Fiscal Sponsorship: Six Ways to Do It Wrong

A fiscal sponsorship is a type of relationship that a sponsored project (often a new charitable endeavor organized by an individual or group of individuals) has with its fiscal sponsor, typically conferring upon the project the benefit of the sponsor's 501(c)(3) tax-exempt status and certain administrative services.  There are several models of fiscal sponsorship.  Accordingly, it is important for a sponsor and its project to understand the exact nature of their relationship.

Greg Colvin's book "Fiscal Sponsorship - Six Ways To Do It Right" (available here) is an indispensable resource for (1) an individual or group considering fiscal sponsorship as an alternative to forming a nonprofit; and (2) 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 (Direct Project) 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 (Pre-Approved Grant), 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).

Here are Six Ways to Do It 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."

Read my previous post on Fiscal Sponsorship Basics.  Here are some additional resources:

National Network of Fiscal Sponsors

Fiscal Sponsor Directory (San Francisco Study Center)

Comments

[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 www.fiscalsponsorship.com.

[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.?

[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.

[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?

[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.

[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.

[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.

[nitin mishra]

my orgisation is registerd in india want fiscal sponsorship
please help me

www.childrenfirst.co.in

[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.

[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.

[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.

[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.

[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.

[allison]

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

[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.

[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?

[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?

[Gene Takagi]

Arthur, I don't know why you posted this comment in a post on fiscal sponsorship, but I'm curious about your ideas and how you get around the fiduciary duties issues (e.g., to maximize shareholder return).

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[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).