Nonprofit Radio: Fiscal Sponsorship

I’ll be on Nonprofit Radio this Friday, September 1, at 10:00 am PT / 1:00 pm ET talking with host Tony Martignetti and consultant Andrew Schulman about fiscal sponsorship. Catch us live on Talking Alternative or a few days later on iTunes.

Fiscal sponsorship. You’ve probably seen it and don’t know what it’s called. We’ll fix that as we cover what it is; who does it; how it can help your work; getting started; and what can go wrong.

Last year, I drafted an overview of fiscal sponsorship for The Nonprofit Quarterly, discussing the pros and cons.

When done right, fiscal sponsorship is a valuable alternative to starting a nonprofit that produces private and public efficiencies through shared administration and fewer nonprofits requiring fiduciary and regulatory oversight.

But when done wrong, fiscal sponsorship may result in an individual or for-profit company inappropriately deriving a private benefit from charitable contributions. This may occur when the fiscal sponsor acts as a mere conduit for contributions to flow to the individual or company without exercising the required control and oversight.

Some Discussion Points

What is fiscal sponsorship and why is it important?

  • It’s a commonly used term that refers to many forms of relationships that allow a charitable project to get the benefit of 501(c)(3)-raised funds subject to its relationship with a 501(c)(3) fiscal sponsor
  • It’s important because it serves as an alternative to starting a new nonprofit, which can be useful (1) where the project has a limited life or only has one activity per year; (2) as an incubator; and (3) where the project leaders want to focus on the charitable programs and fundraising and not on the administration

What are the most common forms of fiscal sponsorship?

  • Comprehensive (Model A) – project is internal to fiscal sponsor
  • Pre-approved grant relationship (Model C) – project is external to fiscal sponsor

Why would project leaders choose one form of fiscal sponsorship over another?

  • Model A favors greater reliance on fiscal sponsor (admin, insurance) but gives up autonomy
  • Model C favors ownership of project assets (often important for art projects) by project entity or leaders but requires more admin and involves greater risk for project entity or leaders (since project entity or leaders are essentially just grantees of the fiscal sponsor)

What types of organizations can serve as fiscal sponsors?

Generally, public charities can serve as fiscal sponsors to projects that are compatible with their specific missions (charities should look at their articles and bylaws to see if their missions remain within the purpose statements that may be written in those governing documents).

Why do organizations serve as fiscal sponsors?

They should do so because the projects further their missions, but some do so as a favor to friends and others because they think they can make some money by allocating a percentage of the funds raised for a project to its general fund (sometimes referred to as an “administrative fee” though it’s really an internal transfer of funds and not a form of additional revenue beyond what is raised for the projects).

What do fiscal sponsors typically charge to a project fund?

There is no standard amount a fiscal sponsor will allocate from a project fund to its general fund, but it’s not uncommon for reputable fiscal sponsors to allocate somewhere around 10% of the revenues raised for the project and a few percentage points more if it involves government funding that requires a government audit.

How should project leaders choose a fiscal sponsor?

It should not be based just on the lowest rate a fiscal sponsor will charge to its project fund. Consider the health of the fiscal sponsor, its experience and reputation as a fiscal sponsor, its mission, the services it will provide as the sponsor, the insurance it has to protect the project leaders and any employees, the quality of the fiscal sponsorship agreement, and its compliance with applicable laws (including all of its required filings). Also, make sure you’ll be comfortable with those who you’ll be working with.

How should a fiscal sponsor determine whether to sponsor a particular project?

Consider the mission of the project for mission-compatibility, the business plan, the projected activities and any special risks they may pose, where it plans to operate (is the fiscal sponsor qualified to do business in all those states or jurisdictions), the amount it plans to fundraise (and whether the charge to the project fund will cover all of the fiscal sponsor’s additional costs and risks), the quality of the leadership, the sincerity of the charitable intent (be careful if the project looks to raise money mostly to pay the project leaders), the capacity of the sponsor in relation to the project.

What can go wrong?

  • Fiscal sponsor goes bankrupt and loses every project’s money (see, e.g., NPQ)
  • Project incurs some big liability for which a Model A fiscal sponsor may be fully liable
  • Fiscal sponsorship agreement doesn’t create a lawful fiscal sponsorship arrangement so donors are not entitled to tax deductions (e.g., if the fiscal sponsor is acting as a mere conduit for funds directed by donors to go straight to the project leaders) and could be accused of committing tax fraud for taking unlawful deductions

Additional Resources