Choice of Entity: The Fiscal Sponsorship Alternative to Nonprofit Incorporation
23 Transactions: Tenn. J. Bus. L. 526 (2022)
16 Pages Posted: 28 Apr 2023 Last revised: 14 Jul 2023
Date Written: April 18, 2022
For many small business ventures that qualify for federal income tax treatment under Section 501(a) of the U.S. Internal Revenue Code of 1986, as amended, the time and expense of organizing, qualifying, managing, and maintaining a tax-exempt nonprofit corporation under state law may be daunting (or even prohibitive). Moreover, the formal legal structures imposed by business entity law may not be needed or wanted by the founders or promoters of the venture. Yet, there may be distinct advantages to entity formation and federal tax qualification that are not available (or not as easily available) to unincorporated not-for-profit business projects. These advantages may include, for example, exculpation for breaches of performative fiduciary duties by nonprofit corporate directors and other personal liability limitations applicable to various participants in nonprofit corporations under state statutory law.
The described conundrum—the prospect that founders or promoters of a charitable or other federal income tax-exempt nonprofit business or undertaking (often simply denominated as a “nonprofit project”) may not have the time or financial capital to fully form and maintain a business entity that may offer substantial identifiable advantages—is real. Awareness of this challenge can be disheartening to lawyer and client alike. Fortunately, at least for some of these nonprofit projects, there is a third option—fiscal sponsorship—that may have contextual benefits. Fiscal sponsorships allow for projects to receive tax advantaged funding and operating support without the need for time-consuming, costly legal entity formation.
This brief article offers food for thought on the uses for and benefits of fiscal sponsorship, especially (but not exclusively) for creative endeavors. First, fiscal sponsorships are defined and described in more detail. Then, the attributes of fiscal sponsorships are compared with the attributes of nonprofit § 501(c)(3) corporations to identify important bases for advice and decision making. Finally, before briefly concluding, the article synthesizes this information for use in applied legal advising and offers an example of a nonprofit project that found fiscal sponsorship both desirable and efficacious.
Keywords: nonprofit, 501(c)(3), tax-exempt, fiscal sponsor
JEL Classification: K22, K34, M13, M14, Z11
Suggested Citation: Suggested Citation