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[ASK AN EXPERT] When Can A Nonprofit Without Its 501(c)(3) Status Start Fundraising?
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Updated - 05/29/2025
Our Ask An Expert series features real questions answered by Claire Axelrad, J.D., CFRE, also known as Charity Clairity. Today’s question comes from a nonprofit employee who wants advice on whether they can start fundraising if they’re still waiting to hear on their 501(c)(3) status:
Dear Charity Clairity,
We’re waiting to hear on our 501(c)(3) status. Can we start fundraising now?
— Not Quite Legit
Dear Not Quite Legit,
If your nonprofit has properly registered, and is waiting on its 501(c)(3) status, you can still ask for donations.
Here’s the kicker: The donations will not be tax-deductible for donors at this point in time, unless… you work with a fiscal sponsor. Consider a fiscal sponsor as training wheels for organizations planning to eventually ride solo.
This can be another nonprofit who agrees to take on this responsibility on your behalf. Or a nonprofit that is set up specifically to be a fiscal sponsor for other charities. Today there are three times as many practicing fiscal sponsors as there were two decades ago.
In fact, nonprofits can accept donations through a registered 501(c)(3) sponsor even without registering themselves. This may make sense if you’re small in scope, only raising funds for a single project, or simply don’t have expertise in corporate, financial, or tax matters.
When you work with a fiscal sponsor, you’ll be asked to sign a Memorandum of Understanding (MOU) or other legally binding agreement.
The MOU spells out the nature and term of the relationship, including a model of fiscal sponsorship, all legal compliance relating to receiving, reporting, and acknowledging donations, recordkeeping responsibilities, ownership of intellectual property, dispute/indemnification clauses, any fees charged, and the process for holding and disbursing funds. It’s a good idea to have this reviewed by a nonprofit or contracts attorney.
The fiscal sponsor will hold the donations received on behalf of your charity as restricted funds.
When you engage in fundraising, it’s considered you’re fundraising on behalf of the fiscal sponsor as an agent of the fiscal sponsor. Similarly, if they are managing the activities and affairs of your project, they are doing so as agents on your behalf. Donations intended for use by you/your project should be disbursed to you upon request, as outlined in your MOU. Just understand you don’t legally have control over these funds.
A benefit of working with a fiscal sponsor is that it engenders donor trust.
Donors care that the organization they give to is doing all it can to be transparent about their fundraising activity. Registering for 501(c)(3) status, plus registering wherever you intend to engage in charitable solicitation, are great steps to take to demonstrate your good faith. As you plan ahead for 501(c)(3) status, you should take care to register in your home state and wherever else you conduct business. Some states view soliciting charitable donations as “doing business” in the state and may require an out-of-state nonprofit to undergo separate processes for business registration and charitable registrations.
So, as you prepare to become your own legit 501(c)(3), there is plenty you can do to solicit donations and convey to donors your trustworthiness. Go forth and prosper!
— Charity Clairity (Please use a pseudonym if you prefer to be anonymous when you submit your own question, like “Not Quite Legit” did.)
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