Wednesday, November 28, 2007

Start Up Non Profit? Need Seed Money? Starting Fundraising? Here's help...Part 2 of 2

[Warning: this post and no other post in this blog is either legal or financial advice. This post is purely informational. If you need either legal counsel or the services of a Certified Public Accountant, hire either or both.]

Starting a non profit? Running a new organization but do not have cash flow? Volunteering with a grassroots group? The previous post "Start Up Non Profit? Need Seed Money? Starting Fundraising? Here's help...Part 1 of 2", included three pieces of advice that I can't urge you enough to: read, honestly look at yourself, and consider.

As I stated in the previous post, I understand that you do not have any money.

In this post I talk about how to receive grants before your organization has officially received it's legal non profit status (it's a 501(c)...3, 4, 5, etc. code designation on the federal level). The process called fiscal sponsorship offers organizations who are not legal non profit entities to receive tax free dollars. If your organization is preparing to or in the midst of receiving a legal non profit status, this is a way for you to raise money before you have tax exempt status. Similarly, if a small 501(c)(3) organization would like the benefit of a larger non profit organization's abilities, experience, relationships, etc. a fiscal sponsorship may be a good formal solution. Other possible fiscal sponsorship relationship scenarios exist but are limited by the letter of the law. There could be a "public support test" which determines whether the exempt status is appropriate, given the project or work you are doing.

Your organization needs to locate a currently legal 501(c)(3) organization that is both doing similar work as your organization is, and can offer your potential grant donors the legal tax free benefit, now, by passing the donation that they receive onto your organization's work.

In all fiscal agent scenarios, there should be a clear and binding agreement between the parties involved BEFORE any fundraising begins, to clarify and protect each entity's legal responsibilities. The agreement should also protects potential donors, because if they do give a donation (for example, a grant) and there are not proper agreements in place, the sponsorship relationship may not exist, in the eyes of the law (or the IRS); and it may wind up that, under legal interpretation, a grant has been given to you without the tax exempt status actually being in place, despite all of the best intentions in the world. If this happens, the donation might be revoked by the law, and the sponsor could lose their legal tax exempt status.

Understand that the law requires that the 501(c)(3) that is receiving the donation on behalf of your organization is legally responsible to make sure that the money is spent to benefit its (the current 501(c)(3) non profit's) mission statement work (its tax exempt purpose). It has complete control and discretion over the funds, legally.

Here are three (more likely) fiscal sponsorship relationships:

Perhaps your organization (which is not yet a legal 501(c)(3), for instance) is going to provide a program or project that the legal 501(c)(3) (sponsor) non profit is not currently doing, but their mission statement is directly related to. The official non profit can become an "umbrella" organization to yours'; extending its non profit (tax free dollars) status to your organization. A clear understanding between your organization and the 'umbrella' 501(c)(3) is strongly recommended. If the project leaves the umbrella organization's control - the ability to raise tax free dollars probably legally diminishes. The agreement should probably define when the project leaves the 501(c)(3) and thereby completely run by the organization currently without non profit status. Paying bills, being the employer, and overseeing the work/project are likely the responsibility of the sponsor (the current 501(c)(3)). Assets purchased for the project, etc. are the sponsor's property. All of this burden does infer the sponsor becomes more liable.

Hiring contractors, and determining if they are 'contractor' status for the duration of the project, or employees - places the fiscal sponsorship in another kind of relationship than the one described above because the law interprets hiring and managing contractors, as contractors, as different from the above scenario.

A third scenario, different from the umbrella fiscal sponsorship or contractor relationship is when a potential fiscal sponsorship relationship could be based on seeking grant money, specifically. The organization that does not have legal charity (or tax exempt) status, yet; writes a grant proposal and shares the proposal with the fiscal sponsor (organization that currently has its 501(c)(3) status). The sponsor's staff leadership reviews the proposal to determine whether the project is charitable and carries out its mission statement work (tax exempt purpose). Next, the sponsor's board of directors checks for the exact same. After these two steps are completed and determined to be true, the sponsor has "pre-approved" the project and will pass the grant (if received) onto the project. Then the fiscal sponsor and non exempt organization create and sign a written "grant agreement" that clarifies the relationship, the project, how and when the funds will be spent, etc., and that the sponsor retains complete control over the funds. After, the two organizations (or one or the other) seeks the grant money and the sponsorship relationship and control of money is made known in writing with any and all potential donors. When a grant is received, the sponsor receives the money as "income" and passes it on as a "grant" to the non charity entity, per your agreement. The non charity entity then makes periodic reports detailing how, where, when, etc. the money is being spent, and progress of the project, per the agreement. The project should be made into a a sole proprietorship or its own entity as the project, not the sponsor, in this scenario, is responsible for its tax reporting, employment taxes, debts, etc. and owns the assets.

As with any fundraising, the funds must be spent on what and where they were described to be spent, during the fundraising (i.e. in the grant proposal).

The sponsor, retaining the discretion over how the money is spent, can withdraw or decide not to fund the project. The money should either be returned to the donor or the donor should be made aware of the change in the use of the money and be given a say in the situation (for the benefit of the donor/recipient relationship and organizational reputation/integrity). Depending on how agreements were written (between sponsor and project manager, and grantor and grantee) a restricted donation designation or unrestricted donation designation may have been stipulated, which would direct where the money can and can not go in different scenarios such as a sponsor deciding not to pass on the money to the intended project manager (non charity entity).

For this particular post I used "Fiscal Sponsorship: Six Ways to Do It Right - A Synopsis"
by Gregory L. Colvin; Silk, Adler & Colvin, San Francisco, California;April, 1993
; as a reference. For more detailed information read this article.

Update: For a real world warning to the potential hazards of fiscal sponsorships see Another Nonprofit Fiscal Sponsor Collapses - With Client's Cash


Maya Norton said...

Dear Arlene,

Thanks for your participation in November’s Carnival of Giving.

If you would like to learn more about what other participants have said, their submissions can be found here.

Best wishes,

Maya Norton

The New Jew: Blogging Jewish Philanthropy

Arley said...

I want to work with a non profit to apply for grants will this be possible to have a non profit become my finacial agent? if so what is the typical fee structure?

Arlene M. Spencer said...

Hello Arley,
Thanks for reading and commenting. I am not sure from your question if you're asking if you, as an individual, can seek grants with a nonprofit as your fiscal sponsor; or if you're wanting to seek a fiscal sponsor (nonprofit) for a nonprofit that you're working for.

There are few legitimate grants for individuals (as opposed to nonprofit organizations) who are not doctors or scientists doing research, or artists. Be leery of anyone offering an individual grants or grant writing services.

If you are an individual read my two posts for insight and recommendations:

If you are seeking a fiscal sponsor nonprofit for a nonprofit you've started up; there is no fee structure. There should be a Letter of Agreement stating that 100% of any grant that a fiscal sponsor receives will be passed through to the sponsored nonprofit. This is standard. No nonprofit should make money off of the fiscal needs of another nonprofit in the fiscal sponsorship relationship.

Good luck!

Anonymous said...

I am a new 501(c)(3) organization and cannot find any grant monies/start up cash to get started. The banks tells us we have no cash flow because we're new, the organization has put sweat equality in the building we're leasing so we have no money. We cannot get a loan because we have no collateral. Please give me advise to what to do. Theresa

Arlene M. Spencer said...

Hello! Thanks for reading and posting.

Raising donations can be tough for start up (or grassroots)nonprofits.

I may have this wrong, but it sounds like you're approaching funding the new nonprofit from a 'for profit' mentality (e.g. the bank won't lend, you've put sweat equity into the building lease, etc.).

Nonprofits are unique animals. While they are professional places of business they require knowledge beyond 'for profit' funding. Nonprofit leaders must fundraise. There's no way around it.

Create a list of friends, family, and other potential donors (especially focus on businesses and people who you know are touched by the cause your org. serves) and send a short but to the point letter requesting a donation. Begin to track who responds and keep this list. This will, over time, become your individual donor base. For example you could begin to issue a newsletter, quarterly, and include donation remittance envelopes with each newsletter. Also, send an annual appeal letter to each donor.

Research potential seed money grant donors, write a letter of inquiry and proposal, formatting each to the specific foundations that you approach; and submit requests for grants.

If your org. has a website, get a 'donate now' button onto each page and accept donations on line.

Any events that your representatives speak at on behalf of the org., or any events/classes that the org puts on - request donations.

You need to educate yourself and the other leaders of the org. (exec. director, board members). There are many many fundraising methods and some are excellent for start up nonprofits.

Read number 7, for sure, and numbers 1, 6, and 9 in my post, "Some Free Resources" at:

Take the time to learn how to do what a nonprofit requires according to modern, professional, nonprofit best practices. I also suggest that you research whether there is a professional nonprofit affiliation in your region (e.g. is an example of the kind of org. that I'm recommending) that will allow you to learn (ongoing continuing educ. classes on everything from nonprofit 101 topics to advanced topics), and it will allow you to network and ask other nonprofit professionals in your region, for advice or suggestions. They've been through what you're experiencing and can suggest resources in your region.

Good luck!


Denise said...

Hi Arlene,

I'm writing on behalf of my church. We already have 510(C)(3) status but are looking to add to our existing building in hopes to provide more activities and programs to those in our community, i.e., after school programs, teen outreach, help to those recently released from incarceration, etc. We have no formal church "backing" as our Pastor is the founder of our church. We have a strong giving membership and already participate in fundraising. I've heard of other churches receiving grant money for such programs. Where do I go to learn about organizations that offer these types of grants and how complicated is it to apply? Thanks for your advice,

***spirit*** said...

We are a nonprofit 501(3)(c) Emergency Medical Service seeking assistance in obtaining start up funding. Can you give us some advice?


Arlene M. Spencer said...

Hello, thanks for reading, and for posting. I urge you to read my Comment response to Theresa (just above your Comment post). Half of any nonprofit's work is fundraising. Nonprofits that aim to grow must develop secure cashflow and the only way to do that is dedicate a nonprofit's leadership to learning (assuming they have little or no nonprofit management experience). Check into your region's nonprofit professional affiliations (check with your region's community foundation or online); Jossey Bass publishing offers some of the most respected resources on the 'how to's' of all aspects of nonprofit operations for all experience levels from brand new to advanced; and check The Foundation Center's resources out online. They have some wonderful free resources.

Good luck!

Arlene M. Spencer said...

First, my heart felt apologies for taking so long to post your question (and respond) that spirit posted a Comment after you and received a response before you did! Fortunately, her question was similar to yours' so I'd recommend you read my response to Threresa, above your Comment, too; but also please read the following of my posts:

"Places, Resources, and Ways To Learn..." at:
This post will give you resources to begin to learn.

"...Where To Begin Grant Writing" at:

"Some Free Resources" at:

I think that if you read these three posts and follow through on the pertinent recommendations you will be well on your way!

Good luck to your church, and again, I apologize!


Sheena said...


First of all, I want to thank you for this wonderful blog! With all the time I've spent online researching funding, you are the only person that has been honest and to the point. For the past two years my volunteers and I have been gathering research, organizing statistics and planning a Pilot Program that will help reduce juvenile delinquency by assisting the community as a whole. We spent six months writing our proposal but now that it is finished we can't seem to find any agencies offering grants that meet our needs or that we qualify for. Although we are not incorporated with the state we are registered with the IRS and I see people all the time taking about how they got grants for their cause and some fo the grants are pretty specific but I really need your help. Do you know anywhere that I can go that can assist me? How do I find fiscal sponsors in my area?

Also, I was wondering if you knew anything about non-profit taxes. We registered with the IRS in June but we haven't received any money yet so do I still have to pay taxes on that? We dont have employees (everybody volunteers) and we don't currently receive donations. Thank you for any help that you can give me.

Arlene M. Spencer said...

Hello, thanks for reading, thank you for your great feedback, and thanks for commenting with your question. You are welcome!

It sounds like you are working with a start up nonprofit. I am not sure that I totally understand your questions, in your comment, so if I miss something please feel free to e-mail me at admin at thegrantplant dot com, clarify what I don't understand, and ask again.

To be sure that you and I are on the same page, I want to clarify a few things, first. Tracking (researching) statistics and results is really important when raising grant money but also for any other type of fundraising method, too, because you can provide any potential (or current) donor to your organization with the 'live, on the ground' real results of your organization's programs, and your organization's track record.

You say in your comment of the organization that you work for that "we are not incorporated with the state we are registered with the IRS and". To remain in good legal standing with any and all municipalities (e.g. cities, counties, states, the federal government, etc.) and to remain in good standing with any current or future potential donor; I recommend strongly that your organization apply for and acquire all required official designations (e.g. Letter of Determination from the IRS confirming your organization has received its official 501(c)(3) designation), permits, and licenses (etc.). Wherever the organization is based one of the volunteers should research what each government that oversees that location (again, city, county, state, and the federal government) requires of nonprofits. Most will only require that the organization (being a nonprofit) registers (there's no or little cost, usually). It's important to do because if donors learn when they research your organization, perhaps before they give to it, that your organization is not registered with all proper authorities, they may question whether your organization is honest with its programming, reporting, and donations. Grant donors, in particular, require documentation today demonstrating a nonprofit's official designation and good standing. Donors do research potential donation recipients. Also, a nonprofit can research federal (U.S. government) grants on but I'm not aware of nonprofits being able to register themselves with the tool (but perhaps I'm wrong). In either case, be sure to research what federal grants you may be able to apply for, via that tool. is one of many great portals available to search for grants through. To learn about other tools that exist to assist nonprofit volunteers and staff in locating grants, read my responses to Denise (just above your comment, here) and to Theresea (which sits just above my response to Denise, here). They list web addresses for posts that I've written that provide a lot of 'how to' or 'where do we find' information for grant seeking (some of which are free).

You ask, too, "How do I find fiscal sponsors in my area?" They are not listed anywhere. Fiscal sponsors are another method to raise funds. They are not grant donors. They are usually other nonprofit 501(c)(3)'s (the same type of organization as the one you work for) who have likely been around longer and are already well established (so usually they are over 5 years old, at least, and are medium to larger sized operations). The way that a start up or a grassroots nonprofit locates a fiscal sponsor is through networking with other nonprofit leaders, in your region, who do similar work as yours'; and then building a relationship with the leadership of the established older nonprofit. The two nonprofits usually do the same type of work for the same cause or issue that their mission statements set out to solve.

You ask, too, "Also, I was wondering if you knew anything about non-profit taxes. We registered with the IRS in June but we haven't received any money yet so do I still have to pay taxes on that? " I am not a CPA or an accountant, so I am not answering you here, and your question is best answered by one that works with nonprofits. But I will say that any legal American nonprofit (that has received its official 501(c)(3) designation) does not pay taxes on donation receipts (that is one benefit that our government gives nonprofits). Other income may be taxed, such as revenue from a for-profit venture that a nonprofit uses to raise money. It doesn't sound like your organization does this. Yes, a volunteer-run organization is cheaper to operate, all around, compared to one with staff.

Raising donations should not be a concern for tax liabilities. Donations must be accounted for (bookkeeping) as any other business must because your organization will need to report any and all revenue (including donations and otherwise) to the federal government at tax time every year.

No one starts a nonprofit hoping to have to fundraise. People start them, of course, because of a passion they have to solve a community issue or problem. Nonprpofits are businesses, though, and must have regular cash flow to operate (with staff or not). Half of any nonprofit leader's job is, then, and must be fundraising. If your organization can not grow it is not a strong one. In order to grow you and the other leaders (e.g. the board) at your organization must be regularly fundraising and often.

It's fine when anyone doesn't know nonprofit operations, but it's not good for the nonprofit, the community, those that the nonprofit is set up to serve, or its donors if any nonprofit leader doesn't admit to themselves what they need to bone up on. As you already are, I encourage you to definitely hold yourself and even your fellow leaders (e.g. the board) at your organization accountable to know what you should to run a nonprofit. Nonprofits are businesses but run differently than for-profit organizations. I really recommend that you learn modern professional nonprofit management, operations, and accounting, etc. best practies. Jossey Bass publishing offers some of the best books on all aspects of nonprofit 'how to' or 'where do we find' questions from fiscal and legal responsibilities, to how to fundraise, etc. Go to and look down their left hand navigation bar to see what they offer. If you can't afford to buy any one of their books that you need, call your local public library and ask them to order it for you. Be sure to note that at the bottom of their menu they offer lines of books specific to start up or grassroots nonprofits. Also if you look over my two respones, above, and go to the posts' links that I suggest, there, I provide a lot of good resources (some of which are free).

I wish you great success in your important work preventing juvenile delinquency.

Best, Arlene

Sheena said...

Hello Again,

Thank you so much for the great advice and recommendations. I've been reading over you blogs for two days, taking notes and making changes !! It's really great to have a place to go when things get tough. I'll keep you posted on the final results!! You are a blessing to the non-profit community!!

Carl Grear said...


Can you give me some insight on the relationship between having the 501(c)(3) status and the 1023 application for tax exempt(ness)? Do I need to have both before I can begin fund raising in earnest?

Also, just wanted to thank you for what you are doing to help in this area of non profit grant seeking. This has got to be one of the most genuinely helpful sites present on the internet.

Carl Grear

Arlene M. Spencer said...

I'm so glad that we've been a help. The 1023 application is the application with the federal government to apply for a nonprofit's official 501(C)(3) status (which allows a nonprofit to raise tax free dollars - and pass that donation status onto its donors). Remember, too, that you will need to incorporate your organization as a nonprofit with your state and possibly city, county, and any other pertinent jurisdiction. Good luck! Best, Arlene

Anonymous said...

my request for tax-exemption is currently pending and I am in the process of recruiting volunteers to help with fundrasing. Is there a program that will help donate or loan money to help with securing a building?

Arlene M. Spencer said...

Dear Anony,
Raising money for a building is called a "capital campaign" and is its own unique fundraising situation because the cost in creating a building is one of the highest costs that exists for anyone. Read and learn about capital campaigns, find volunteers who have successful positive experience with capital campaigns, and go after the same kinds of support as described on this post (in both the post and in my responses to other comments). Good luck! Arlene

Jay Breitlow said...

GREAT website Arlene. I just found it today and am excited to read in depth and follow your updates. As the director of a new NPO it is right in my/our wheelhouse! Cheers!

los said...

We have been given the opportunity of a lifetime and we need to start a non-profit/research institute. The idea is to test and verify the product (which is not my invention) and let the inventor sell licenses to his product. This product should/will be EPA cerified. First, is this a valid and legal trade of services. Second, in your estimation would investors support such an endeavor. Third, would government grants qualify to start (or empower) such an institute.

Arlene M. Spencer said...

Dear los,
Hello, thanks for reading, and for posting a comment.

Unfortunately, I really can't answer your questions, though, I'm pleased you have an opportunity before you. There are too many critical details that I do not know, but more importantly, your question demonstrates how critical initial due diligence is prior to any nonprofit starting up.

My guess is, about government grants, that you would have some to apply for. It is always best, when applying for federal grants, to call one's federal reps' offices and let their staff know what your organization does, what federal grants the organization is interested in, and ask them to work with your agency to assist in both the application process and be an advocate for the application.

I do not know if it is a legal endeavor that you are proposing as I do not know enough detail, but I would encourage you, either way, to speak to an attorney familiar the specific research and work with the FDA being considered. Check with your nearest United Way as to whether a nonprofit in your region provides low cost, sliding fee scale, or free legal advice and assistance. If there's nothing local, look over (we recommend them in our left hand margin, in our blog design). They will have legal advisers at low or no costs.

Finally, you ask if investors (I presume you mean donors) would support such a venture. Again, I don't know but you are wise to ask this prior to initiating the organization. My answer is you should determine how much concern there is, interest exists, and potential cash flow from supporters can realistically be raised in the region (i.e. a city, state, country, or world) that the organization will serve. How? You can research how other similar nonprofits are doing financially and who they solicit support from. You can also do a feasibility study (go to Labels at the lower right side of this blog page and find "feasibility studies" to read more on them) to determine the same. Remember, too, the amount of powerful information often available for free to us at our own public libraries' reference desks (recent regional/local studies' findings of all kinds, demographic data for the area, etc.). Reference desk librarians are true angels at helping with this kind of source material if the desk doesn't have it.

I wish you luck! Arlene

Karin said...

Can you tell me how I would find out who the federal reps would be to contact. I am in the beginning stages with regards to this non-profit in Iowa and any help would be greatly appreciated.

Arlene M. Spencer said...

Hello, and thanks for reading. Go to and in the upper left hand corner of the web page, enter your zip code. Good luck, Arlene

Anonymous said...

Dear Arlene,

We are in the start up process of a non profit specifically for handicap/disabled individuals. Unfortunately, we have no money and most of the board,although extremely knowledgeable, have no money to invest. With all the filing cost, we have not been able to file all the necessary paperwork, and thus have not been able to fund raise. There are grants available even for for non-profit without the status, but we really need funding. Where do I go? There are not any NPO near me with a similar mission. I actually have not found anything even close. Any suggestions would be appreciated. I found your blog and feel like it is a God send for us.

Arlene M. Spencer said...

I know it might not feel like it at times, but your new organization is on its way (unique in its services provided, active board, etc.).

I can encourage you to prospect (search for grants according to proven methods most efficient, etc. to actually find potential grant donors likely to give to your specific organization). Look for the "Label" "prospecting" under "Labels" on the lower right hand side of this blog and click on it. There will be several posts that explain how to find grants for your organization.

There are grants for start up organizations out there.

Good luck,

Mariah Steward said...

Dear Arlene,
My name is Mariah Steward and group of friends and I want to start a non profit.We started S.P.E.A.K to be a voice for young adults that are facing obstacles in their lives. We want to be an outlet for them so they don't have to feel alone and they have somewhere to go. Most young adults feel like they don't have anyone in their corner. I know we have all felt that way and some kids take it all the way to the point they take they own life and we are here to talk to every last one of them so they can know they have someone that is willing to listen and be there for them and get them in the right path. We aren't just targeting bullying we are targeting everything for abuse, rape, drugs, runaway, teen pregnancy, STD's & HIV and last but not least social networks. But where do we start with NO MONEY. We need advice

Arlene M. Spencer said...

You have definitely posted your comment on a blog post (here) that will help your start up nonprofit begin to raise funds from the outset.

I recommend the following posts:

and many other posts, here, will help (either look at the "Labels" list at the lower right on this web page or use the search feature at the upper left corner to locate specific nonprofit operations/start up information per topic).

Look at my recommended resources in the middle of the right hand margin, too.

You have a steep learning curve to get your organization going - but it's well worth the effort. Locate reputable 'best practices' nonprofit resources to learn from (i.e. The Foundation Center (and its free education content), local courses at your nearby community college, look for any pertinent books that I recommend in my Amazon store (above right side) in your local library (or if they don't have the book(s) get them to get the book you want for you through inter-library loan), join your local professional nonprofit affiliation and attend their classes and network opportunities, etc.) and you'll get your organization up and running.

Good luck in your important work for the community,

Lori Brown said...

Hi Arlene,
Do you know if there is a legal way to solicit donations/raise money in order to help pay the 501(c)3 legal set up fees? The organization I'm helping out has already spent all personal money on development to date (website, biz plan, etc) and the last hurdle is $2K or so of legal fees to file the 501(c)3 status using a legal firm that specializes in that. They're really trying not to spend any more personal money, but I'm not sure they can solicit donations without the status. I read all about fiscal sponsorship, but not sure it would apply here. Thanks for any advice you may have!

Arlene M. Spencer said...

Dear Lori,
Hello! Thank you for reading, your important work for the community and for your comment.

I urge you to look at my responses to both Mariah and Sheena, above. Read the posts that I recommended to those ladies.

Yes, fiscal sponsorship allows you (along as set up legally) to fundraise before the 501(c)(3) is received.

Learn about fiscal sponsorships further before arranging one but it's a terrific supportive start to a baby nonprofit.

I wish you guys much luck in your effort.

Best, Arlene

Anonymous said...

Can not say how much I enjoyed reading this article!

Always felt there was a problem with the way a the non-profit I joined has been operating but now realize we have been running as a club rather than as a professional group. Thank you for opening my eyes and giving me words for my feelings.

In order to apply for grants, I have been (gently) working on improving the qualifications of our board and pushing for a formal operating expense.

Two topics I hope you can address:
1)Overcoming politics within a group in grant writing.
2)Writing reasonable objectives on a grant. What happens if the objectives are not met?

Thank you again!