We’ve written extensively on fiscal sponsorship on this blog and for others, including The Nonprofit Quarterly and the American Bar Association. Over the past few years, we’ve seen a great increase in interest in fiscal sponsorship, but also a rise in misconceptions and disputes, sometimes resulting from fiscal sponsors correcting past unlawful or imprudent practices. And, often, involving the fiscal sponsorship administrative fees.
For this post, we’ll focus specifically on the administrative fees charged by fiscal sponsors with respect to comprehensive or Model A fiscally sponsored projects (FSPs). Model A FSPs are operated as internal projects of the fiscal sponsor. All of the assets, liabilities, rights, and obligations of a Model A FSP are the assets, liabilities, rights, and obligations of the fiscal sponsor. And all employees, volunteers, contractors, and fundraisers of the Model A FSP are those of the fiscal sponsor.
First thing to understand is that the Model A fiscal sponsorship administrative fee is an intraorganizational fee – that is, the fiscal sponsor is charging its own restricted fund (created for purposes of supporting the FSP’s charitable purpose) such fee. There is no charge to an external party, including the other party that entered into the fiscal sponsorship agreement (commonly, an unincorporated nonprofit association, sometimes referred to as the “Steering Committee”). So, from an accounting perspective, the administrative fee is not income to the fiscal sponsor.
While the administrative fee is often described as a service fee, this is also a mischaracterization of the comprehensive fiscal sponsorship relationship. The Model A fiscal sponsor is not like an outside vendor providing bookkeeping, payroll, and financial reporting services to the Steering Committee. The Model A fiscal sponsor has accepted ultimate legal responsibility for the FSP and carries the risks of an entity housing the FSP. If the FSP can’t pay a creditor, that’s the fiscal sponsor’s responsibility. Even if the fiscal sponsor tries to shift that responsibility to the FSP leaders, the creditor will ordinarily sue only the fiscal sponsor. If the FSP engages in prohibited political campaign intervention or a private benefit transaction, the fiscal sponsor risks its 501(c)(3) status.
Beyond so-called back office services, a good Model A fiscal sponsor typically provides the benefits of a corporation’s limited liability protection, a board of directors with persons who hold fiduciary duties of care and loyalty with respect to the FSP (which provides further personal liability protection to the committee members who provide intermediate oversight over the FSP), insurance coverage (including commercial general liability and directors and officers insurance), access to other professionals in the fiscal sponsor’s network, and a solid reputation for potential grantmakers. The Model A fiscal sponsor is responsible for employment claims related to FSP staff, OSHA violations related to FSP workplaces, infringement claims related to FSP intellectual property, and other claims related to the FSP’s production and delivery of goods and/or services. The Model A fiscal sponsor also removes the need for the Steering Committee to file registrations, information returns, and employment-related returns, since these are all filed by the fiscal sponsor as a single entity.
Back Office Services
While much more than back office services is provided to support the FSP, it is important for the Model A fiscal sponsor and the Steering Committee to agree upon what forms of support are provided, including those forms for which the FSP’s restricted fund will be charged extra. Such services typically include:
- Bookkeeping and financial management support, including accounts payable, accounts receivable, reconciliations of accounts and restricted funds, the production of financial statements, management of financial management systems, annual audits, and the establishment and implementation of financial management policies.
- Human resources, payroll, and benefits support, including employment and employer tax law compliance (possibly multi-state), management of compensation and benefits (including sick, vacation, PTO, health), employment tax reporting and payments, development and maintenance of HR handbook and employment and risk management policies, management of employee harassment and discrimination claims, management of independent contractor – employee characterizations, and consulting with respect to all of the foregoing.
- Donation- and grant-related support, including review of and accountability for fundraising law compliance (possibly multi-state and increasingly involving rapidly evolving internet platform rules), provision of the proper written acknowledgement or written disclosure (for quid pro quo contributions) to donors, risk assessment and possible acceptance and liquidation of noncash gifts (which might include assets other than publicly marketable securities, like crypto), risk assessment and administration of restricted gifts (including possible unintended creations of donor advised funds), risk assessment of prohibited private benefit and/or excess benefit transactions, and support on proper grant reporting. Fiscal sponsors may also provide major donors to certain projects a certain level of anonymity because the donors’ gifts do not need to be reported as directed to a specific FSP.
- Contract-related support, including review and assessment of contracts, and provision of certain forms of contract.
- Investment support, including compliance with applicable prudent investor laws for reserve funds, capital funds, and endowment funds (which may include compliance with internal investment policies or reliance on an investment adviser pursuant to an appropriate investment management agreement).
- Activities-related support, including review and coaching whether such activities are consistent with 501(c)(3), may be an unrelated business (and subject to UBIT), constitute lobbying (which will require tracking and possible registrations and reporting), and/or create risks that require modification of the activities or other risk mitigation strategies.
Fiscal sponsors will typically charge additional fees to a specific FSP for costs that the fiscal sponsor incurs that are specific to serving that FSP. This might be for specific activities operated by the FSP requiring additional insurance, registrations and filings, and/or legal counsel. This might also be to pay a cost incurred by the fiscal sponsor for the FSP’s act or omission causing such cost (e.g., a settlement or lawsuit). And the cost may fairly include the time spent by the fiscal sponsor’s non-FSP-specific staff spent addressing such matters.
Fiscal sponsorship by a charity whose sole programmatic activity is sponsoring FSPs may be viewed as a way for the FSPs to enjoy savings from cost sharing all of the things they would otherwise each need to have if they were independent entities. Accordingly, the administrative fees from each FSP should be used not only to offset the costs the fiscal sponsor has to provide services to the specific FSP, but also to ensure the overall health and compliance of the fiscal sponsor.