With increased government, grantmaker, and media scrutiny of fiscal sponsorship, I find it interesting to read about ‘fiscally sponsored entities.’ From a legal perspective, an entity has separate legal existence from its individual members or owners. Typical entities associated with nonprofits are nonprofit or nonstock corporations and limited liability companies. Unincorporated associations and unincorporated nonprofit associations are also recognized or empowered as legal entities under some state law statutes.

In a Model A (comprehensive) fiscal sponsorship, the fiscally sponsored project (FSP) has no separate legal existence. It is not a legal entity. Moreover, members of the leadership group providing advice regarding, and intermediate oversight over, the FSP, are generally not fiduciaries in the same way that the directors (board members) of a nonprofit corporation are fiduciaries.

Model A FSPs are generally like other discrete programs or divisions of a nonprofit with a leadership group that does not have authority or responsibilities over any other program or division of the organization. Importantly, this leadership group is subject to the nonprofit board’s ultimate control and discretion, and individual members of the leadership group can consequently be terminated by the nonprofit, subject to any contractual rights they may have. The leadership group should not be structured or characterized as a fiscally sponsored entity.

As I have made the case in other posts, this leadership group generally should not be an independent legal entity that entered into the fiscal sponsorship agreement with the fiscal sponsor. By staying an internal body authorized by the nonprofit, the leadership group members are typically protected by the fiscal sponsor’s limited liability status (assuming the fiscal sponsor is incorporated) and insurance. In addition, the leadership group would not be required to separately register as a charitable organization.

If the leadership group is created as a separate legal entity, it may be confused as the fiscally sponsored entity. This setup has led to confusion amongst donors, funders, and regulators. And, in the Model A context, especially among fiscal sponsors that may not have rigorously reviewed the required structure, it can create confusion between the fiscal sponsor and the leadership group regarding ownership and control.

Further, because the relationship between the fiscal sponsor and the leadership group entity may be viewed as an independent contractor relationship, the fiscal sponsor’s board members may feel obligated by their fiduciary duties to pursue a lawsuit against the leadership group entity if the entity’s negligent actions or failures to act cause harm to the FSP and the fiscal sponsor. This would generally not be the case where the relationship that the fiscal sponsor has with individual leadership group members is one between a nonprofit and its volunteers.

Finally, legislators and regulators who are focusing their attention on fiscal sponsorship should understand that Model A fiscal sponsorship structures, when properly constructed and operated, do not create a greater risk of the misuse of charitable assets. Model A FSPs are internal programs or divisions of a nonprofit. What makes them an FSP and otherwise distinct from other internal programs or divisions:

• A leadership group (often referred to as a project committee) provides intermediate-level direction and oversight (the fiscal sponsor’s board has ultimate power and authority as it would with all of the nonprofit’s other programs and divisions);
• Individuals associated with the other party to the fiscal sponsorship agreement (who may or may not be the same persons who comprise the internal leadership group / project committee) may be delegated with authority to fundraise as employees or volunteers of the fiscal sponsor; and
• The other party to the fiscal sponsorship agreement has the authority to terminate the fiscal sponsorship agreement and rights to select a qualified successor to house the FSP, subject to the fiscal sponsor’s approval rights.

None of these distinctions raise risks that could not apply to any nonprofit with multiple programs. It might even be argued that the leadership group provides an extra layer of oversight that can better protect charitable assets of a nonprofit with multiple programs. And having a fiscal sponsor that is qualified and experienced with providing administrative and legal oversight, has existing structures that make compliance more effective and efficient than might otherwise be available to a startup, and a finance team that is less likely to have any self-interest in the activities of the project should provide greater comfort to legislators and regulators.