Basic Information on Obtaining Nonprofit Status and Fiscal Sponsorship

This is the sixth article in a series on grant writing. Read the introduction to the entire series.

To obtain nonprofit status, you must first have a federal Employer Identification Number (EIN) and be registered as a business in New Mexico (with Articles of Incorporation). Once this is complete, you must apply for tax-exempt status from the IRS using the IRS Form 1023. You must also have the following:

• Board of directors.In New Mexico, you must have at least three directors, but your board can be larger if you determine that is helpful
• Legal name
• Charitable purpose
• Bylaws
• Articles of Incorporation.

You will need to complete the Form 1023, including the above information about your organization, as well as your finances and compensation. There is a fee to file your application. Once filed, it usually takes between 8-24 weeks to receive a decision from the IRS.

Be aware, applying for nonprofit status with the IRS does not guarantee you will receive that status. While the information in this document provides general background, you should consult with a lawyer before setting up your organization. Because each organization is unique, a lawyer will help you navigate the process, ensure it goes smoothly, and decrease the likelihood of being rejected or running into issues later in the process.

What is Fiscal Sponsorship?
What if your organization is not ready to become a nonprofit, but you still want to provide services to the community and apply for funding? You may also have a time-limited project for which applying for separate nonprofit status does not make sense in the long-term. If this is the case, you may consider working under a fiscal sponsor. A fiscal sponsor is an existing charity that will serve as a fiscal manager of funds and allow the use of its tax-exempt status. Usually, they will charge an administrative fee, which is generally a percentage of revenue flowing through the sponsor. The sponsor is assuming some risk as well as administrative burden and may also have restrictions limiting the type, location, or activities of organizations they sponsor.

Any nonprofit organization can act as a fiscal sponsor for another organization. However, it is advisable to ensure that you find the right fit before entering into an agreement. You will want to vet your potential fiscal sponsor as much as they will want to vet you. Do they keep good financial records? Does it seem likely that they will be able to separate your income from their income and generate financial reports accordingly? If they apply for grants, you may not be able to apply for the same ones. Will they be responsive to your needs as an organization?

The New Mexico Community Foundation acts as a fiscal sponsor. While it is not their only program, they do have specific protocols and policies in place to act as a fiscal sponsor. You can find more information on their fiscal sponsor page. 

Requirements for fiscal sponsorship vary by the sponsoring agency but typically include things such as having a board or advisory committee in place, having and using an annual budget, and submitting various general and funding related reports to the sponsor. It is important that you have an agreement in writing with your fiscal sponsor outlining roles, responsibilities, and asset allocation. This ensures everyone is on the same page as you begin to work together.

If you are applying for grants using a fiscal sponsor, it is important to research the funder's guidelines to ensure that it will accept an application through a fiscal sponsor. Some funders will not accept fiscal sponsorship arrangements.