed to those new to this concept. We are assuming the reader knows nothing, so our apologies to those who already know a lot. We plan to also use this space to invite others to contribute posts of interest to the field, to share information that is relevant to the practice of fiscal sponsorship, and to highlight the important work of our fiscally sponsored projects.
Where to begin: what is the nonprofit sector? What is a nonprofit organization? What is fiscal sponsorship and why should I care?
What is the nonprofit sector and where did it come from?
In the United States, the government has long recognized the important role played by associations organized to do good for the general public, as opposed to those making a profit or carrying out the business of government. The nonprofit sector is sometimes called the third sector, the independent sector, or the voluntary sector to distinguish it from business and government.
There is a long tradition in this country of helping one’s neighbors, from the first attempts to colonize America to the barn raisings that accompanied its Westward expansion. Government recognition of not-for-profit activities is enshrined in the tax code; around 25 categories of activity are exempt from paying taxes. The most important of these is the single category that also grants the donors to those organizations a tax deduction for their charitable contribution. This is the 501(c)(3) tax-exempt nonprofit organization. There are currently around 1.6 million 501(c)(3) organizations in the U.S. They make up more than five percent of the country’s gross national product.
Recent decades have seen enormous growth in the number of 501(c)(3) start-ups. Not only is this the only organizational type that can give its donors a tax deduction, but also, most private foundations require that grant recipients have 501(c)(3) status in order to receive a grant. This is where fiscal sponsorship becomes important. It is a faster, cheaper mechanism to achieve nonprofit status than the alternative of starting your own 501(c)(3) organization. There are also a number of situations where it would never be appropriate to start your own organization—projects of limited duration, for example—that are ideal candidates for fiscal sponsorship. Continue to read our Friday posts to find out more about the benefits of fiscal sponsorship.