ALTERNATIVES TO A NONPROFIT CORPORATION

If the existence of the venture is for a short duration, the nonprofit organization may not be the best structure.  Nonprofits are good for long-term ventures. Alternatives include: (1) Operating as an informal organization under the legal umbrella of an existing charity, also known as fiscal sponsorship; or (2) Forming an unincorporated nonprofit association.  

FISCAL SPONSORSHIP

An alternative maybe to obtain fiscal sponsorship, in which the “sponsee” can join an existing organization and operate under its tax-exempt status.  This provides a small project the opportunity to be tax exempt through the sponsor’s IRS status and also pass overhead costs onto the sponsor. There are no incorporation costs in this situation.  However, the sponsor most likely will retain control over the direction of the project and may also charge a fee from the sponsee. For example, a fiscal sponsor may charge administrative fees for the use of its facility, services, and staff.  The advantage of a fiscal sponsorship is that the fiscal sponsor will assume the risk of liability.      

A fiscal sponsorship may be created by forming an employer-employee relationship, in which the sponsor has direct control over the project.  There is no legal separation between the sponsor and sponsee. That is, the sponsor will be both fiscally and legally liable for the project.  Moreover, the insurance cost to the sponsee may also be lessened as the sponsor may be able to purchase an affordable blanket liability policy covering all projects.  

A fiscal sponsorship may also be created by forming a grantor-grantee relationship, in which the sponsor remains separate from the sponsee.  The sponsor only provides fiscal support to the sponsee through grants. The sponsor is not legally liable for the project, but the sponsor must exercise sufficient control over the project’s funds to ensure the funds are used according to the grant agreement.  In this relationship, the sponsee must still maintain its own tax liability and is required to comply with the required tax reporting requirements for its particular legal status. That is, an organization that is an incorporated nonprofit that is receiving grants from a sponsor must still file its own IRS Form 990 even though it is receiving fiscal sponsorship.  As a practicality, the nonprofit grantor must have appropriate safeguards to assure that the corporate funds granted to other organizations are being used for tax exempt purposes.  

In order to facilitate the separation from the fiscal sponsor, the Fiscal Sponsorship Agreement should specifically provide terms for how the relationship can be terminated and identify the rights and liabilities for each party upon termination.  

UNINCORPORATED NONPROFIT ASSOCIATION

In addition, an unincorporated nonprofit association may also be created without the need to file forms with the Secretary of State and without compliance to the corporate formalities.  The unincorporated association need not have regular formal meetings, has no incorporation costs, and no ongoing filing and reporting requirements. Essentially, there is no government scrutiny.  However, in such situations, the members of the association may not be protected from personal legal liability for their acts or the acts of their fellow associates. In addition, such associations have difficulty in raising grants, contributions, and other funds.  Moreover, the association may be treated as a legal entity for tax purposes, and will be taxed on net income and be required to file partnership or corporate tax returns.

CONTACT A BUSINESS LAWYER TO FORM ALTERNATIVES TO A NONPROFIT!

Want to know more about alternatives to a nonprofit organization? Contact a business attorney at The Sterling Firm. We have an attorney experienced in providing counsel to businesses. We can help! Call now to speak with an attorney!