Many individuals looking to develop a charitable program assume that they need to create a nonprofit organization to solicit tax-deductible contributions. While establishing a nonprofit is often the best course of action, for many there is another way – fiscal sponsorship. Fiscal sponsorship is a partnership with a 501(c)3 tax-exempt organization – the fiscal sponsor – that allows a charitable project or organization that is not itself tax-exempt to develop the project and raise funds under the auspices and tax-exempt status of the fiscal sponsor. The fiscal sponsor provides fiduciary oversight and may provide administrative assistance, legal services, and help with financial management to the sponsored project. Such a partnership can be advantageous for both parties.
The sponsored project benefits from the umbrella-like coverage the fiscal sponsor grants it (mainly by being able to solicit tax-deductible contributions), while the fiscal sponsor benefits by taking a percentage of the funds received on behalf of the sponsored organization as an administrative fee for its services. When done correctly, fiscal sponsorship can be a great tool for fulfilling charitable goals without necessarily requiring the formation of a new nonprofit entity, applying for tax-exempt status, or separately meeting charitable fundraising registration and filing requirements. However, a fiscal sponsorship relationship must be properly memorialized in contract. Failure to do so can result in a host of problems for the fiscal sponsor including charges by the IRS that it is acting as a conduit for the project which could result in revocation of its 501(c)(3) status.
There are two main types of fiscal sponsorships:
- Comprehensive Fiscal Sponsorship, and
- Pre-approved Grant Relationship Fiscal Sponsorship.
Comprehensive Fiscal Sponsorship
Under a comprehensive fiscal sponsorship (sometimes called a Model A), the sponsored project becomes an internal program of the fiscal sponsor. The fiscal sponsor has both legal and monetary control over the project, which can be beneficial for the sponsored project as it will not have to maintain a separate legal existence and comply with registration requirements. Comprehensive fiscal sponsorships are often a good idea for those who may not have either the time or the expertise to run a nonprofit.
Pre-approved Grant Relationship Fiscal Sponsorship
Under a pre-approved grant relationship fiscal sponsorship (sometimes called a Model C), the sponsored project is conducted by a separate legal entity, individual or partnership. The fiscal sponsor preapproves the project as a grantee, in part by determining that its purpose is in line with the sponsor’s charitable purpose. Funds solicited for the project are put into a restricted fund set up to support the sponsored project and are granted periodically to the project. The fiscal sponsor must still maintain discretion and control over the funds raised for the project and require reporting from the project to ensure funds are spent properly. Since the project is a separate entity, the programmatic, tax, and legal responsibilities aren’t automatically dealt with by the sponsor. Entering into a pre-approved grant relationship is best when an organization prefers having legal control over the project and a more arms’ length relationship with the fiscal sponsor.
In either case, the fiscal sponsor will have control over the funds raised by and for the project (the funds legally belong to the sponsor), and final discretion and control over how the funds are used.
Fiscal sponsors generally charge a fee to cover their administration of the project. The fee for pre-approved grant fiscal sponsorships typically is 6-10% of funds raised. For comprehensive fiscal sponsorships, the fee is usually a bit more. Some fiscal sponsors that provide extensive additional services charge 20% or more.
It is important to seek legal counsel before entering into a fiscal sponsorship relationship. If done incorrectly, the project and especially the fiscal sponsor can run into trouble with the IRS. If you are interested in pursuing a fiscal sponsorship, we can help! The Law Firm for Non-Profits is comprised of a legal team specializing in nonprofit law with knowledge on IRS regulatory issues, corporate governance, private foundations, as well as fiscal sponsorships (representing both fiscal sponsors and projects). Please visits us at www.lfnp.com or call (818) 623-9898.