This blog post explores how Ethnic Community-Based Organizations (ECBOs) can expand their impact by choosing between 501(c)(3) status and fiscal sponsorship. Here, we’ll define both options, discuss scenarios for choosing each path, and examine their benefits and challenges. Featuring insights from leaders of New Chance Inc.—Ukraine Relief Program, United Stateless, and Slavic Refugee and Immigrant Services, this post offers practical guidance for ECBOs navigating the important transition from an informal volunteer group to a more structured entity, capable of receiving grant funding.
Many Ethnic Community-Based Organizations (ECBOs) begin as informal volunteer groups serving their communities. As they grow, the need for sustainable funding leads to a crucial decision: apply for 501(c)(3) status, or partner with a fiscal sponsor? This choice, often overlooked by emerging organizations, can significantly impact an ECBO’s development and operations. Understanding the pros and cons of each option is essential for making an informed decision that aligns with the organization’s goals and capacity.
What Is a 501(c)(3) Tax-Exempt Organization?
Nonprofit organizations that gain recognition from the Internal Revenue Service (IRS) as tax-exempt are referred to as 501(c)(3) organizations. 501(c)(3) refers to a provision of tax law that allows the IRS to grant tax-exempt status to organizations that have a charitable purpose and serve the public good. By law, foundations can only give grants to nonprofit organizations recognized as 501(c)(3)s. Likewise, to be eligible for many government grants, an organization must have 501(c)(3) status. Individuals and businesses can claim a tax-deduction for their contribution when they give to a 501(c)(3).
To gain 501(c)(3) status, an organization must meet these requirements:
- Exist for the public good and not for the financial benefit of any individuals
- Be governed by volunteers, which means having a volunteer Board of Directors
- Be independent of both the government and private sector, which means there is no control or ownership of the organization by either sector
- Be non-partisan, which means that the organization can never support or oppose a candidate for elected office
Further, to maintain 501(c)(3) status, a nonprofit organization must:
- File an annual Form 990 tax return with the IRS, and ensure compliance with other state and local filings, to keep the organization in good standing
- Ensure fiscal responsibility by having policies, procedures, and systems for managing money, including income and expenses
- Have copies of the completed Form 990 available for public inspection upon request
- Keep lobbying to an “insubstantial” amount, which typically means that lobbying must be less than 5% of an organization’s activities and/or budget
What Is a Fiscal Sponsor?
A fiscal sponsor is an organization with 501(c)(3) status that helps operate a project or organization without 501(c)(3) status by receiving and overseeing funding on their behalf. The term “fiscal sponsor” can be confusing, as it suggests monetary sponsorship. However, fiscal sponsors do not provide funding directly to a sponsored organization—they receive and manage funds on the behalf of the sponsored organization. There are different models of fiscal sponsorship and different types of fiscal sponsors. For example, some fiscal sponsors are solely focused on providing fiscal sponsorship (that is their mission) while others are nonprofits with their own community-focused missions who may be willing to serve as the fiscal sponsor for aligned efforts. Organizations interested in having a fiscal sponsor should choose the type of fiscal sponsor and the model that best meets their needs.
To learn more about the different models of fiscal sponsorship, explore these resources: https://fiscalsponsorship.com/the-models-summary/ https://www.wildapricot.com/blog/nonprofit-fiscal-sponsorship
When Would an ECBO Want to Form a 501(c)(3)?
For newly established ECBOs, obtaining 501(c)(3) status offers significant credibility with prospective funders, donors, and partners because it signals government recognition. Without this status, organizations may be reliant on a fiscal sponsor to funnel their funding to them. While the status certification process typically takes 3 to 6 months, an organization with 501(c)(3) status can expedite fundraising from diverse sources, as some funders may be unfamiliar with or hesitant about fiscal sponsorship. It also allows for quicker fund allocation, giving the ECBO direct control over operations without waiting for a fiscal sponsor’s approval. Zori Opanasevych, Director of New Chance Inc.—Ukraine Relief Program, highlights this advantage: “Because we were a 501(c)(3), we were able to receive donations and help [refugees from Ukraine] right away.”
ECBOs that choose to have a fiscal sponsor when they are just getting started may decide to apply for their own 501(c)(3) status when they “outgrow” their fiscal sponsor, likely because their programmatic work and budget needs have grown and/or become more complex. Opanasevych noted that her organization started as a volunteer network that was supported by a local church with 501(c)(3c) status and received small donations through the church. However, once she assessed the extent of community need, she realized that the Ukraine Relief Program needed to be a long-term and well-funded effort, and she and the church agreed that it would be better if her organization operated under its own 501(c)(3) status.
501(c)(3) status is great for ECBOs with a firm understanding of the regulations and requirements for tax-exempt organizations and which are ready and willing to create the management systems necessary for maintaining it. However, there are significant barriers to gaining this status, such as learning about American non-profit laws, required fees and paperwork, and extensive administrative work which may make immediately applying for 501(c)(3) status not ideal for younger, less stable organizations.
When Would an ECBO Want to Have a Fiscal Sponsor?
Having a 501(c)(3) fiscal sponsor may be the ideal solution for ECBOs that:
- Are unsure of their long-term future (for example, an ECBO that emerged to meet an urgent need but may not want or need to operate for longer than a few years)
- Want to focus on serving the community and developing their programs rather than building their administrative capacity
- Are unfamiliar with the many laws and regulations of the U.S. nonprofit system
Sometimes, an ECBO may have a long-term goal of becoming a 501(c)(3) but with a shorter-term opportunity to apply for or receive funding, and working with a fiscal sponsor can give the ECBO access to that funding more quickly.
Karina Ambartsoumian-Clough, Executive Director of United Stateless, found that working with a fiscal sponsor allowed her team to focus on their mission of building community and advocacy without worrying about financial management. Similarly, Krystsina Shchelkunova, Executive Director of Slavic Refugee and Immigrant Services, turned to a fiscal sponsor when she realized she was unfamiliar with U.S. nonprofit regulations. Her fiscal sponsor provides guidance on legalities, grant management, and human resources, helping her learn best practices for organizational management. Shchelkunova views her fiscal sponsor as an “insurance” and “umbrella,” covering unfamiliar administrative and regulatory tasks.
Another potential benefit of fiscal sponsorship is mentorship from an established 501(c)(3) organization, which can help prepare a young ECBO to eventually stand on its own. However, the degree and type of mentorship a sponsored organization may receive varies greatly depending on the fiscal sponsor. For example, Ambartsoumian-Clough noted that, as a new Executive Director, she also feels she could benefit from more one-on-one support and mentorship from her fiscal sponsors beyond handling day-to-day financials and human resources. Without this personalized mentoring and support, Karina notes that the relationship feels more transactional rather than transformative for the organization. She added that EBCOs would likely benefit from support around networking with funders.
The tables below lay out key points highlighting the pros and cons of the elements discussed above, with a few additional considerations to keep in mind.
What Are the Benefits and Challenges of Forming a 501(c)(3)?
Benefits of Forming a 501(c)(3)
- Legitimacy and credibility
- Tax exemption—income to the ECBO is not taxed (but remember that employees must still pay taxes on their income!)
- Can apply for sales tax exemption
- Individual contributors can receive tax deductions for their donations
- Greater control over funds received and how to manage them
Challenges of Forming a 501(c)(3)
- Significant amounts of paperwork (filling out Articles of Incorporation, bylaws, mission statement and vision, definitions of programs/activities, etc.)
- Significant amount of fiscal and governance responsibility to continue being compliant, including costs for accounting and filing taxes
- Time-consuming application, typically taking 3-6 months
- Planning and development to sustain the organization long-term
What Are the Benefits and Challenges of Working with a Fiscal Sponsor?
Benefits of Working with a Fiscal Sponsor
- Management (fiscal, HR, admin) is taken care of
- Ability to focus energy and efforts on programs and services
- Ability to immediately begin fundraising
- Mentorship from leaders with more experience in program and organizational management
Challenges of Working with a Fiscal Sponsor
- Projects and spending are subject to guidelines and limitations of the fiscal sponsor
- Limited legal power in unfavorable situations
- Limited ability to raise large amounts of funding
- Likely limited ability to approach new funders
- Usually a fee that must be paid to the sponsoring organization
ECBO leaders who would like further guidance on deciding whether to form a 501(c)(3) or work with a fiscal sponsor can discuss this issue with subject matter experts by submitting a technical assistance request here.
