Updated January 25, 2015
Fiscal sponsorship is an increasingly common alternative to starting a nonprofit organization. In its most common forms, it allows a group or individual to create a project that can receive grants and deductible charitable contributions without forming a nonprofit entity and/or obtaining tax-exemption. Accordingly, it’s not surprising to see fiscal sponsorship used as an incubator to test a charitable project and later spin it off into a separate nonprofit corporation if the project is successful. It’s also common where an organization is waiting for an IRS determination of its tax-exempt status but has an immediate opportunity to receive charitable funding and start operating.
Fiscal sponsorship is a term commonly used to describe any one of a number of contractual relationships between:
- An individual or group desiring to run a project that advances a tax-exempt purpose; and
- A tax-exempt organization that is willing to serve as the project’s fiscal sponsor by conferring upon the project the benefit of the sponsor’s tax-exempt status.
It’s important at the outset to emphasize that a fiscal sponsor cannot “loan” its 501(c)(3) status or employer identification number to an individual or other entity. A fiscal sponsor will be responsible for all of its own actions, including any authorized actions taken by its agents. And if any liability results from those actions, the fiscal sponsor and possibly its board will be liable. So, it’s not a relationship to enter into lightly.
Comprehensive Fiscal Sponsorship
The National Network of Fiscal Sponsors (NNFS) defines comprehensive fiscal sponsorship as a model in which “projects are a fully integrated part of the sponsor who maintains all legal and fiduciary responsibility for the sponsored project, its employees and activities.” This is the most common form of fiscal sponsorship. It’s best to think of this model as follows:
- The fiscal sponsor has complete ownership of the project.
- Everyone who works on or manages the project are employees, volunteers, and/or agents of the fiscal sponsor when acting in such capacity.
- Project leaders that sign the fiscal sponsorship agreement (typically as a steering committee) have the right to terminate the agreement and, subject to the agreed upon terms, transfer the project to another fiscal sponsor or other tax-exempt organization.
Pre-Approved Grant Relationship Fiscal Sponsorship
NNFS defines the pre-approved grant relationship fiscal sponsorship as a model in which “the project is a separate entity that retains ownership of the work produced, while the sponsor ensures legal and regulatory compliance for charitable funds.” This is perhaps the second most common form of fiscal sponsorship and most commonly associated with arts projects. It’s best to think of this model as follows:
- The party that signs the fiscal sponsorship agreement with the fiscal sponsor (the “Grantee”) has complete ownership of the project.
- Everyone who works on or manages the project are employees, volunteers, and/or agents of the Grantee.
- The fiscal sponsor raises funds to advance the purposes of the project without any legal obligation to direct such funds to the Grantee.
- Everyone who raises funds on behalf of the fiscal sponsor for purposes of the project are agents of the fiscal sponsor when acting in such capacity (even if they also are agents of the Grantee in other capacities, such as managing the project).
- The fiscal sponsor generally re-grants any funds it collects for the purposes of the project to the Grantee (so long as Grantee hasn’t violated the fiscal sponsorship grant agreement and/or misdirected or misused any of the grant funds)
Table Comparing Two Common Forms of Fiscal Sponsorship
|Pre-Approved Grant ...
|Project is housed in sponsor||Yes||No|
|Project is housed in separate legal entity||No||Yes|
|Project employees||Employees of the sponsor||Employees of the project (sub-grantee)|
|Solicitations||By agents of the sponsor||By agents of the sponsor|
|Grants||To sponsor for purposes of the project (housed in sponsor)||To sponsor for purposes of the project; sponsor may, but is not required to, regrant to project (sub-grantee)|
Fiscal Sponsorship Agreement
A fiscal sponsorship agreement must be drafted properly to get the benefits desired by the parties and to avoid legal problems. While there are several different models of fiscal sponsorship possible, there are only a few ways to do it right and several ways to do it wrong. Accordingly, it is important for the parties to understand precisely their respective roles and obligations under the particular form of fiscal sponsorship relationship they have selected and properly document it in an enforceable agreement.
For the Fiscal Sponsor:
It is essential to ensure that the activity of sponsoring a particular project is done in furtherance of the fiscal sponsor’s own exempt purposes. Before entering into a comprehensive fiscal sponsorship relationship, the sponsor should also be aware of its exposure to liability for the actions of its project and/or of those delegated with authority to manage or fundraise on behalf of the project. Generally, the sponsor should control the drafting of the fiscal sponsorship agreement to ensure it meets all of its needs. Legal review of the agreement is highly recommended.
For the Other Party:
It is important to recognize that, in a comprehensive fiscal sponsorship relationship, the project will be the under the control and legal ownership of the fiscal sponsor. And under either of the discussed sponsorship relationships, the fundraising for the project will be under the control of the sponsor, The benefits of immediate tax-exempt status and administrative support must be weighed against the lack of autonomy and fees typically charged by the sponsor. Also, the other party to the fiscal sponsorship agreement should ensure the termination provisions of the agreement provide it with sufficient flexibility to select a suitable successor sponsor or spin off the project to a new 501(c)(3) entity.
FiscalSponsorship.com, San Francisco Study Center
You can order Greg Colvin’s book “Fiscal Sponsorship – 6 Ways To Do It Right” on this site. I consider this book essential reading for organizations that are contemplating fiscally sponsoring projects and recommended reading for groups looking to become fiscally sponsored.
Guide to Fiscal Sponsorship, Foundation Center
Tips on Starting a Nonprofit: Alternatives to Forming a Nonprofit (3-min YouTube video w/ Erin Bradrick)