Fiscal sponsorship describes a relationship between an individual or group who have initiated a charitable project, and an existing tax-exempt organization that has agreed to support said project. In the most common form of fiscal sponsorship, “Model A” or comprehensive fiscal sponsorship, the sponsor brings the project in-house. The project has no separate legal existence and, instead, is owned and operated by the sponsor. The sponsor is vested with control and administration of the project, and project staff are employees or volunteers of the sponsor.
All of the assets of the Model A project are the sponsor’s assets, and, conversely, all of the liabilities associated with the project are the sponsor’s liabilities. Accordingly, the sponsor may be held liable for the actions of a project employee acting within the scope of his or her employment. Similarly, the sponsor may be held responsible to the extent that the project has engaged in any unlawful conduct such as infringing a copyright or violating a restriction described in Section 501(c)(3) of the Internal Revenue Code (IRC). Thus, fiscal sponsors should be careful to ensure that each project is legally compliant and financially viable throughout the relationship.
The following are a few ways a fiscal sponsor can exercise due diligence before and after entering into a Model A fiscal sponsorship relationship:
- Mission Alignment– A fiscal sponsor’s initial consideration in taking on a project is whether that project’s mission is consistent with the sponsor’s own exempt purposes. As a tax-exempt 501(c)(3) organization, the fiscal sponsor must be operated primarily for a stated charitable purpose. If the project’s activities stray away from the sponsor’s stated purpose, the sponsor may be acting beyond its power and authority (ultra vires). Sponsors should be thorough in questioning the project’s mission, leadership, and planned activities to properly assess whether the two missions are, and will remain, aligned.
- 501(c)(3) Restrictions and Limitations– While the project is housed within the fiscal sponsor, any project activities are activities of the sponsor. Therefore, the project is subject to the same 501(c)(3) rules and restrictions as its sponsor. A sponsor should vet the project’s leaders to have comfort that they will not engage in any prohibited or restricted activities such as electioneering or substantial lobbying, and will not enter into any transactions that violate the private benefit and private inurement A sponsor should consider providing training materials to project personnel at the beginning of their relationship and periodically (e.g., annually) thereafter.
- Minimum Level of Engagement– The level of engagement between a sponsor and a project may vary from case to case. However, at a minimum, the sponsor must retain control and discretion of the use of funds, maintain records demonstrating that the funds were used for 501(c)(3) exempt purposes, and limit distributions to projects that further the sponsor’s exempt purposes. (See Rul. 68-489, 1968-2 C.B. 210). A fiscal sponsor that fails to meet these requirements could have its tax exemption revoked. Thus, sponsors should take and keep accurate records of all sponsorship activities, question any compliance issues, and intervene when necessary.
- Sufficient Resources– Fiscal sponsor should examine whether each project is viable with respect to financial, human, and other resources. Fiscal sponsors generally charge a fee to a project based on a percentage of project revenues. However, such fees may be insufficient for the sponsor to recoup all the costs associated with sponsoring a project that is having trouble generating income or engaging in activities that significantly drain a sponsor’s time, energy, and finances. Since fiscal sponsors assume liability for each project, they should be prepared to lay off employees and terminate inactive or waning projects if future funding and viability is in doubt.
- Fundraising– Commonly, a project’s personnel takes the lead in soliciting donations and grants. Any project employee or volunteer making representations in this fundraising role should be doing so as an agent of the sponsor. Fiscal sponsors should take steps to assure that such representations are accurate, including training project personnel to avoid any misrepresentations of the project as a separate legal entity. Although all funds raised are the property of the sponsor, the sponsor could be restricted on how to use or distribute those funds because of charitable trust principles. Sponsors should ensure that project personnel are in compliance with fundraising laws and internal policies, and that they are properly documenting any restrictions they have agreed upon or created, by nature of a solicitation (e.g., capital campaign).