Filing for 501(c)(3) Status

Question: I’m part of a group of people that wants to protect our local river. Should my group file for our own 501(c)(3) nonprofit status or get a fiscal sponsorship for the time being?

Answer: That’s a big decision! It’s important to know that when you’re thinking about organizing a group of people around an issue, you can either file for 501c3 status yourselves or find a 501c3 nonprofit that will let you borrow theirs. There are some definite benefits and definite drawbacks to each solution, and the decision should be made on a case-by-case basis. Let’s explore:

Why would we want to ask another organization to be our fiscal sponsor? The benefit of this is that without going through the process of filing for 501c3 status, you’re able to accept donations though a registered 501c3 nonprofit, so the donor would be able to claim any money they donate to you as tax exempt on their taxes. In addition to that, it allows your group to be able to accept grant monies (since you can’t get a grant without 501c3 status).

There are also a few drawbacks to adopting a fiscal sponsor. The first is simply that there may not be an organization that is willing to sponsor you. Being a fiscal sponsor does create more accounting work for them, and the more money your group makes, the more work it will create for the sponsor group. In addition to that, the fiscal sponsor is entitled to take a percentage of all the money you make—a service fee for sponsoring you. This fee is subject to negotiation, but it’s usually between 2%-10%.

And finally, fiscal sponsorships are generally temporary fixes—sort of a patch job to hold you until you get your feet on the ground or until your temporary project is completed. In fact, here are a few examples of situations in which it would be a good idea to get a fiscal sponsor instead of applying for 501c3 status yourself:

• If your group can deliver programs effectively, but doesn't have support staff to do it at the moment.
• If your group is organizing around a temporary issue or project. There is no use in spending the time and expense of applying for a 501c3 if the work is not long-term.
• Pilot projects and test runs that haven't demonstrated long-term viability are always good candidates for fiscal sponsorship.
• If your organizations has applied for 501c3 status, but is awaiting confirmation, you can get a fiscal sponsor in the interim in order to accept donations.

Our group wants to file for 501c3 nonprofit status. How do we do it?
As is true with any good idea the IRS has ever had, there is a form. This form (called the 1023) is what you will complete to apply for 501c3 status. It is 30 pages long and can be found here: https://www.irs.gov/pub/irs-pdf/f1023.pdf. You can fill it out online if you like, but a word of advice: it is a very, very good idea to have the application reviewed by a lawyer before you send it in. The reason for this is, just like with your personal taxes, the 1023 is created by people who don’t realize how difficult it will be to answer some of the questions they ask in their form. If you inadvertently answer a question incorrectly, which is entirely possible and reasonable, then it will hold up the whole process for who-knows-how-long. Lawyers generally know where the pitfalls are in an application like this, and their advice will expedite the whole process.

The cost of filing for 501c3 status is currently $400, and as of  January, 2010, they've come out with a new software package for helping you to fill the forms out correctly.