Nonprofit leaders historically face and overcome challenges because that’s just what they do. But there are periods of extraordinary challenge that may impact various segments of the sector in different ways. This is one of those periods. And for fiscal sponsors, the unique impacts include:

• the necessary focus on compliance, but sometimes across a very large number of projects that also seek a certain amount of autonomy, including with respect to determining their own risk tolerance;
• the view that fiscal sponsors may be the saviors of organizations that are targeted by the IRS or a state charities regulator for advancing policies and programs not aligned with the current administration’s agenda; and
• a landscape in which fiscal sponsorship is widely viewed by the media, lawmakers, regulators, funders, and others as one type of relationship when it may refer to multiple types of relationships.

Compliance

While many nonprofits are understandably worried about possible threats posed by the current political and legal environment, they cannot forget to focus on basic compliance with existing laws. See, e.g., Nonprofit Legal Compliance in an Unfriendly Political Environment (NPQ).

A charity or nonprofit’s plans can be shut down for a failure to properly register. Its board actions might be reversed because they were not taken pursuant to the organization’s bylaws or applicable corporate laws. Or an organization can damage its reputation and trustworthiness by permitting an unlawful transaction, like one involving prohibited self-dealing by an organizational leader or the conferring of a prohibited private benefit (for example, excessive compensation) on any other party.

The compliance challenge is particular difficult for fiscal sponsors, particularly those that sponsor a large number of Model A (comprehensive) projects, all of which are considered internal projects housed within the fiscal sponsor. The failure of any of these projects to comply with the law will generally mean that the fiscal sponsor has failed to comply and may be held accountable for such failure. Because fiscal sponsors tend to encourage a certain sense of autonomy given to each project, they must provide directions through policies, oversight, and enforcement.

Tips:

• All project committees acting to manage the Model A project should be recognized as internal committees of the fiscal sponsor if is intended that they are protected by the fiscal sponsor’s insurance and corporate status (which can provide them with limited liability protection they might not otherwise have).
• Fiscal sponsors should provide each Model A project committee member and project director with a guide that summarizes the Model A fiscal sponsorship terms, ensuring the mutual understanding that the fiscal sponsor’s board ultimately has control and responsibility over the project’s activities and communications to ensure they are compliant.
• Fiscal sponsors should provide all persons managing Model A project activities with appropriate policy guidance and training, as necessary, to ensure that they have sufficient understanding of applicable laws, including regarding lobbying and political campaign intervention.

Saviors?

For some nonprofits that feel like they are at higher risk of an adverse government action, having a fiscal sponsor willing to take over their activities in such circumstances seems like a good strategy. However, fiscal sponsors must be careful in accepting new projects that may create additional risks to the fiscal sponsor and all of its Model A projects.

If a nonprofit has its tax-exempt status revoked by the IRS, in and of itself, this does not mean that the nonprofit will have its assets frozen or its corporate powers suspended. Such other actions generally require action by a state agency. And in some states, they can result from being delinquent on a state registration or violating other state laws. But just because a nonprofit is a taxable entity doesn’t necessarily mean that it can’t continue to operate. The revocation may, however, act like a scarlet letter and scare donors and funders away. Whether a fiscal sponsor might serve as a Model C (pre-approved grant relationship) fiscal sponsor in such circumstances is questionable.

On the other hand, if suspended by state action, a corporation may not have authority to enter into any contracts, including regarding any grants or transfer of assets. It may also not qualify to receive grants, including from a fiscal sponsor pursuant to a Model C fiscal sponsorship arrangement.

Tips:

• Determine whether a fiscal sponsor may be willing and able to serve as either an alternative host (pursuant to a Model A fiscal sponsorship) or funder (pursuant to a Model C fiscal sponsorship) with an understanding of the risks it may impose on all of its other projects and beneficiaries depending on the work of those projects.
• If moving to a Model A fiscally sponsored project, consider whether transferring some of the programs (rather than all of them) and operating under a separate name may be more protective to the advancement of the nonprofit’s mission and values as well as to the fiscal sponsor and all of its other projects and beneficiaries.
• Consider transferring some funds (possibly reserves) to a Model A fiscally sponsored project that stays dormant until and unless the nonprofit decides to transfer certain programs to the fiscal sponsor, but with acceptance of the knowledge that the transfer means relinquishing ultimate control over those funds.

Misunderstandings

Fiscal sponsorship refers to a variety of very different relationships. Accordingly, anyone making judgments and decisions regarding fiscal sponsorship as if it were one thing may be highly misinformed.

Most references to fiscal sponsorship appear to consider the project as a separate entity, which is not accurate in Model A arrangements. Critics of fiscal sponsorship sometimes claim that fiscal sponsors allow projects to be hidden from regulators. However, Model A projects do not have separate legal existence and therefore are like any other internal program of a nonprofit. Generally, if the Model A fiscal sponsorship relationship is properly constructed, the only difference is that a person, group, or other organization may have the right to spin off the project to another qualifying fiscal sponsor or independent charity, but only with the ultimate approval of the fiscal sponsor.

In someone refers to a Model C arrangement, it should be understood that the core relationship is a simple grantor-grantee relationship in which the grantee has been vetted and pre-approved by the fiscal sponsor before the fiscal sponsorship agreement is signed. The additional wrinkle to this relationship is that individuals associated with the grantee are generally authorized to fundraise as agents of the fiscal sponsor for the charitable purposes of the project and not as agents of the grantee. This distinction is important because the funds raised are all legally going to the fiscal sponsor. The fiscal sponsor then, at its own discretion, may regrant these funds to its pre-approved grantee, as intended by the Model C fiscal sponsorship agreement. But the fiscal sponsor cannot be compelled to do so if it has reasonable cause to believe that the grantee will misuse the grant.

There are other lawful models referred to by some as fiscal sponsorship that are very different from the Model A and Model C arrangements described above. You can read more about these in the seminal book on fiscal sponsorship by attorneys Greg Colvin and Stephanie Petit, Fiscal Sponsorship: Six Ways To Do It Right (3rd edition), available only from San Francisco Study Center. Make sure you get this most recent edition, which also describes the Model L fiscal sponsorship arrangement which has the fiscal sponsor holding the project in a single member limited liability company.

It would make no sense for one law, one form, one criticism to apply to all of these models just because people use the colloquial name “fiscal sponsorship” to describe them. And each of these models, when properly constructed and observed (which admittedly is not always the case), represent customary and lawful relationships.

Tips:

• Fiscal sponsors should do a better job of ensuring that the distinction between Model A and Model C fiscal sponsorship is well established in their external and internal communications; attempting to commingle these two models of fiscal sponsorships often results in problems.
• Fiscal sponsors should not market their activities as a set of back office services to be paid for by each group it sponsors; all the funds contributed for the purposes of a Model A or Model C fiscally sponsored project belong to the fiscal sponsor; the other party to the Model A or Model C fiscal sponsorship agreement is paying nothing to the fiscal sponsor.
• Fiscal sponsors should treat each Model A project as a separate program service when completing their Form 990 rather than identify fiscal sponsorship as a single program service

Additional Resources

Fiscal Sponsorship: What You Should Know and Why You Should Know It (Erin Bradrick, ABA Business Law Today)

What is Fiscal Sponsorship? (Stephanie Petit, Adler & Colvin)

Is Fiscal Sponsorship a Service Provided for a Fee? Why it isn’t and why it matters. (Erin Bradrick and Josh Sattely)

FiscalSponsorship.com (Greg Colvin)

Fiscal Sponsor Conversations (hosted by Andrew Schulman and Oliver Hack)

Purpose-Driven Board Leadership (BoardSource)

Many thanks to Greg Colvin, Eric Gorovitz, Andrew Schulman, Oliver Hack, and my partner Erin Bradrick for our conversation last week. Please sign up for Fiscal Sponsorship Conversations to hear this brilliant group of fiscal sponsorship experts in discussion on Tuesday, April 7, at 10 am PDT / 1 pm EDT.