Fiscal Sponsorship Basics

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Updated January 25, 2015

Fiscal sponsorship is an increasingly common alternative to starting a nonprofit organization. In its most common forms, it allows a group or individual to create a project that can receive grants and deductible charitable contributions without forming a nonprofit entity and/or obtaining tax-exemption. Accordingly, it’s not surprising to see fiscal sponsorship used as an incubator to test a charitable project and later spin it off into a separate nonprofit corporation if the project is successful. It’s also common where an organization is waiting for an IRS determination of its tax-exempt status but has an immediate opportunity to receive charitable funding and start operating.

Definition

Fiscal sponsorship is a term commonly used to describe any one of a number of contractual relationships between:

  1. An individual or group desiring to run a project that advances a tax-exempt purpose; and
  2. A tax-exempt organization that is willing to serve as the project’s fiscal sponsor by conferring upon the project the benefit of the sponsor’s tax-exempt status.

It’s important at the outset to emphasize that a fiscal sponsor cannot “loan” its 501(c)(3) status or employer identification number to an individual or other entity. A fiscal sponsor will be responsible for all of its own actions, including any authorized actions taken by its agents. And if any liability results from those actions, the fiscal sponsor and possibly its board will be liable. So, it’s not a relationship to enter into lightly.

Comprehensive Fiscal Sponsorship

The National Network of Fiscal Sponsors (NNFS) defines comprehensive fiscal sponsorship as a model in which “projects are a fully integrated part of the sponsor who maintains all legal and fiduciary responsibility for the sponsored project, its employees and activities.” This is the most common form of fiscal sponsorship. It’s best to think of this model as follows:

  • The fiscal sponsor has complete ownership of the project.
  • Everyone who works on or manages the project are employees, volunteers, and/or agents of the fiscal sponsor when acting in such capacity.
  • Project leaders that sign the fiscal sponsorship agreement (typically as a steering committee) have the right to terminate the agreement and, subject to the agreed upon terms, transfer the project to another fiscal sponsor or other tax-exempt organization.

See NNFS Guidelines for Comprehensive Fiscal Sponsorship

Pre-Approved Grant Relationship Fiscal Sponsorship

NNFS defines the pre-approved grant relationship fiscal sponsorship as a model in which “the project is a separate entity that retains ownership of the work produced, while the sponsor ensures legal and regulatory compliance for charitable funds.” This is perhaps the second most common form of fiscal sponsorship and most commonly associated with arts projects. It’s best to think of this model as follows:

  • The party that signs the fiscal sponsorship agreement with the fiscal sponsor (the “Grantee”) has complete ownership of the project.
  • Everyone who works on or manages the project are employees, volunteers, and/or agents of the Grantee.
  • The fiscal sponsor raises funds to advance the purposes of the project without any legal obligation to direct such funds to the Grantee.
  • Everyone who raises funds on behalf of the fiscal sponsor for purposes of the project are agents of the fiscal sponsor when acting in such capacity (even if they also are agents of the Grantee in other capacities, such as managing the project).
  • The fiscal sponsor generally re-grants any funds it collects for the purposes of the project to the Grantee (so long as Grantee hasn’t violated the fiscal sponsorship grant agreement and/or misdirected or misused any of the grant funds)

See NNFS Guidelines for Pre-Approved Grant Relationship Fiscal Sponsorship

Table Comparing Two Common Forms of Fiscal Sponsorship

 Comprehensive
Model A
Pre-Approved Grant ...
Model C
Project is housed in sponsorYesNo
Project is housed in separate legal entityNoYes
Project employeesEmployees of the sponsorEmployees of the project (sub-grantee)
SolicitationsBy agents of the sponsorBy agents of the sponsor
GrantsTo sponsor for purposes of the project (housed in sponsor)To sponsor for purposes of the project; sponsor may, but is not required to, regrant to project (sub-grantee)

 

Fiscal Sponsorship Agreement

A fiscal sponsorship agreement must be drafted properly to get the benefits desired by the parties and to avoid legal problems. While there are several different models of fiscal sponsorship possible, there are only a few ways to do it right and several ways to do it wrong. Accordingly, it is important for the parties to understand precisely their respective roles and obligations under the particular form of fiscal sponsorship relationship they have selected and properly document it in an enforceable agreement.

Important Considerations

For the Fiscal Sponsor:

It is essential to ensure that the activity of sponsoring a particular project is done in furtherance of the fiscal sponsor’s own exempt purposes.  Before entering into a comprehensive fiscal sponsorship relationship, the sponsor should also be aware of its exposure to liability for the actions of its project and/or of those delegated with authority to manage or fundraise on behalf of the project.  Generally, the sponsor should control the drafting of the fiscal sponsorship agreement to ensure it meets all of its needs.  Legal review of the agreement is highly recommended.

For the Other Party:

It is important to recognize that, in a comprehensive fiscal sponsorship relationship, the project will be the under the control and legal ownership of the fiscal sponsor.  And under either of the discussed sponsorship relationships, the fundraising for the project will be under the control of the sponsor,  The benefits of immediate tax-exempt status and administrative support must be weighed against the lack of autonomy and fees typically charged by the sponsor.  Also, the other party to the fiscal sponsorship agreement should ensure the termination provisions of the agreement provide it with sufficient flexibility to select a suitable successor sponsor or spin off the project to a new 501(c)(3) entity.

Additional Resources:

National Network of Fiscal Sponsors

FiscalSponsorship.com, San Francisco Study Center

You can order Greg Colvin’s book “Fiscal Sponsorship – 6 Ways To Do It Right” on this site.  I consider this book essential reading for organizations that are contemplating fiscally sponsoring projects and recommended reading for groups looking to become fiscally sponsored.

Guide to Fiscal Sponsorship, Foundation Center

Fiscal Sponsor Directory

Tips on Starting a Nonprofit: Alternatives to Forming a Nonprofit (3-min YouTube video w/ Erin Bradrick)

 

7 thoughts on “Fiscal Sponsorship Basics

  1. Jenny, a non-501(c)(3) project may have a 501(c)(3) fiscal sponsor. The group that founded and will operate the project does not even need to incorporate as a nonprofit.

  2. Gene- Thanks for this great site. If an organization has incorporated as a nonprofit in a state, but does not have 501(c)(3) status, can it still have a fiscal sponsor?

  3. Hi Joanna. A donor advised fund (DAF) is very different from a fiscal sponsorship. A DAF is now defined under federal tax law and generally is a fund or account controlled by a sponsoring organization, identified by reference to the donor(s), and where the donor (or a donor-appointee) has ADVISORY privileges over the distributions and investments of the assets. While it may often look like a “holding cell” for the donor, the donor has given up all legal control over the assets, and the sponsoring organization has ultimate control over the assets (including the ability to distribute them to grantees other than those selected by the donor within any purpose restrictions agreed upon). But so long as the donor RECOMMENDS (not directs) distributions for valid charitable purposes that are within the mission of the sponsoring organization, such recommendations are very, very likely to be followed. So, point taken.

  4. Dominique, I’m not sure I understand your question. A fiscal sponsorship is a contractual relationship so the contract terms will govern so long as they are consistent with the law. Also, the sponsor must act in furtherance of its own exempt purposes and not for private benefit. Generally, for risk management purposes, a sponsor may prefer not to give to a non-501(c)(3), including any former sponsored project.

  5. Dominique Simon

    Is there any way monies in reserve can be transferred to an individual fiscal sponsee when sponsoring relationship has ended (other than transfer to another not for profit)?

  6. It’s possible for a group to have multiple projects, each fiscally sponsored by a separate fiscal sponsor. If, however, a single project has commingled funds of multiple sponsors, I don’t think it’s practical for each sponsor to exercise control.

  7. Daniella

    Can a non-profit hold multiple fiscal sponsorships with different sponsors?
    Thank you

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