Fiscal sponsorship is one of the topics we have been receiving a surge of inquiries about during the pandemic at The Law Firm for Non-Profits. Some of these inquiries are driven by organizations seeking a way to respond quickly to one of the myriad challenges facing our country. Others are looking for a way to continue a successful program as funding is diminishing.
Whatever the motivation, is your organization thinking about exploring fiscal sponsorship? Here are 10 things you should know:
#1: Fiscal sponsorship allows a project that does not have 501(c)(3) status to receive tax-deductible contributions and grant funding through a relationship with an existing tax-exempt 501(c)(3) nonprofit organization.
#2: Fiscal sponsorship can be a great way to incubate or test a new project. Starting a nonprofit takes a considerable amount of time and resources. Beginning operations under the umbrella of a fiscal sponsor offers the opportunity to test the concept for viability as well as for its founders to learn about operating a nonprofit before launching independently. It also is ideal for short-term or temporary ventures such as those seeking to respond to pandemic-specific issues.
#3: The fiscal sponsor may be legally responsible for the activities of the sponsored project. This means that a sponsored project’s actions could jeopardize the tax-exempt status of the fiscal sponsor. Therefore, fiscal sponsors must carefully select appropriate projects for sponsorship and closely oversee their activities.
#4: Fiscal sponsorship is not a tool for circumventing restrictions on 501(c)(3) tax-exempt organizations. To put it simply, the sponsored project may not do anything the sponsor cannot do such as engage in political activities, inappropriate private benefit or private inurement, or excessive lobbying. All funds received through the fiscal sponsor must be used by the sponsored project exclusively for tax-exempt purposes.
#5: A sponsored project must further the sponsor’s own tax-exempt purpose. While fiscal sponsorship is often thought of as simply an administrative relationship, the IRS requires that the fiscal sponsor retain discretion and control over the use of the funds to ensure that the arrangement is not merely a pass-through of charitable dollars to the project.
#6: There are many different types of fiscal sponsorship. The two most common are the comprehensive model and the pre-approved grant model. In the comprehensive model, the project becomes a part of the fiscal sponsor which owns and operates the project (although it may delegate management of the project to the project operators). In the pre-approved grant model, the project is run by a separate entity funded by the fiscal sponsor. Understanding these distinctions and the type of model proposed is critical, particularly if the sponsored project seeks to become an independent organization in the future.
#7: A well-drafted fiscal sponsorship agreement is essential to a successful relationship. Fiscal sponsorship agreements are not one-size-fits-all. Each relationship will have unique considerations that must be thoughtfully addressed. Among other things, the written agreement should outline the responsibilities of both parties, services to be provided, accounting procedures, administrative fees, and termination procedures.
#8: Termination can be tricky if not thoughtfully addressed in advance. For example, if a fiscal sponsor holds funds for a sponsored project and would like to end the relationship for any reason, it must transfer the funds to an appropriate successor or otherwise use them for the project’s purposes. It may not simply turn them over to the project managers.
#9: Sponsored projects often require a lot of hand-holding as their leadership typically less experienced with nonprofit operations. A fiscal sponsor must make sure it has adequate staff and systems in place to handle both the logistics involved in receiving and disbursing funds as well as the advice and counsel sponsored projects may require.
#10: A sponsored project can make the fiscal sponsor look really good… or really bad. In addition to the legal risks to the fiscal sponsor, there are significant reputational considerations. This is yet another reason why projects should be carefully vetted and selected for fiscal sponsorship.
What has been your experience with fiscal sponsorship? What would you add to this list? We look forward to hearing from you.