What is a fiscal sponsorship?
A fiscal sponsorship is an arrangement in which a 501(c)(3) nonprofit tax-exempt organization (the “fiscal sponsor”) shares its tax-exempt status to another group for a specific project or activity.
The fiscal sponsor is the tax-exempt organization that agrees to share its tax-exempt status with another group for a specific project, grant, event, or artistic creation. Generally, this other sponsored group is not incorporated and lacks its own tax exempt status, but is interested in soliciting donations from others.
Fiscal sponsorships usually are fee-based contractual arrangements between the established non-profit organization and the project.
Under this arrangement, the fiscal sponsor accepts financial donations on behalf of the sponsored group and then grants those donations to the sponsored group.
Why would a project need a fiscal sponsor?
Since most grantmakers give to organizations, rather than individuals, a fiscal sponsorship may help a project qualify for certain funding opportunities. In this way, the project may be able to obtain funding without its own organizational tax-exempt status.
- Example: A group of neighbors decides that they want to improve their local park; they want to apply for a neighborhood improvement grant. The grantmaker requires that all grant recipients must be tax-exempt under IRS Section 501(c)(3). Since the group of neighbors is not an incorporated organization and it does not have tax-exempt status, they could work with a fiscal sponsor with a similar mission to apply for the grant.
- Example: A media-related projects with an educational focus (documentary film) wants to secure funding form individual, foundation, or corporate sources to expand the educational message of the film.
Why do groups enter into fiscal sponsorships?
- Start-up Assistance. Fiscal sponsorships can be useful in mobilizing grassroots efforts and in helping start-up and emerging nonprofits get the momentum they need to become independent organizations.
- Donations. As a 501(c)(3) tax-exempt organization, the fiscal sponsor is also able to provide donors the opportunity to claim tax deductions for appropriate donations.
- Time Sensitive Projects. Working with a fiscal sponsor can be helpful when time is of an issue. For example, grant money may become available for a time-sensitive activity such as disaster relief. Fiscal sponsorships can also be helpful when a project is short-term and waiting for tax-exempt status would be moot.
Who is in control?
At all times, the fiscal sponsor maintains control over the funds. This is not a “pass through” arrangement.
The IRS gave the public charity (the fiscal sponsor) special tax-exempt status for conducting certain exempt activities (charitable, educational, religious, scientific, etc.). To maintain this status, the public charity (fiscal sponsor) must conduct activities tied to those specific charitable purposes. So, any sponsored project also must be tied to these purposes.
What are the responsibilities of a fiscal sponsor?
Fiscal sponsorships can offer benefits, but it is important to recognize the responsibilities that a fiscal sponsor must undertake.
- Legal responsibility: The fiscal sponsor has legal liability in this situation since they must ensure compliance with all federal, state, and local laws.
- Financial management: The fiscal sponsor needs to practice proper fiscal management of the funds. They will report such financial details on their annual IRS reports.
- Program supervision: The fiscal sponsor must ensure that the activity they are sponsoring is aligned with their own charitable purposes.
A majority of the time, the fiscal sponsor will take a small percentage of the funding to offset the cost of managing the funds (often 6 – 10 percent).
Issues to consider before entering into a fiscal sponsorship
Projects/groups seeking a fiscal sponsor should consider the following issues:
- Is the project/group comfortable sharing autonomy over the project/event with the fiscal sponsor?
- Does the project/group understand what expenses are allowed and the process for obtaining funds?
- What are the reporting requirements? What data needs to be captured?
Potential fiscal sponsors should consider:
- Does the charity have the staff and resources to oversee and support the project?
- Is the project furthering the charity’s mission and exempt purpose?
Do groups need a written agreement with the fiscal sponsor?
Yes! Fiscal sponsorship affiliations are formal affiliations, based on a written contract that sets out who will do what. The agreement should include:
- The roles and responsibilities of each party
- Project activities and sponsor policies
- Control over the funds and the use of such funds
- Intellectual property
- Variance power/restricted funds
- Performance of exempt purposes
- Fee for services.
Get help for your fiscal sponsorship
We strongly recommend that each party consult with legal counsel when drafting a fiscal sponsor agreement.
The attorneys at Cullinane Law Group would love to visit with you about getting a fiscal sponsorship in place.