Fiscal sponsorship is a term commonly understood to reference one type of relationship – where the fiscally sponsored project is operated within the fiscal sponsor with all project assets, liabilities, revenues, expenses, employees, and volunteers being the fiscal sponsor’s. But this model, commonly referred to as Model A, is only one of several types of relationship all referred to as fiscal sponsorship based on the seminal book, Fiscal Sponsorship: Six Ways to Do It Right (Greg Colvin and Stephanie Petit). The book also describes another model of fiscal sponsorship, Model C, that is fundamentally different from Model A and has caused confusion among parties that treat fiscal sponsorship in their applications, contracts, and funding decisions as just one thing.

Model C fiscal sponsorship is properly structured with the fiscal sponsor as an intermediary and grantmaker and the fiscally sponsored project operated within a separate grantee, one that is not exempt under 501(c)(3) (the “Subgrantee”). Individual donors and foundations may donate or grant funds to the fiscal sponsor, and the fiscal sponsor subsequently grants those funds to the Subgrantee, which has been vetted in advance and preapproved as a suitable recipient of grant funds by the fiscal sponsor. To be clear, what is currently referred to as a Model C fiscal sponsorship, as referenced in the Colvin-Petit book, is a legitimate structure supported by decades of law and invaluable to the support of many tens of thousands of charitable projects if not more.

It’s important to note each step of the Model C relationship:

• A person or entity applies to be preapproved as a Subgrantee of the fiscal sponsor
• Upon approval, the Subgrantee and the fiscal sponsor enter into a Fiscal Sponsorship Grant Agreement
• Individuals associated with the Subgrantee act as authorized agents of the fiscal sponsor to raise funds to advance the charitable purposes of the project
  • Note that the Subgrantee itself should typically not fundraise for itself or for the project or as an authorized agent of the fiscal sponsor
    • Fundraising for itself would mean that the fiscal sponsor is a mere conduit, donors would not be eligible to take a charitable contribution deduction, and foundations would be making grants to an organization other than a 501(c)(3) organization
    • Fundraising for the project is the same as fundraising for itself since the project is housed in the Subgrantee
    • Fundraising as an authorized agent of the fiscal sponsor, in certain states, may trigger registration requirements of the Subgrantee, possibly making it a commercial fundraiser as a party receiving funds in part because of its fundraising activities for the fiscal sponsor, and failure to register could result in penalties to the Subgrantee and to the fiscal sponsor that facilitated the unlawful arrangement
  • Individual volunteers of the fiscal sponsor may be authorized to fundraise so long as it is for the purposes of the project and not exclusively for the project and Subgrantee (this leaves the fiscal sponsor with the discretion to not grant the funds the Subgrantee if the Subgrantee has violated the fiscal sponsorship grant agreement or otherwise given reasonable cause for the fiscal sponsor to believe that any funds granted to Subgrantee will be diverted for noncharitable purposes)
• The Subgrantee and the fiscal sponsor have an adequate reporting system to allow the fiscal sponsor to exercise reasonable care with respect to ensuring that its grant funds were spent consistent with the project’s charitable purposes (Model C arrangements typically do not allow for general support grants because the grantee is not otherwise bound by Section 501(c)(3) of the Internal Revenue Code)

The big difference between Model C and Model A fiscal sponsorship is that the fiscal sponsor in a Model C arrangement is an intermediary (with sufficient legal discretion regarding its use of the funds it raises for the purposes of the Model C project) and that’s not the case in a Model A arrangement even though it’s sometimes marketed that way. The Model A project operations are all operated by the fiscal sponsor’s employees and volunteers. And ideally, in my opinion, the committee that serves to guide the Model A project should also be structured as an internal body of the fiscal sponsor (even if it is composed of all of the same people that make up the party that entered into the fiscal sponsorship agreement with the fiscal sponsor). This way, the committee members would be covered by the fiscal sponsor’s insurance (assuming the fiscal sponsor has appropriate coverage) and typically by the corporate limited liability shield associated with the fiscal sponsor.

It is because of the fundamental differences between Model C and Model A fiscal sponsorship that are widely misunderstood by the general public, funders, regulatory agencies, and legislators, that fiscal sponsors and formal and informal networks of fiscal sponsors (including NNFS) should start discussing whether Model C fiscal sponsorship should be called something else. While the nomenclature works when everybody has a strong understanding of the differences, it creates dangers where there is a lack of sufficient understanding, including:

• Improper and noncompliant structuring of fiscal sponsorship arrangements;
• Reputational harm to fiscal sponsors for failures to accurately describe the required relationships to the parties with which they contract;
• Legislation that fails to account for the different models of fiscal sponsorship and consequently does harm to all the different models.

Some of you may have heard my partner Erin Bradrick advocating for limiting the use of the term “fiscal sponsorship” to just Model A arrangements. I think that’s a very good idea, particularly as we’re seeing potential federal legislation try to define fiscal sponsorship without the substantive legal background supporting the legitimacy of the different models and with all of the confusion caused by the lack of clarity on how the different models each work in very different ways. This advocacy should in no way seek to limit the existence of the Model C arrangement, which might benefit simply by being called something else.