Article on Fiscal Sponsor Legal Obligations

In March 2022, NEO Law Group Principal Erin Bradrick presented on the topic of the legal obligations of fiscal sponsors to Fiscal Sponsor Conversations: The Weekly Forum for Fiscal Sponsors hosted on the Schulman Consulting website. The Fiscal Sponsor Directory published excerpts from Erin’s presentation in an excellent article edited by Marjorie Beggs of the San Francisco Study Center: Oversight and Control: Fiscal Sponsors’ Legal Obligations to Their Projects.

Here are just a few general and supplemental thoughts:

Model A Fiscal Sponsor

The Model A fiscally sponsored project (FSP) is legally just an internal division or program of the fiscal sponsor. Accordingly, the fiscal sponsor is fully responsible for the FSP, and the fiscal sponsor’s board members owe fiduciary duties of care and loyalty to the FSP as part of the operations of the fiscal sponsor corporation. Part of those duties include ensuring that the restricted fund assets for the FSP are not used for other purposes. (Generally, the FSP’s “advisory board members” are not fiduciaries and not bound by such legal duties.)

It would be an abdication of the fiscal sponsor board members’ fiduciary duties to allow the fiscal sponsor to “lend” a Model A FSP the fiscal sponsor’s employer identification number so the FSP can effectively run autonomously without any oversight by the fiscal sponsor. The Model A fiscal sponsorship agreement should not be structured as a fiscal agent relationship pursuant to which the fiscal sponsor is merely a service provider to the party or parties leading the FSP.

Model C Fiscal Sponsor

The Model C FSP is housed in the pre-approved grantee of the fiscal sponsor. Accordingly, the fiscal sponsor is not directly responsible for the activities of the FSP. However, the fiscal sponsor is responsible for the fundraising that would appropriately be for the same charitable purpose as the FSP but not specifically restricted for regranting to the FSP/grantee (at least without variance powers allowing the fiscal sponsor to redirect those funds).

Assuming the grant is made to the pre-approved grantee, the fiscal sponsor’s obligations would also include that of a typical 501(c)(3) funder to its grantees. The grantee in a Model C fiscal sponsorship relationship generally does not have its own 501(c)(3) status, which suggests that the fiscal sponsor’s due diligence (both in the pre-approval phase and on an ongoing basis) should be more rigorous than that of a funder making a grant to a public charity because of the possibility of violating the 501(c)(3) prohibition against private benefit.

Similar to the case with a Model A FSP, the fiscal sponsor’s board members would owe fiduciary duties to the restricted fund associated with the Model C FSP to ensure the restricted fund assets are not used for other purposes (though the fiscal sponsor would still have variance powers). But they would not owe fiduciary duties with respect to the FSP operations.