Social entrepreneurs have a number of options for housing a charitable project, and many recognize fiscal sponsorship as the best option. But how do you find and select a fiscal sponsor?
What is a fiscal sponsor?
While no legal definition exists, a comprehensive (Model A) fiscal sponsor is generally considered to be a tax-exempt organization which houses one or more projects given a degree of programmatic autonomy, including the right to separate from the fiscal sponsor to move to a qualified successor tax-exempt organization. In contrast, a grantor (Model C) fiscal sponsor is generally considered to be a tax-exempt organization which has pre-approved making restricted grants to one or more projects housed in separate (typically nonexempt) entities exclusively for tax-exempt purposes consistent with the fiscal sponsor’s mission.
In either model, persons associated with the project are delegated with the authority and responsibility to fundraise on behalf of (and as agents of) the fiscal sponsor for the project (Model A) or the purposes of the project. (Model C).
Many fiscal sponsors serve only as a Model A or a Model C fiscal sponsor, while other fiscal sponsors offer both of these models and possibly others for different projects.
Does fiscal sponsorship make sense for your project?
Fiscal sponsorship can be an attractive alternative to starting a new nonprofit corporation, which generally requires a board, officers, and a plan for administration and compliance as well as for fundraising and operations. Fiscal sponsorship also represents a faster way of being able to fundraise, obtain grants, and start programs. And if it doesn’t work out as planned, it’s typically much easier to close the project and terminate the fiscal sponsorship relationship than it would be to dissolve a nonprofit corporation. See this chart from fiscal sponsorship guru Greg Colvin comparing a Model A fiscal sponsorship with starting a new nonprofit.
What type of fiscal sponsorship are you seeking?
A Model A fiscal sponsorship may work best for a project that would benefit from incubation and an existing support system of administrative infrastructure and back office support that allows the project leaders to focus on fundraising and programs.
The project leaders would not be required to form a new entity, file articles of incorporation, find fiduciaries to serve on the board, adopt bylaws, get an employer identification number, apply for and receive tax-exempt status (federal and possibly state), register with the state’s charities regulator (in most states), and observe corporate formalities (meetings, elections, minutes, etc.). And they may be protected by the fiscal sponsor’s risk management policies and insurance.
The tradeoff, however, is ownership and control. The fiscal sponsor owns and ultimately has legal control over the project, the funds that the project leaders raise for the project, and all of the project assets. The fiscal sponsor also owns and is ultimately responsible for all of the liabilities and obligations of the project and may consequently be assuming a fair amount of risk when sponsoring a project.
A Model C fiscal sponsorship may work best for a project in which the project founders, creators, and/or leaders do not want to give up ownership and control over the project assets. These assets may be created, developed, and/or improved with funds raised by the fiscal sponsor for the charitable purposes of the project.
As with Model A, the Model C fiscal sponsor owns the funds raised and has ultimate discretion (variance power to accountants) over how to distribute or expend the funds so long as it is consistent with the purpose and/or other restriction imposed by the donor or grantor. Accordingly, it must be clear that the fiscal sponsor is not simply a legal conduit for funds to pass-through from the donor or grantor to the project, which is housed apart from the fiscal sponsor. The project will exist as part of a sole proprietorship, unincorporated association, or other nonprofit or for-profit legal entity (the “Grantee”).
The Model C fiscal sponsorship works because the fiscal sponsor vets and pre-approves the Grantee before the project leaders start fundraising as agents of the fiscal sponsor for the purposes of the project. But it means that the Grantee must comply with all of its filing and tax obligations as it is receiving and expending funds and running its own programs.
Model C fiscal sponsorship are particularly popular for artists who want to produce works for public education and enjoyment and nonprofit startups during the interim period between formation and receipt of recognition of tax-exemption by the IRS.
In sum, Model A is generally preferable when the project leaders want greater support and don’t want the responsibilities associated with also running a separate entity. And Model C is generally preferable when the project leaders want to retain ownership of project assets and are willing to be responsible for running a separate business or entity and taking care of all the associated responsibilities. For more details on Model A and Model C fiscal sponsorship, check out the resources on our fiscal sponsorship resource page.
Where can you find a fiscal sponsor?
If you’re unsure about where to find a fiscal sponsor, you might first try conferring with some trusted community foundations or capacity building organizations in your city or state. You can also check out the Fiscal Sponsorship Directory, which allows you to search for fiscal sponsors by state and city. In addition, you might look at the member organizations of the National Network of Fiscal Sponsors, a charity that provides guidelines for best practices of Model A (comprehensive) and Model C (pre-approved grant relationship) fiscal sponsorship, and/or see which organizations present on fiscal sponsorship to broader audiences.
Many fiscal sponsors operate projects only within a particular geographic area/state or a particular field (e.g., arts, film, social justice). A visit to a fiscal sponsor’s website will let you know if it’s at least a possible fit. But there is still great variation among fiscal sponsors in terms of quality, capacity, responsiveness, services, support, and fees.
What are signs of a good fiscal sponsor?
Below is a list of 15 signs of a good fiscal sponsor:
- Current 501(c)(3) and public charity status
- Mission fit (i.e., the fiscal sponsor’s mission, including its purpose statement in its articles of incorporation, is consistent with the project’s mission)
- Current charitable registration(s)
- Strong reputation (check out several sources)
- Qualification(s) to do business in any state in which the project is to operate other than the state of incorporation
- Healthy financials, in relation to the expected size and scope of the project’s activities, including a reasonable amount of reserves to allow the fiscal sponsor to operate in difficult times (of course, this may be more difficult to find in these times during a global health and economic crisis)
- Clean audits (preferable that a fiscal sponsor has audited financials) and well-prepared Forms 990
- Appropriate risk management policies and insurance
- Application process that reflects appropriate vetting of the project and not a commercial (profit-driven) transaction.
- History of sponsoring respected projects in a compliant and mutually agreeable manner, with an accounting system that can provide regular reporting to the project leaders to allow for appropriate management of the project (interview a couple of current projects)
- Strong understanding of fiscal sponsorship from a legal perspective (see if they follow the NNFS best practices or the models described in the seminal Colvin and Petit book – Fiscal Sponsorship: Six Ways to Do It Right)
- Quality of the fiscal sponsorship agreement with appropriate terms for the model selected and protections against the fiscal sponsor’s use of the restricted funds raised to advance the purposes of the project for other purposes (though the agreement must reflect the fiscal sponsor’s ultimate discretion on use of those funds within such restricted purposes)
- Reasonable level of services and other benefits provided in support of a project
- Professional liaisons to manage the fiscal sponsorship relationship, inspiring confidence that it will be a “good fit”
- Appropriate fiscal sponsorship administrative and other fees (review all of the possible fees and charges)
Find a Fiscal Sponsor that Fits (Candid)
Choosing a Fiscal Sponsor (Charity Lawyer Blog)