lose

 

Fiscal sponsorship is the term used to describe a set of relationships between (1) an individual or group desiring to run a project that advances a tax-exempt purpose; and (2) a tax-exempt organization that is willing to serve as the project’s fiscal sponsor by conferring upon the project the benefit of its tax-exempt status.  It’s important to note that fiscal sponsorship is not defined under state or federal law and there are several possible models that may be used to accomplish the parties’ goals.  But it’s more common than not to see fiscal sponsorship agreements drafted in a way that fails to accomplish the parties’ goals, is inconsistent with applicable laws, creates exposure to liability for one or both parties, and jeopardizes the donors’ ability to take a charitable deduction.

Greg Colvin’s book “Fiscal Sponsorship – Six Ways To Do It Right” (available here) is an indispensable resource for an individual or group considering fiscal sponsorship as an alternative to forming a nonprofit and existing organizations that either serve or are considering serving as a fiscal sponsor.  The most common way to do it right is referred to by Colvin as a Model A (or comprehensive) fiscal sponsorship, where the sponsor takes the project in-house, and the project has no separate legal existence.  Another popular form of sponsorship is referred to as a Model C (or pre-approved grant relationship) fiscal sponsorship, where the sponsor and the project have a grantor-grantee relationship that enables the project to obtain proceeds of a grant and donations through the sponsor (i.e., the sponsor essentially regrants the initial gifts to the project).

Because it’s sometimes easier to learn from others’ mistakes, here’s our list of six ways to do fiscal sponsorship wrong:

1.  Sponsor organization fiscally sponsors a project without adequate due diligence/review of the project; its mission; its founders and steering committee; and their past, present and planned activities.  The Model A sponsorship is akin to a merger and acquisition.  The sponsor must treat such a transaction with appropriate care and ensure that the sponsorship furthers the sponsor’s own charitable purposes.

2.  Project gets fiscally sponsored by a sponsor without adequate due diligence/review of the sponsor; its mission; its reputation; its previous experience with fiscal sponsorship; its sponsorship policies; and its fees.

3.  The fiscal sponsorship arrangement is created without a written agreement.  All sorts of room for misunderstandings, harsh feelings, and disputes.  The sponsor is likely to have ultimate control and discretion over all terms where there was no mutual assent if a Model A structure was contemplated.

4.  The fiscal sponsorship agreement does not include clear exit provisions.  Can the project spin off?  Can it be moved to another fiscal sponsor, and if it can, what are the qualifications of the successor sponsor?  What assets (including intellectual property assets) follow the project and what assets stay with the sponsor?

5.  The sponsor does not provide sufficient oversight over the project.  In a Model A structure, the sponsor may be entirely liable for any and all debts and obligations incurred by the project.

6.  A Model C-like fiscal sponsorship is structured in a manner that has the sponsor serving as a conduit for donations to go to the project.  As Colvin states in this article:  “If there is a “trap for the unwary” among fiscal sponsorship arrangements, Model C is it.  If the control mechanisms are not administered properly, Model C can collapse into a “conduit” or “step transaction” in which the IRS will disregard the role of the sponsor and declare that the funding source has, in effect, made a payment directly to a non-501(c)(3) project.  For funding sources, the result will be that the donor cannot take a charitable deduction, or the the private foundation must now observe the strictures of “expenditure responsibility.”  The project will find that funding has disappeared.  The sponsor may lose its tax exemption for failure to exercise sufficient control over its grants, allowing those funds to be used in a noncharitable manner.”

Additional Resources:

Fiscal Sponsorship Basics

Fiscal Sponsorship Revisited

National Network of Fiscal Sponsors

Best Practices for Fiscal Sponsorship

44 Responses to “Fiscal Sponsorship: Six Ways to Do It Wrong”

  1. Karen Cook

    I am a member of a quilt guild and one of our members contacted the AG’s office. We have not applied for non-profit status but are planning on doing so. Can we hire a private business to become our fiscal sponsor? This business already pays taxes and they could be our umbrella.

    • Gene Takagi

      A private taxable business can’t be a fiscal sponsor that allows a project to attract deductible charitable contributions.

  2. Julia G

    Hello. I’m part of a project that is looking to create a temporal pre-approved agreement with a small non-profit with similar missions and goals.
    Does the non-profit have to raise a certain amount of money a year or has financial restrictions that prevent it from being a Fiscial sponsor to a project. Does that even matter in order to become a Fiscial sponsor to a project?

    • Gene Takagi

      A nonprofit that decides to serve as a fiscal sponsor should ensure that (1) the project’s mission is consistent with the nonprofit’s mission (check the articles and bylaws), (2) it creates an appropriate and compliant set of agreements and policies to serve as a fiscal sponsor, and (3) it has the capacity (including sufficient financial resources) to serve as a fiscal sponsor and meet all of its obligations under the fiscal sponsorship agreement. For many small nonprofits engaging in responsible fiscal sponsorship for the first time, the project will likely result in a net financial loss because of the costs of creating the proper infrastructure. This is true for even long-established fiscal sponsors when sponsoring smaller projects (and the reasons some of these sponsors require that a minimum amount of money be raised to qualify for sponsorship). Accordingly, the leaders of fiscal sponsors must ensure that any project they decide to sponsor will further the fiscal sponsor’s mission.

  3. JAN

    We have been working under a fiscal agent for several years; now we are applying for our own 501c3 status…do we need 3 years of financials or is the fiscal agent’s past financials sufficient and we can start with a clean slate?

    • Gene Takagi

      In such circumstances, generally, it depends on (1) whether the organization that is applying for 501(c)(3) status existed while the project was fiscally sponsored and (2) the nature of the fiscal sponsorship (e.g., comprehensive or pre-approved grant relationship). Generally, an organization starts with a clean slate only if it has been relatively newly created and did not receive funds (grants) from the fiscal sponsor (the fiscal sponsorship relationship was not a pre-approved grant relationship). Read my article in the Nonprofit Quarterly for more information – https://nonprofitquarterly.org/2016/01/19/fiscal-sponsorship-a-balanced-overview/. Also note that “fiscal agent” is not synonymous with “fiscal sponsor” and from a legal perspective, they mean different things. For fiscal sponsorship to work, the agreement and terminology have to be accurate and precise, and commonly, that’s not the case. Talk with a lawyer in your state that understands this area.

  4. Phil

    Hello. I have an established 501(c)3 whose purpose is focused on creating community-driven initiatives to promote innovation in the community. We offer scholarships to students and other learning programs based on promoting innovation. I wanted to know if my organization’s cause areas would be broad enough to allow it to act as the fiscal agent of a charter school whose curriculum focuses on building careers with individualized career pathways for at-risk high school students. I would really appreciate some advice!

    • Gene Takagi

      This is an issue for which the organization should get legal representation, particularly because of the size and scope of taking on a charter school as either an internal and integral part of the organization (Model A / comprehensive) or a nonexempt grantee (Model C / pre-approved grant relationship). The purpose of an organization is codified in its governing documents, its application for exemption, and its information returns. A broad purpose statement may allow an organization to fiscally sponsor many types of projects, but if it’s vague or unclear, there may be deeper issues to examine.

  5. Adam

    I want a non-profit to act as my fiscal sponsor but the organization told me that they operate in the red every year, so a grant agency wouldn’t approve them as a fiscal agent. If they operate in the red, does that really matter?

    • Gene Takagi

      In choosing a fiscal sponsor, a group will want to consider the financial health of the organization and the capacity of the organization to serve as a fiscal sponsor. It’s a complex arrangement involving allocations of control that must be understood by both parties.

  6. Phil

    Does the fiscal sponsor and the group looking for a sponsor have to have missions that are close to the same or can they be completely different in nature. For example the sponsor’s mission is helping disabled vets and the group looking for a sponsor is wanting to do a little league baseball non-profit….

    • Gene Takagi

      The project sponsored by the fiscal sponsor must have an exempt (e.g., charitable) purpose that fits within the fiscal sponsor’s exempt purpose. In other words, the fiscal sponsor must advance its own mission through its sponsorship of any projects.

  7. Carolyn

    Can a nonprofit under a fiscal sponsor sign a contract to hire a grant writer or does the fiscal sponsor need to be the contract signer?

    • Gene Takagi

      Carolyn, the answer depends on the model of fiscal sponsorship used (and whether the relationship is one that is structured properly). Generally, in a comprehensive fiscal sponsorship arrangement, the nonprofit “project” is housed in the fiscal sponsor and only an authorized agent of the fiscal sponsor can sign contracts; while in a pre-approved grant relationship fiscal sponsorship arrangement, the nonprofit “project” is housed in the grantee organization (not in the fiscal sponsor) and an authorized agent of the grantee organization can sign contracts on behalf of the grantee. Check with a knowledgeable attorney to ensure this is being done correctly.

  8. Fiscal Sponsorship Basics - Nonprofit Law Blog

    […] 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 a sponsor and its project to understand precisely their […]

  9. Gene Takagi

    Nola, it is possible to get a fiscal sponsor for a single event. But you may need to shop around a little to find a willing sponsor organization.

  10. nola

    My group is in the process of obtating 501(C)(3) status but have a pending fundraiser planned. Since it takes a while for approval (2-6 months), is it possible to get a fiscal sponsor for a one time event?

  11. Gene Takagi

    K, you may be able to fiscally sponsor another organization, but only if it furthers your own organization’s charitable purposes. Even if your missions are aligned (and they seem pretty different to me), I strongly recommend not entering into a fiscal sponsorship of another group without having a full understanding of the legal relationship created and your responsibilities as the fiscal sponsor, a well-drafted agreement that reflects the mutual understanding of the parties and compliance with applicable laws, and a solid projection of the financial benefits and costs associated with the sponsorship. If you don’t have deep knowledge of this area, I think you should purchase Greg Colvin’s book on fiscal sponsorship available at http://www.fiscalsponsorship.com.

  12. K. Linden

    I started a non-profit in 1997. Our mission is to bring hope and health to mom, babies and families. We work primarily with low income men in women who are expecting a baby or in early years of parenting. A group of people in my community would like to build a much needed athletic facility in my community. They would like to operate under the umbrella of our 501 c 3 status. Can we be their fiscal sponsor until they can get established.?

  13. Gene Takagi

    Mauricio, it may be difficult to find a fiscal sponsor for a foreign organization because of the due diligence required of the sponsor and the laws and recommended practices regarding international charitable activities. You’ll probably need a connection to a U.S. charity that already operates or makes grants to organizations in Costa Rica.

  14. Mauricio

    We are located in Costa Rica and would like to have a fiscal sponsor so that we can fundraise in the U.S. – what would you recommend?

  15. Gene Takagi

    Matt, this may involve issues that go beyond fiscal sponsorship. With respect to organizations that state that they are fiscally sponsored, if it is important to verify that you are renting to a 501(c)(3) entity, you’ll probably want the sponsor to sign the lease and review a copy of the fiscal sponsorship agreement.

  16. Matt

    What should I require of an organization who wants rent my facility using my non-profit rate structure. Many organizations do not have their own 501-c 3 status, but state they are sponsored by a non profit organization.

  17. Gene Takagi

    Nitin, try contacting an organization like Give2Asia. Sponsors generally do not fiscally sponsor foreign projects unless they (the sponsors) have a presence in such country. Also, note that sponsors generally do not fundraise on behalf of their projects and may require a minimum amount committed to the project before they will sponsor it.

  18. nitin mishra

    my orgisation is registerd in india want fiscal sponsorship
    please help me
    http://www.childrenfirst.co.in

  19. Gene Takagi

    Binny, you should confer with an attorney to see what rights you actually have under the agreement. It would not be unusual for the agreement to prohibit a transfer of assets to your corporation until it receives a favorable determination of 501(c)(3) status. Note also that fiscal sponsorship does not mean an agreement to “park” funds temporarily. The funds all belong to the sponsor, which remains responsible and potentially liable for any misuse of such funds. However, the funds may be restricted to furthering the project’s mission, and your nonprofit may be delegated with the authority to manage the project subject to the sponsor’s board’s oversight and control.

  20. Binny

    Help. The executive director of the fiscal sponsoring agent we have an agreement with is making decisions outside of the agreement we have in place, and those decisions are affecting our ability to move forward with our own stand alone organization. We have given her notice of our intent terminate our agreement, we have filed our incorporation papers, and the 501(c)3 is in process. Even though our contract termination language specifically states that upon invoking the termination clause, all funds will be remitted to our agency, she is now refusing to abide by the contract and transfer the funds our project has raised. She is citing 501(c)3 tax codes which she claims states that she has the duty to ensure the dollars raised by our project are spent appropriately, and thus cannot release the funds we have raised and “parked” in an account at her agency. Her agency is already receiving 10% of all incoming donations specified for our project. We have worked so hard to get our organization off the ground, and we hope we won’t have to resort to hiring attorneys to protect our interests.

  21. Gene Takagi

    Samantha, your question is a tricky one to answer. Generally, it is not appropriate to have two sponsors for the same project (unless the two sponsors have agreed to a joint venture or partnership to oversee the project). But a “project committee” might have two separate projects, each run under a different sponsor. Or the “project committee” might be an entity involved in a Model C sponsorship with the sponsor and be delegated with managing a Model A project of the sponsor. You need to review Colvin’s book to understand the terminology. And you should have a lawyer to explain such hybrid arrangements.

  22. Gene Takagi

    Allison, the fiscal sponsorship agreement should be a written contact approved by the board of the sponsor and the “project committee” agreeing to manage the project subject to oversight of the sponsor. It does not need to be submitted with an information return (e.g., Form 990), but there may be reporting requirements associated with the project activities.

  23. Samantha

    Is it possible to have two or more fiscal sponsors for the same project? Are there any resources or articles you can point me to that may answer this question? Thanks.

  24. allison

    What paperwork must be submitted (and to whom) in order to formalize the sponsor agreement? Is this even necessary?

  25. Gene Takagi

    PJ, the Colvin models of fiscal sponsorship are well thought out constructs to help people understand the possibilities of fiscal sponsorship. But variations of the models are absolutely possible.
    In a strict Model A or Model B framework, the sponsor must be the owner of the project. But you might include a Model C component in which the founders of the project might retain some ownership of certain assets that can be funded by the sponsor. This can get complicated, may increase the sponsor’s exposure, and may generate tax liabilities for the founders. For all these reasons (and some others), to my knowledge, such structures are not very common.

  26. PJ Heller

    Under a Model A and B, I have read that the sponsor owns the result of the project. Is it possible to write into an agreement for Model A or B that the ownership belongs to the project?

  27. Tony Martires

    are there legal requirements (like, notice/application filing or amendments to articles of incorporation) from the irs and state of california, other than the financial and project management responsibilities, when a non-profit organization decides to act as fiscal sponsor?

  28. Gene Takagi

    Tandra, re: Model D: look for affiliation agreements between independent chapters and national organizations that have included the chapters in a group exemption. The IRS has published important information re: group exemptions as well (see Publication 4573).

  29. Gene Takagi

    Dara, a for-profit’s officers may serve as the advisory committee for the project. However, the project and for-profit assets should not be commingled.

  30. Tandra Sbrocco

    Are there any examples of the Model D agreement for fiscal sponsorship?

  31. Dara

    Can a for-profit business have a fiscal sponsor for a program or community project affiliated with the business, but not generating profit?

  32. Gene Takagi

    Francesca, the fiscal sponsor’s 501(c)(3) status may be at jeopardy if its Model A project engages in prohibited political activity. Remember that the Model A project has no separate legal existence so the violation is the sponsor’s violation of IRC Section 501(c)(3).

  33. Francesca

    Hello,
    What happens if the organization that the 501 (c) (3) is sponsoring engages in political activity in violation of the rule? Is there are revenue ruling on this issue?

  34. Gene Takagi

    Rob, a fiscal sponsor may be based in a different state from one of its projects. However, it may need to qualify to operate in the state where the project is based. It may further need to register in such state to engage in charitable solicitations.
    The board of the fiscal sponsor must provide oversight over the project. So, the sponsor cannot truly be dormant. Note that the sponsor’s board must ensure that sponsoring another organization is actually in furtherance of its own charitable purposes. Generally, what you are considering does not look like a sound strategy.

  35. Marvin Klein

    Another way to “Get it Wrong” is to sponsor and brand name an event from a small non profit, without checking to see that the event is properly insured. Without insurance, and with limit assets in the nonprofit, the sponsor may wind up holding the bag in the event of an accident. In certain cases (check with your insurance broker), the Sponsor should request that the Non Profit add the Sponsor as an additional insured for the event. Yours, Marvin Klein, McManus Serra & Klein, Insurance Brokers to the Non Profit Community

  36. Rob N

    My colleague is interested in starting a performing arts organization, and we’re exploring options for its organization. He has a 501(c)3 organization established in another state, but that group has been dormant for almost a year – its board has disolved, and it is not producing. Two questions, at least, arise:
    1. Can a fiscal sponsor operate in a different state than its sponsoree? (Can that 501(c)3 be his fiscal sponsor?)
    2. Can a dormant 501(c)3 be a fiscal sponsor, or must it be actively working on charitable activities?

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