Is Fiscal Sponsorship a Service Provided for a Fee? Why it isn’t and why it matters.

By Erin Bradrick and Josh Sattely

Fiscal sponsorship is a growing part of the nonprofit sector and, when done properly, is an important and impactful tool for furthering public benefitting work and activities. However, because fiscal sponsorship is not a relationship that is explicitly defined anywhere in the law or Internal Revenue Code and is instead most often defined in a written contract, we see fiscal sponsors using a wide range of words and phrases to refer to what are essentially the same things. For example, comprehensive (or Model A) fiscal sponsors might refer to the projects they sponsor as “affiliates”, “partners”, “allies”, “projects”, or “clients”. As the field of fiscal sponsorship continues to grow and to attract additional attention from charity regulators and other governmental agencies, we believe there’s a strong case for developing a common vocabulary of key fiscal sponsorship terms, starting with how we refer to the amounts that fiscal sponsors allocate to cover their operating expenses. We won’t provide an overview of the basics of fiscal sponsorship here, but you can find more information herehere, and here.

Regardless of the model of fiscal sponsorship offered, fiscal sponsors of course incur costs and expenses in offering fiscal sponsorship, including in the form of staff time, administrative support, bookkeeping and accounting, reporting and other compliance, insurance, and other areas of overhead. In order to cover such costs, many fiscal sponsors allocate a portion of the funds received for the purposes of a sponsored project (often a specified percentage) to support shared operations costs. While this amount is commonly referred to as a “fiscal sponsorship fee”, we would like to encourage fiscal sponsors to instead consider referring to it as a “cost sharing”. Hear us out.

We (Erin on behalf of the NEO Law Group and Josh for Social Impact Commons) had the privilege of attending the 2022 National Network of Fiscal Sponsors’ conference in sunny San Diego. In addition to great peer learning and networking, we had a chance to talk vocabulary and found that many fiscal sponsors are still referring – in their fiscal sponsorship agreements, on their websites, and in conversations – to the groups they sponsor as their “clients” that are charged a “fee for services”, while others had shifted to referring to “projects” and “cost allocations”. Fundamentally, what’s being provided by fiscal sponsors and how it is paid for is the same within the various models of fiscal sponsorship, so why the different language? You may think this a question of semantics only of interest to academics and overly caffeinated exempt law attorneys, but there are real implications and potential consequences for how these relationships and cost structures are characterized.

The language used to describe how a fiscal sponsor organization covers its indirect and overhead costs is important, and we encourage sponsors to move away from the “fee for service” characterization for three primary reasons:

  1. It’s not legally accurate. At a basic level, comprehensive (or Model A) fiscal sponsorship is simply a nonprofit carrying out charitable programs. It’s how the programs are carried out – namely by pushing as much managerial and strategic decision making as possible to the program level and having an agreement memorialize the relationship that generally gives a third-party the right to request a spin out of the project – that makes it fiscal sponsorship. Just as a nonprofit would not call an internal program a “client” and charge it a “fee”, neither is it appropriate to frame Model A relationships in that manner. Likewise, pre-approved grant relationship (or Model C) fiscal sponsorship is essentially a grantor-grantee relationship. You don’t see foundations referencing a “fee” they charge to engage in grantmaking and neither should fiscal sponsors. In either model, there’s rarely, if ever, a third-party paying the fiscal sponsor a “fee” for fiscal sponsorship services – rather, the fiscal sponsor is receiving purpose-restricted funds and using a portion to contribute towards covering its general administrative and operating expenses. 
  1. Language signals values and intentions. For fiscal sponsors striving to build deep relationships steeped in trust and reciprocity, referring to sponsored projects as “clients” and charging them a “fee” is not only inaccurate from a legal standpoint, it may send signals that counter the messages and intentions a fiscal sponsor is otherwise working so hard to cultivate. Given that fiscal sponsors exercise ultimate oversight responsibility over the activities and use of funds of the organization, including by sponsored projects, when a fiscal sponsor chooses to use “fees” and “services” language, it runs the risk of setting inaccurate expectations about the nature of fiscal sponsorship and the degree of control that the fiscal sponsor is required to maintain and exercise. In our experience, a lack of clear alignment and understanding between fiscal sponsors and projects about what fiscal sponsorship is and what it isn’t is often a significant contributing factor when problems arise in these relationships.
  1. Protecting fiscal sponsorship practitioners and the field calls for accurate messaging. As discussed, referring to sponsored projects paying “fees” implies that fiscal sponsors are providing services to third-parties, which is not accurate. Giving that impression to regulators or the general public perpetuates the inaccurate notion that fiscal sponsorship is a conduit or a “charity-for-hire” mechanism, rather than highlighting the central oversight and support functions that fiscal sponsors play in carrying out compliant and impactful charitable work. Appropriate characterization of the relationship and cost structure protects the organization and helps advance the field.

As the field continues to grow and evolve, consistent use of legally accurate and values-aligned framing will help funders, regulatory agencies, and groups seeking fiscal sponsorship better understand the true nature of these relationships. It may also give staff at fiscal sponsors a grounded understanding of how they contribute. 

For this post, we do not offer a single alternative term to express how administrative costs are shared withing fiscal sponsor organization, but examples we’ve seen include “administrative cost allocation”, “overhead cost share”, and “member contribution”. A future post led by our partners in the nonprofit finance and accountancy realm will go deeper into accounting considerations which may inform both what you call and how you report on how these funds flow. But for today, our takeaway message is, if you are a fiscal sponsor, please consider the implications of what language you use to describe your relationships and cost recovery structure. Happy sponsoring!