Fiscal Sponsorship

Fiscal Sponsorship in Brief

Many individuals and entities have great ideas for projects that they believe will help make the world a better place. This could be an artist-in-residency program, an initiative to bring blankets to those in need, or projects to clean up local parks. Not all of these projects need to establish their own nonprofit corporation and apply for 501(c)(3) status. Instead, many of these projects turn to fiscal sponsorship as an alternative.

Under fiscal sponsorship, the project essentially uses the 501(c)(3) status of an existing nonprofit corporation to conduct its operations. The project must fit within the parameters of 501(c)(3) purposes – that is, it must be charitable, educational, scientific, literary, or religious, as those terms are interpreted by the IRS and the courts. In addition, the fiscal sponsor must confirm that the project’s proposed operations fit within its own corporate and tax purposes and will not result in liabilities to the sponsor.

There are different ways to structure the fiscal sponsor relationship. Most common is the internal project model and the pre-approved grant model.

Under the internal project model, the project becomes a part of the 501(c)(3) fiscal sponsor. The project’s staff become employees or volunteers of the sponsor and all of its activities become effectively activities of the sponsor. This means that the project comes under the authority of the sponsor’s board, although often sponsored projects are given significant autonomy in their activities. Grants and donations to the project go directly to the sponsor who generally accounts for them as a restricted fund for the use by the project.

Under the pre-approved grant model, the project is its own separate legal entity. It can be a sole proprietor, an LLC, a nonprofit corporation waiting for 501(c)(3) status, or a for-profit corporation. The project’s entity contracts with the fiscal sponsor to engage in certain 501(c)(3) activities. The sponsor agrees to set up a fund for the project, to accept grants and donations into that fund, and to disburse that money to the project to engage in the promised activities. Under this model, the only authority that the sponsor has over the project is the sponsorship agreement and the ability to divert the funds (and request return of funds, generally) if the project does not engage in the activities that it promised, or otherwise jeopardizes the sponsor’s 501(c)(3) status. Notably, under this model, the project as a separate legal entity still has to pay tax on funds that it receives from the sponsor.

These are only two of a series of potential models, including a simple independent contractor model or a more complex supporting organization model. Regardless, there should ALWAYS be an agreement in place between the sponsor and the project to clarify expectations. Particularly important in this agreement will be pre-negotiated terms for how to deal with exit of the project from fiscal sponsorship, when and if that becomes an issue. Who keeps the money? Who keeps the name? How will the database of donors be transferred, if at all? The devil is in the details with fiscal sponsorship.

The Tides Center, based in San Francisco, is a leading fiscal sponsor in the United States but there are many local fiscal sponsors in the Bay Area, including Community Initiatives and the Rose Foundation. The fiscal sponsor directory is a good place to find a fiscal sponsor that fits a particular project.

An excellent resource on the various types of fiscal sponsorship agreements is: Fiscal Sponsorship: 6 Ways to Do It Right, by Gregory L. Colvin as well as the associated website fiscalsponsorship.com.

Written by Cameron Holland.