Greater Good Blog

Four Reasons to Use A Fiscal Sponsor—and One Cautionary Tale

Chris Hobbs
Four Reasons to Use A Fiscal Sponsor—and One Cautionary Tale

The widespread news of the unraveling of Wyclef Jean’s foundation, Yele, was disappointing. The Fugees, his band, were part of the soundtrack of my youth: “Ready or Not” was often booming from the speakers of my Chevy Camaro. I was a fan of his, first for his incredible talent and later for his outspoken support of his native Haiti. Unfortunately, the collapse of his foundation was also avoidable. While its demise played out in the media, a recent IRS report that encourages the government to facilitate the advancement of the field of fiscal sponsorship got little coverage but provides valuable insight—from which Jean and his foundation could have benefitted. Indeed, there are many compelling, if less dramatic, reasons to promote fiscal sponsorship.

Fiscal sponsorship is a relationship in which a nonprofit organization provides the legal and financial framework for a charitable initiative, activity, or project that lacks tax-exempt status. As the IRS report states, these sponsorships provide “adequate internal controls to ensure that funds will be used for the intended charitable purposes,” underscoring one of Yele’s fatal flaws. To realize the impact he presumably wanted, Jean could have housed an initiative benefiting Haiti within a fiscal sponsor and lent his name to support it. In doing so, the sponsor would have provided oversight, and the $16 million that Yele largely squandered could have actually benefited Haitians.

Those with varying philanthropic goals, from celebrity social entrepreneurs to institutional foundations, can benefit from a fiscal sponsor. The real payoff comes in more effective and efficient philanthropy across the industry, which in turn yields greater impact. For example:

Fiscal sponsors facilitate collaboration by providing an immediate, yet reputable and established, vehicle for different constituencies—from individuals donating online to private foundations to government entities—to contribute funds.

Fiscal sponsors increase efficiency. The IRS report notes that the agency received more than 55,000 applications for nonprofit status in 2011 and goes on to say that many “organizations may seek [public charity status] without exploring possible alternatives that might be more appropriate in light of their goals and objectives.” The process can take several months to a year and can cost anywhere from $10,000 to $100,000. For short-term projects, projects that respond to urgent needs or immediate opportunities, or pilot projects, time delays and start up costs add up to less impact. Fiscal sponsorship is an “alternative” that can alleviate those burdens.

Fiscal sponsors provide infrastructure and expertise including financial management, compliance, disbursement of funds, grants management, reporting, and human resources. Overseen by experienced boards of directors and nonprofit professionals, reputable fiscal sponsors provide initiatives like Jean’s with the counsel and knowledge of best practices that ensure transparency and impact.

Fiscal sponsors provide value to funders. By providing services across multiple initiatives, the cost of operations is lower for the funder. In addition, funders benefit from the knowledge base of professionals who work with multiple initiatives.

In his song “Gone Till November,” Jean sings: “When I come back, there’ll be no need to clock. I’ll have enough money to buy out blocks.” While true, it’s too bad it wasn’t put to better use.

Chris Hobbs is a director at Arabella. Chris oversees the work of the Managed Organizations team, which is responsible for Arabella’s management of several nonprofits, including the New Venture Fund, a 501(c)(3) public charity, and the Sixteen Thirty Fund, a separate 501(c)(4).

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