Fiscal sponsorship sometimes gets a bad rap because an organization setting itself up as a fiscal sponsor fails – sometimes for ordinary reasons, similar to why other nonprofits and for-profit businesses fail at a relatively high rate, and sometimes because someone did something wrong, similar to what can happen with other nonprofits and for-profit businesses. But no reasonable person claims all nonprofits or all for-profits are bad because of isolated incidences of wrongdoing, no matter how high-profile.

The key to a fair review of fiscal sponsorship is to understand what it is and why the term may be misused and misapplied to the detriment of the nonprofit sector and the communities that benefit from the valuable work of fiscal sponsors. This post will focus solely on 501(c)(3) fiscal sponsorship relationships, but there are also 501(c)(4) and other tax-exempt fiscal sponsorship relationships possible.

What is Fiscal Sponsorship?

Fiscal sponsorship is not legally defined, and consequently, the term is used to describe a number of relationships between (1) a tax-exempt nonprofit organization, as the fiscal sponsor (the “Fiscal Sponsor”); and (2) a person, group, or other organization looking to work within or together with the fiscal sponsor (the “Project Founder”) to advance a nonprofit project.

Because there are a number of relationships that could be constructed and called fiscal sponsorship, problems arise when the parties, donors, funders, media, and regulators have incongruent understandings of an intended relationship that allows the Project Founder to leverage the benefits provided by the Fiscal Sponsor.

Attorney Greg Colvin, in his seminal book, Fiscal Sponsorship: Six Ways to Do It Right, described different models of fiscal sponsorship to help the field reach mutual understandings about fiscal sponsorship in its many forms and the benefits with such relationships. His book established the nomenclature for the two most common forms of fiscal sponsorship: Model A (also referred to as comprehensive fiscal sponsorship by the National Network of Fiscal Sponsors (NNFS)) and Model C (also referred to as pre-approved grant relationship fiscal sponsorship by NNFS). You can read more about our descriptions of Model A and Model C fiscal sponsorship in my article for The Nonprofit Quarterly and my firm partner Erin Bradrick’s article for the American Bar Association.

Model A

Generally, a properly structured Model A fiscal sponsored project should be viewed by a regulator or legislator as no different from an internal project of a nonprofit. The fiscal sponsorship agreement may delegate certain management authority to a project director and project committee, but subject to the ultimate authority of the Fiscal Sponsor’s board. The agreement may also give some right to the Project Founder (the other party to the agreement) to spin the project off from the Fiscal Sponsor to another qualified nonprofit, which positions the Fiscal Sponsor as an incubator or temporary home for the project. But even this right is typically qualified by the Fiscal Sponsor’s ultimate discretion to approve the successor/transferee.

Model C

Generally, a properly structured Model C fiscal sponsored project should be viewed by a regulator or legislator as no different from a grantee of a nonprofit. The fiscal sponsorship agreement may provide for three extra features: (1) a recital or recognition that the grantee (the Project Founder) has been preapproved after advance due diligence by the fiscal sponsor, (2) the authorization of individuals associated with the grantee to act as agents of the fiscal sponsor in fundraising for the charitable purposes pursued by the grantee (the “Project Purposes”), and (3) some right of the grantee to terminate the relationship and request that remaining funds held by the Fiscal Sponsor to advance the Project Purposes be transferred to some other qualified nonprofit that can advance the Project Purposes.

Value of Model A Fiscal Sponsors

Fiscal sponsorship provides substantial value to the communities served by the Fiscal Sponsor and all of its projects, including:

• The ability to quickly launch charitable projects vetted in advance by a recognized 501(c)(3) organization and subject to the oversight of the Fiscal Sponsor and the ultimate authority of its board of directors.
• The cost-efficiencies of delivering charitable services gained by the sharing of administrative support across several separate projects (rather than each having its own administrative team and work if each was a separate legal entity).
• The enhanced development, quality, and delivery of charitable services due to the experience of an administrative team and executive leadership, existing systems and infrastructure, and access to certain resources of the Fiscal Sponsor.
• The ability to quickly terminate nonviable or noneffective charitable projects without the need to burden state agencies and others with the costs of dissolution.

Value of Model C Fiscal Sponsors

• The ability for a charitable project to be funded quickly, with the Fiscal Sponsor grantor’s oversight, even if the project is operated by a nonprofit that is still waiting to receive recognition of 501(c)(3) status.
• The ability for a charitable project to be funded quickly, with the Fiscal Sponsor grantor’s oversight, even if operated by a for-profit.

I think it’s reasonable to opine that most private foundations will not make grants to grantees that do not have IRS recognition of 501(c)(3) status because of the need for the private foundation to exercise expenditure responsibility (ER) and the substantial penalties that could result for a failure to comply with the ER rules. However, these private foundations are often willing to make a grant to a Fiscal Sponsor (generally, a public charity) that can be lawfully regranted subject to the Fiscal Sponsor’s own due diligence and funding discretion. Without the Fiscal Sponsor, there may be less funding for public good resources that depend on rapid action or on the existing infrastructure and resources of a for-profit entity (e.g., drugs that address rare diseases or conditions which would otherwise not be commercially viable for a for-profit to research and produce) or newly created nonprofit (which may be the result of a collaboration of existing 501(c)(3) organizations).

Acknowledgement of Risks Associated with Fiscal Sponsorship

The principal risks of Model A fiscal sponsorship are:

• The improper delegation of authority to project leadership without due care and oversight by the fiscal sponsor.
• The misunderstanding of some stakeholders that the projects are legally autonomous and not internal and integral components of the Fiscal Sponsor.

The principal risks of Model C fiscal sponsorship are:

• The failure of a Fiscal Sponsor to acknowledge, communicate, and properly observe its role as a fundraising and grantmaking organization in advancement of the charitable purposes of a project and not a pass-through entity serving as a conduit for the grantee.
• The misunderstanding of donors and funders that believe they are in a direct fundraising relationship with the Fiscal Sponsor’s grantee (“Model C Grantee”). The Model C Grantee and its agents, acting in such capacity, are likely not authorized to engage in their own charitable fundraising. Accordingly, fundraising by these individuals should be structured in way where they are, acting on behalf of, and as authorized agents of, the Fiscal Sponsor. Otherwise, the Fiscal Sponsor may be perceived as acting only as a pass-through entity, jeopardizing a donor’s potential ability to take a charitable contribution deduction or a private foundation’s ability to claim a qualified distribution and not report an unlawful taxable expenditure.

Problems Created by Funders

Funders, including government agencies, can inadvertently worsen the risks described above by:

• Failing to understand that a Model A fiscally sponsored project is not autonomous and that their grantee in such situations is the Fiscal Sponsor, not the project.
• Treating fiscal sponsorship in their forms as if it refers to just one type of relationship – in particular, failing to understand that funding a Model C fiscally sponsored project is something that the Fiscal Sponsor is doing and that, generally, the original funder is either (1) making a grant to the Fiscal Sponsor with the ability to regrant those funds to a subgrantee for the same charitable purpose; or (2) entering into a contract with the Fiscal Sponsor, allowing it to subcontract the Model C Grantee. It appears common for private funders and public agencies to have form agreements with fiscal sponsors that only work in the Model A context (and often even those forms inaccurately treat the project as legally autonomous from the fiscal sponsor).

Faulty Criticisms

Fiscal sponsorship has attracted some criticism, particularly after some high profile failures and attacks on Fiscal Sponsors that support causes contrary to the federal administration’s priorities. And it’s true that there are more than a few fiscal sponsors, like other nonprofits and for-profit businesses, that suffer from poor management and financial challenges. However, when fiscal sponsorship is constructed and operated properly, it may be less likely to run into these problems because of the secondary layer of oversight from the “project/advisory board” and the cost efficiencies offered by the fiscal sponsor.

In the Model A context, the different projects are neither legally independent nor separate from the Fiscal Sponsor. They legally are just internal projects, programs, or divisions of the Fiscal Sponsor. Accordingly, there is no requirement for a Fiscal Sponsor to release financial records of each and every project, which would be equivalent to requiring any nonprofit to release financial records of each and every internal program or division. The choice not to share financials beyond the required public disclosures (e.g., Forms 990, audited financials) is generally a reasonable and operationally prudent one. Of course, this opinion is not intended to defend bad Fiscal Sponsors, bad nonprofits, or their leaders who are failing to meet their fiduciary duties.

In the Model C context, as between the Fiscal Sponsor and the Model C Grantee, the Fiscal Sponsor is the grantmaker, not the grantee. Accordingly, the Fiscal Sponsor should not be held responsible or accountable for the grantee’s failures beyond that of other grantmakers. The one exception to this would be in supervising the solicitation of funds that typically end up with the Model C Grantee.

Here are a few faulty criticisms of fiscal sponsorship we’ve seen:

• Money Laundering: This is a deeply misleading charge. Of course, any nonprofit or for-profit may be used to engage in money laundering. The structure of the fiscal sponsorship models discussed in this post are legally compliant and well-established. In either model, money is received by a 501(c)(3) organization and spent on activities that further its 501(c)(3) purposes – either directly or through regrants to entities better situated to advance such purposes. The funds are accounted for and reported to the IRS on forms made available to the public.
• Violation of Tax-Exempt Purpose: Critics sometimes claim that fiscally sponsored projects that engage in advocacy are violating their tax-exempt status. However, public charity Fiscal Sponsors are permitted to engage in lobbying (with rather generous limits if they made the 501(h) election provided by Congress) and non-partisan issue advocacy. Further, attacking a policy or an elected official’s actions or inactions is a legal and appropriate activity for a 501(c)(3) organization if it’s in furtherance of its charitable mission and values.
• Lack of Accountability: This is unfair when directed at reputable Fiscal Sponsors that operate with excellent oversight. A project under a strong Fiscal Sponsor is often more accountable than a standalone nonprofit because it is subject to the Fiscal Sponsor’s experienced board and stringent internal controls. The criticism ignores this enhanced layer of governance.

Partisan actors who deliberately or negligently misrepresent fiscal sponsorship’s role in providing critically important charitable services to our communities should not influence policy on fiscal sponsorship, particularly when they have no statistics to support a higher rate of wrongdoing than in other segments of the nonprofit or for-profit sector.

The nonprofit sector and those who are support or are supported by fiscal sponsors should speak out to protect fiscal sponsorship and further support the fiscal sponsor field. I look particularly to funders who support fiscally sponsored projects without providing unrestricted funding to fiscal sponsors. The rationale for such omission is reminiscent of the narratives that support the overhead myth. Funders should support the structure that house charitable projects. In addition, if they seek to shift their own risk by asking fiscal sponsors to make grants where the funders themselves are unwilling, they should support the fiscal sponsors’ capacity to do so in a compliant, effective, and efficient manner. It is disingenuous for a funder to shift its own risks (e.g., those related to funding DEI programs) to a fiscal sponsor then to criticize the fiscal sponsor for having such risks.

Fiscal sponsors must also self-regulate to help support standards that can be accessed and applied throughout the field. They must educate the field and advocate for greater support of compliant fiscal sponsors. Collaboration is key. While there is an important National Network of Fiscal Sponsors, it does not receive sufficient support to make it a strong champion for the field similar to a National Council of Nonprofits, Council on Foundations, or Independent Sector, albeit on a befitting scale.