When fundraising, it’s important to consider your tax status. Different tax statuses will determine if you can accept tax-deductible donations and how you need to report on the money that comes in and what you’ve done with it. It can also impact what kinds of funding opportunities you are eligible for and how big your donor pool is.
Some kinds of fundraising opportunities are only available to organizations that have, for example, 501(c)(3) nonprofit status or are working with a fiscal sponsor. We'll outline both 501(c)(3) status and fiscal sponsorship, plus information on how to become fiscally sponsored if you decide that's the best decision to support your creative practice.
501(c)(3) Nonprofit Status
501(c)(3) nonprofit status, most simply, is a specific tax category for nonprofit organizations. Nonprofits that fit into this category are called 501(c)(3)’s because that’s the portion of the U.S. Internal Revenue Code that covers these particular kinds of nonprofits. Not all nonprofits are 501(c)(3)’s, but all 501(c)(3)’s are nonprofits.
Being a 501(c)(3) nonprofit has less to do with whether your work is important, whether you are successful, or anything about what you do. It’s more about how the government taxes you and how you can receive money.
There are pros and cons of becoming a 501(c)(3) nonprofit.
501(c)(3) nonprofits can receive tax-deductible donations. This means that any individual donor (if they itemize their taxes) or institution that donates to one of these nonprofits can deduct the amount that they donated from their final taxable income. Nonprofit entities are also exempt from paying federal income tax.
Tax-exempt donations can be appealing to donors who are looking to deduct those donations from their taxes or who just prefer to donate to more established organizations (although this can certainly be rooted in some unsavory systems of structural inequality). Some funding opportunities are only available for 501(c)(3) nonprofits.
501(c)(3) nonprofits have mission statements and boards to help guide their work. For arts organizations, a board can help you guide your work and provide support for you and your team. A mission statement can help you clarify what it is you want to be doing.
On the other hand, it can be expensive and time-consuming to go through the legal process of incorporating as a nonprofit. The application process is paperwork-intensive, for starters. Then, once you’ve gotten your 501(c)(3) status you’ll need to keep meticulous records of your finances, budget, and other going-on for tax purposes and for public accountability. You need to be able to demonstrate that you are doing what you say you are doing.
You might find it challenging to stay nimble as an organization or as a project. Once you have a board, a mission statement, and all of the legal framework set up around your specific mission, it can be challenging to switch strategies or focus. The more institutional layering you have around a project, the more challenging it can be to turn the ship.
You don’t need to become a 501(c)(3) nonprofit to be a successful arts organization or to fundraise. Your work can be important and good regardless of how it appears to the IRS.
Many artists and arts organizations need something more than just a personal bank account and something less intensive than a 501(c)(3) nonprofit. That’s where fiscal sponsorship comes in.
If you want to apply for a wider breadth of grants and accept tax-deductible donations but don’t want to become a 501(c)(3) nonprofit, check out fiscal sponsorship.
Fiscal sponsorship is a contractual relationship between a 501(c)(3) nonprofit organization and a group or individual whose activities fall within the sponsoring organization’s mission. This relationship enables the 501(c)(3) to extend certain benefits of being nonprofit to the sponsored group, without the group having to file for nonprofit status on its own.
In other words, folks without tax exemption can use some of the benefits of a 501(c)(3)’s status to raise funds and execute projects as long as their work furthers the mission of the nonprofit.
Even simpler: if you do what the nonprofit does, you could possibly be fiscally-sponsored by them.
Fiscal sponsorship is one way artists can access tax-deductible funds without becoming your own nonprofit. You can then use this donated money to pay for budget items related to your work, pay your collaborators, and/or even pay yourself!
There are, however, a number of things that fiscal sponsorship is not:
- A grant application: You shouldn’t expect that filling out an application for fiscal sponsorship and getting that application approved will lead to immediately receiving funds or a grant from the fiscal sponsor.
- Tax exemption status: While fiscal sponsorship extends some of the benefits of the fiscal sponsor’s 501(c)(3) to sponsored individuals, collectives, and other groups, that does not make those sponsored projects tax-exempt themselves. The only way that you can become a tax-exempt entity is if you apply for and receive that status from the IRS directly.
- A bank account: Fiscal sponsors are nonprofit organizations, not banks, so fiscal sponsorship doesn’t create a bank account for your work. You can’t go to an ATM to get funds from a fiscal sponsor or expect to use fiscal sponsorship like a bank account to directly pay your bills.
- Corporate sponsorship: A fiscal sponsor helps facilitate receipt of funds from other sources, including corporate sponsors, but won’t be a “sponsor” in the way the term is typically used. Instead, a fiscal sponsor supports your work by receiving donations or grants on your behalf.
- Foundation funding: Many foundations will only grant funds to organizations with 501(c)(3) status, so fiscal sponsorship can be a powerful tool for individuals and other groups to access foundation funding. But fiscal sponsorship is not itself foundation funding.
- A grant writing service: Even though fiscal sponsors might be involved in the grant application process and offering guidance (we certainly do!), fiscal sponsors don't do the hard work of researching or writing grants for their sponsored projects.
- A development department: A fiscal sponsor can help you learn more about fundraising and development, but won’t do the work of creating campaigns or executing those campaigns for you.
- A donor database: Fiscal sponsors may have received donations from hundreds of donors, but those donors made the gift because of a personal connection to a fiscally-sponsored artist, collective, or small arts organization. Fiscal sponsors want to respect the privacy of donors and not share their information without consent.
If you work with a fiscal sponsor, you’ll likely have access to the staff at your fiscal sponsor in case you have any questions. It can be a great support system for artists and creatives who are looking for some guidance navigating the world of arts fundraising. For artists who work with Fractured Atlas as a fiscal sponsor, you have access to our support team by phone and email. Plus, our team reviews every grant application that lists us as a fiscal sponsor.
Finding a Fiscal Sponsor
If you decide to find a fiscal sponsor, you’ll have to pick which one! We’ve got a few ways to help you get started choosing the right fiscal sponsor for your project.
Most importantly, you will need to find a fiscal sponsor whose mission aligns with your own work. Otherwise, you won’t be eligible to be fiscally sponsored by them. But beyond that, artists and creatives should look deeper into an organization that you’re thinking of partnering with. Look at an organization’s values to see if you like its vibe, to see if you want to work with its staff, and to see if you would be proud to be associated with it. For example, there are other arts nonprofits that provide fiscal sponsorship to artists but if you are specifically interested in anti-racism, you might be interested in working with Fractured Atlas because of our commitment to anti-racism and anti-oppression.
You’ll want to determine which model of fiscal sponsorship you are looking for, as well.
Two of the most common models for fiscal sponsorship are Preapproved Grant (Model C) and Direct Project (Model A).
Fractured Atlas uses Model C. In this model, the relationship between a fiscal sponsor and a fiscally-sponsored project is similar to a grantor-grantee relationship. In Model A, the project basically becomes a part of the fiscal sponsor. With Model A, the fiscal sponsor is something like an incubator or an umbrella for projects in an ongoing capacity.
You’ll also want to ask about the specifics of the relationship that you’ll have with your fiscal sponsor including length of commitment, IP rights, and if you can have multiple fiscal sponsors. And, importantly, how the finances will work. Before you sign up with a fiscal sponsor, ask them what the fund dispersal process looks like. How long does it take? What kind of documentation do they need from you? What kinds of records do you need to keep and will they provide any reporting to you to help you better understand how your finances are working?
You’ll also want to figure out what kind of ancillary support the fiscal sponsor offers. In addition to helping with receiving tax-deductible donations and to broaden the field of grants that you can apply to, working with a fiscal sponsor can give you institutional knowledge and support, which can be crucial for artists who are wading into wholly new territory.
For example, the Fractured Atlas Programs team supports fiscally-sponsored projects by creating Knowledge Base articles, providing custom support via phone and email, and hosting webinars. Additionally, they review every grant application that lists Fractured Atlas as a fiscal sponsor. Plus, we offer plenty of tips and tools on our blog!
Applying for Fractured Atlas Fiscal Sponsorship
If you decide that you want to apply for fiscal sponsorship with Fractured Atlas, congrats and we hope to work with you!
As you apply, we’ve got some best practices for you to keep in mind:
- If you run into questions about the fiscal sponsorship application process, ask us! You might have questions about eligibility, documentation, or about specific questions that we ask in the application. While we can’t coach you because we have a vested interest in you applying successfully, we can definitely help clarify confusion that arises along the way.
- Prepare your paperwork ahead of time. While you could always try to find all the materials you need as you go, it’ll be a much smoother process overall if you gather everything you need ahead of time rather than trying to rifle through email inboxes and physical papers in the moment. We require the name, address, and phone number of the member applying for fiscal sponsorship, the name of the legal entity (individual or organization) who will be responsible for the tax obligations for the money that comes through Fractured Atlas (crowdfunding, recurring donations, grants). We also need to know the type of legal entity responsible for the tax obligations and either the social security number of the individual or the EIN number for the legal entity responsible, plus the residency status of the legal entity.
- Describe your mission and your activities. We want to know both what you are doing and why. This means that we want to know both your mission and your activity (or activities).
- The mission describes the overall change you want to make in the world. For example, you might preserve the legacy of Black composers. But your mission might not tell us exactly what it is that you do. For example, if your mission is to preserve the legacy of Black composers, you might do that by performing work exclusively by Black composers or you might publish coffee table books about their work with accompanying recordings.
- Identify the audience for your work. Before you apply for fiscal sponsorship, you’ll want to think about who the intended audience or beneficiary of your work is. Who exactly are you creating for? And once you’ve figured out who your core audience is, think about how you’re going to put your work in front of them? This can be helpful for you to strategize about outreach and distribution, but it’s also crucial for us to know who your audience will be.
- Don’t worry too much about the budget. We just need to see a breakdown of what the money looks like for your project and how you’ll use fiscal sponsorship. Plus, we understand that budgets can change as projects evolve and as the world we live in changes.
- In the application process, we’ll ask questions about political activity, investors, distribution, where geographically you expect to raise and spend money, and if you’ve ever had 501(c)(3) status. You might worry that if you answer one of these questions “wrong,” your application will be denied. That isn’t the case! We have to ask these questions because as a 501(c)(3) we have restrictions about what we can fund and what kind of oversight we need to provide on different kinds of projects. Ultimately, we want you to succeed in your application and get that sponsorship.