Why I Usually Tell People Not to Start a Nonprofit

Every few months someone asks me the same question. "I have this great idea. Should I start a nonprofit?"

Most people expect me, a grant writer, to enthusiastically say yes. Instead, I usually say no. I tell them to find a fiscal agent.

That answer surprises people, but after nearly fifteen years in nonprofit consulting, I've become convinced that fiscal agency is one of the most underutilized and misunderstood tools available to charitable organizations.

Unfortunately, I've also noticed a troubling trend. More grant applications using fiscal agents are being denied simply because reviewers don't understand why the partnership exists. Even worse, some funding agencies now exclude fiscal agency applications altogether.

I think that's a mistake.

First, What Is Fiscal Agency?

A fiscal agent is an established nonprofit that agrees to receive and manage grant funds on behalf of another charitable project or program.

The sponsored project uses the nonprofit's EIN when applying for grants. If funding is awarded, the nonprofit receives the money, manages the finances, oversees grant compliance, and submits required reports. This isn't simply passing money from one organization to another. The IRS requires fiscal sponsors to maintain complete discretion and control over grant funds. They assume the legal and financial responsibility for ensuring those funds are spent exactly as described in the grant application.

That responsibility is why fiscal sponsors typically charge a 2.5 to 5 percent administrative fee. It's also why every fiscal sponsorship should begin with a strong Memorandum of Understanding that clearly defines each partner's responsibilities before a single grant application is submitted.

Why Create Another Nonprofit?

Here's the question I always ask. Does this project really need an entirely new organization? Or does it need a partner?

Roughly half of all new nonprofits close within their first five years. Even among those that survive ten years, many continue to struggle financially.

Starting a nonprofit means forming a board, filing annual tax returns, purchasing insurance, creating policies, managing financial systems, completing audits when required, filing grant reports, recruiting volunteers, raising unrestricted operating dollars, and complying with ever changing nonprofit regulations. That's an enormous amount of infrastructure. Sometimes the idea doesn't need infrastructure. It simply needs a home.

Imagine someone wants to teach financial literacy to survivors of domestic violence. The local shelter already provides emergency housing, legal advocacy, counseling, and basic necessities. Could they also offer financial education? Maybe. Maybe not. Perhaps they simply don't have the staff or expertise. Instead of creating a brand new nonprofit that appears to compete with the shelter, why not create a partnership? The shelter continues doing what it already does well. The financial literacy expert fills an unmet need. The clients receive more comprehensive services. Everyone wins.

Fiscal Agency Already Happens Everywhere

Many people think fiscal agency is rare. It isn't. Community groups often partner with local park foundations to improve neighborhood parks. The foundation holds fundraising proceeds, pays contractors, files grant reports, and ensures accountability. Cities frequently partner with nonprofits on public improvement projects. Arts organizations regularly sponsor community productions. Collaborative projects happen every day under fiscal sponsorship. Most people just don't realize that's what they're seeing.

So Why Are Some Funders Rejecting Fiscal Agency?

Part of the answer comes from the IRS. The IRS watches carefully for organizations acting as illegal conduits. In simple terms, they want to prevent nonprofits from becoming vehicles to hide income or improperly pass money through tax exempt organizations. That's a legitimate concern.

Unfortunately, I think some grantmakers have allowed that concern to create unnecessary suspicion around every fiscal sponsorship. There's a difference between money laundering and collaboration.

Grant reviewers already receive budgets, financial statements, tax returns, and organizational history. They're in an excellent position to evaluate whether a partnership is legitimate. If the finances are sound, the roles are clearly defined, and the project complements the sponsor's mission, why shouldn't that partnership be celebrated?

We Say We Want Partnerships

Nearly every grant application asks applicants to describe community partnerships. Fiscal agency is one of the strongest partnerships a nonprofit can have. One organization contributes infrastructure, financial oversight, and administrative capacity. The other contributes expertise, innovation, and direct programming. Together, they serve more people than either could alone. That seems exactly like the kind of collaboration philanthropy says it wants to encourage.

My Hope

I hope more nonprofits consider fiscal agency before forming another organization. I also hope more funders begin viewing fiscal sponsorship for what it often is: a thoughtful strategy that reduces duplication, strengthens financial accountability, and allows great ideas to serve communities faster.

Sometimes the best way to change the world isn't by creating another nonprofit.

Sometimes it's by helping two good organizations work together.