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Starting a Nonprofit & Fiscal Sponsorship

Look before you leap!

Countless community and global needs have been met by nonprofits. And undoubtedly, new solutions will inspire others to consider this path. Yet critical to success is knowing that not every idea or initiative lends itself to starting a new nonprofit organization. In fact, some ideas are best implemented through alternative methods. Bottom line: pursuing the "right" course requires research, communication, and planning. Please read on.

For anyone considering starting a new nonprofit, an excellent place to begin is our Starting a Nonprofit Organization guide (also see "Starting a Nonprofit Resources" below). In simple terms, the guide takes you through a series of informative parts and key questions like:

  • Is your idea best suited as a nonprofit or business/for-profit? (Learn about a new for-profit type: social purpose corporation.)
  • What other organizations in your community – and beyond – are focused on your interests, and is there an opportunity to work through them (e.g., fiscal sponsorship) or partner in other ways?
  • The legal steps to forming a nonprofit
  • Nonprofit management obligations
  • A checklist for starting a nonprofit
  • Online resources and more

Business Planning

Perhaps most important to a group’s potential for success is part four of the Starting a Nonprofit Organization guide. It outlines the steps to developing a business plan. A basic template for creating one – including a staffing plan and budget – can be found at the end of the guide.

The importance of a business plan cannot be overstated. While a nonprofit organization is different in many ways from a business or for-profit from an operations perspective, there are many similarities. In fact, when you think of starting and running a nonprofit, imagine that you are about to start a small business and what that entails. Then add to it nonprofit-specific government requirements.

Ultimately, a well-developed business plan lets you assess if you are ready to start a new organization (e.g., able to meet "staffing" needs) and how sustainable it may be (e.g., you identified research-supported funding streams). It also:

  • Becomes an introductory document to share with community leaders and potential board members, staff, donors, and other partners in the venture
  • Gives future board, staff, and volunteers of the organization a road map for building a successful organization
  • Helps you respond to questions from the state, the IRS, and other government agencies

Legal Support

Getting legal or other professional help when starting a new organization is one way to ensure compliance with state and federal requirements. One organization to note is Communities Rise (formerly Washington Attorneys Assisting Community Organizations). Communities Rise provides pro bono legal assistance to nonprofits so groups can focus on their work in the community with less concern about legal issues. Help with forming a nonprofit is a service Communities Rise and others offer.

Yet here again, having a business plan is an important step. For example, one of Communities Rise’s eligibility requirements for a start-up organization is that it demonstrate that it has such a plan.

Consulting Services & Training

501 Commons and Communities Rise are not the only options for help with starting a new nonprofit. A number of highly skilled consultants are also knowledgeable in this and other areas. Some have experience with particular nonprofit subsectors, like arts and cultural organizations, while others have worked with groups serving diverse communities or specific populations. To find service providers who have been vetted and evaluated by 501 Commons, visit the Nonprofit Resource Directory.

Also, every month and around the Pacific Northwest, there are numerous learning and networking opportunities for current and aspiring nonprofit professionals and volunteers. Take advantage of great trainings offered by service providers in the Resource Directory as well as those put on by 501 Commons. Some events cost a fee, while others are free!

Fiscal Sponsorship & Other Ways to Serve Your Mission

As noted earlier, there may be ways for community-benefiting ideas to become reality other than starting a new organization. The American Bar Association outlines some alternatives to forming a charitable nonprofit. One of these options is fiscal sponsorship (FS).

What is a fiscal sponsorship? According to nonprofit attorney Ellis Carter of Caritas Law Group:

"The term 'fiscal sponsorship' refers to an arrangement by which an established public charity (referred to as the 'Fiscal Sponsor') facilitates fundraising for a charitable project (the 'Sponsored Project') by, among other things, allowing the Sponsored Project to solicit tax-deductible contributions from individuals or grants from private foundations that the Sponsored Project is not itself eligible to receive directly."

Fiscal Sponsorship InfographicHow does a fiscal sponsorship work? Check out this FS infographic created by the National Council of Nonprofits to quickly see who does what (i.e., fiscal sponsor vs. sponsored project). The Council's Fiscal Sponsorship for Nonprofits page provides its own description and additional resources.

We also recommend the following to learn more about fiscal sponsorship, access agreement templates, and research potential fiscal sponsors:

Starting a Nonprofit Resources

Remember: starting a new nonprofit organization begins as a question, not a conclusion. Take time to read what is involved in running a nonprofit and talk with others who are already in the sector – especially those working on the issue(s) in which you are interested – before jumping in! The following documents will help you reach an informed decision.

Other printed materials we like include:

Applying for 501(c)(3) Tax-Exempt Status

If you want to file for federal tax-exempt status, visit Tax Information for Charities & Other Non-Profits or contact the IRS at 1-877-829-5500. Ask about the following free items:

  • SS-4 - Employer Identification Number
  • Form 1023 - Application for Recognition of Tax-Exemption (i.e., 501(c)(3) status)
  • Publication 557 - Tax-Exempt Status for Your Organization

Note: When you file the Form 1023 or other IRS tax-exemption application form, you will need to pay the IRS a filing fee.

You may also need to file an annual information return (Form 990) with the IRS sooner than you think. According to the IRS's website, "An organization should file a Form 990-series return if it claims exempt status but hasn’t applied for it, or if it has applied but not yet received an IRS letter recognizing tax-exempt status.

"For recognition of exemption from the date of formation, organizations requesting recognition generally must apply within 27 months after legal formation of the organization. Organizations apply for exemption by filing Forms 1023, 1023-EZ, 1024 or 1024-A." Learn more about this IRS filing responsibility, including when to submit your information return and which type to submit, at an IRS page titled "Many tax-exempt organizations must file annual returns in May."

Finally, to help the application process go smoothly, read the IRS' top ten tips to shorten the tax-exempt application review process.