The National Network of Fiscal Sponsors held its Annual Gathering in New Orleans on October 26 and 27. Approximately 120 leaders of fiscal sponsors and other professionals from across the country came to share experiences and to learn about common issues, best practices, and new developments. One common question throughout the gathering was whether the term “Fiscal Sponsorship” should continue to describe the relationship between a sponsor and project, or whether there is a better term (e.g., “incubation”) that is more accessible and understood outside of the fiscal sponsorship community.
Many charities begin engaging in fiscal sponsorship without knowing what it really means or how it needs to work. Based on some of the conversations that occurred at the gathering, here are a few legal tips and best practices for sponsors:
Every fiscal sponsor should review its purpose statement in its governing documents (e.g., Articles of Incorporation and Bylaws). A purpose statement should be consistent across such documents, as well as on the sponsor’s website and other solicitation materials. It is especially important for sponsors to review the purpose statement to ensure that the sponsor’s fiscally sponsored projects fit squarely within such purposes.
Generally, under the charitable trust doctrine, use of charitable funds is limited to the activities specified in the corporation’s governing documents and possibly on its solicitation materials at the time such funds were received. If the purposes of a sponsor are described in its Articles as “providing support to performance art projects in California,” then funds donated to the corporation generally cannot be used towards performance art projects in another state, or arguably, towards a different art medium, such as fine arts. A sponsor may want to consider amending its Articles and Bylaws if its purpose statement is not broad enough to cover the types of projects it hopes to sponsor. See Starting a Nonprofit: Articles of Incorporation and Specific Purpose Statements and Changing a Nonprofit’s Mission for additional information.
Selection of Projects
As a rule of thumb, each fiscally sponsored project (in a comprehensive or Model A fiscal sponsorship relationship) should stand alone in meeting the tax law requirements of a charity. When reviewing whether to select a project, the sponsor might consider whether the project would receive a favorable determination from the IRS under IRC 501(c)(3) if it applied. To best protect itself, a sponsor should not accept a project that is too commercial in nature, or that engages in substantial commercial activities that are in direct competition with for-profits entities. See Starting a Nonprofit: What is “Charitable” under 501(c)(3)?; Arts Projects: Charitable or Not?; and Commerciality Doctrine: Denial of Exemption for additional information.
The project leaders’ plans, expertise, and experience also matter. While it may be difficult for a sponsor to reject certain well-intentioned individuals planning to do important work, some may not be prepared to properly manage a charitable project and their deficiencies can ultimately hurt the sponsor. For example, a poorly organized event by a project could result in bad PR for the sponsor or worse, an injury for which the sponsor will be liable. In terms of efficiency, some charitably inclined individuals might do better working with an existing charity instead of running a project. Project leaders have the burdens of program design and management, and their charitable goals may be better suited working with an existing successful program helping the same targeted beneficiaries. Of course, there are also those project leaders who are trying something different or targeting a very underrepresented class of beneficiaries and who have the skills, expertise, and experience to engage in program design and management, fundraising, and the ability to operate within a budget. Those would be favorable factors in a sponsor’s project approval process.
Registration and Qualification
If a sponsor enters into a comprehensive fiscal sponsorship with a project operating in another state, the sponsor itself will then be operating in that state, since the project will become an internal program of a sponsor. A sponsor should make sure that it is properly registered and qualified to do business in any state in which it operates. In California, for example, this means registering with the California Attorney General and qualifying to do business with the California Secretary of State. Other states may have different rules and required registrations.
Lobbying vs. Political Activity
Common misconceptions about public charities include that a public charity cannot engage in lobbying, or that lobbying and partisan political activity are one in the same. While it is true that there is an absolute prohibition on engaging in partisan political activities (which generally refers to supporting or opposing any candidate for public office), it is also true that charities can lobby, or engage in activities that attempt to influence specific legislation, so long as those activities represent an “insubstantial” part of their overall activities (note that the lobbying limits are fairly generous, particularly if a charity makes the very simple 501(h) election). For sponsors, the limits will be based on their cumulative activities and would not be viewed on a project by project basis. It would be prudent for sponsors to review and understand the definitions and rules regarding these activities, and to help educate their projects as well. Lobbying and issue advocacy are often underutilized tools for sponsors and projects working to advance their missions. See Charities and Issue Advocacy: Doing it Right Part One and Part Two, and Starting a Nonprofit: The Value of Making the 501(h) Lobbying Election for more information.