Heminway: The Fiscal Sponsor Alternative to Nonprofit Incorporation
This short article explores the potential use of fiscal sponsorships as a means of incentivizing and systematizing the activities of nonprofit projects without the need to form a separate legal entity. The appeal of attracting funders who desire a federal income tax deduction for their contributions and the desire to conduct operations that are tax-exempt under U.S federal law may be core reasons for conducting a nonprofit project through a nonprofit corporation. Yet, nonprofit corporations may be a less than appealing choice of entity for certain nonprofit projects after considering other factors.
Specifically, the time and expense involved in both entity formation and maintenance and federal income tax compliance activities may make nonprofit incorporation under state law a suboptimal choice for certain nonprofit projects. Moreover, many nonprofit project founders and promoters do not need the structural and governance attributes that nonprofit corporate law provides. This may be especially true for discrete or one-off nonprofit projects that involve a single founder or promoter (or a small number of founders and promoters)—which often is the case for creative enterprises (like the Vita Brevis project in Boston). If
● the founders or promoters of this kind of nonprofit project can identify a §501(c)(3) organization with a corporate purpose that incorporates the substance of the nonprofit project and
● that §501(c)(3) organization is willing to serve as a fiscal sponsor for the nonprofit project under terms satisfactory to the founders and promoters of the nonprofit project,
then incorporation as a nonprofit corporation may not be necessary for the nonprofit project to secure federal income tax deductibility for funders and a federal income tax exemption for its income.
Lloyd Mayer