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Fiscal sponsorship refers to the practice of non-profit organizations offering their legal and tax-exempt status to groups—typically projects—engaged in activities related to the sponsoring organization's mission. It typically involves a fee-based contractual arrangement between a project and an established non-profit.
Advantages of fiscal sponsorship
Fiscal sponsorship can enable projects to share a common administrative platform with a larger organization, thus increasing efficiency. In addition to legal status, sponsors can provide payroll, employee benefits, office space, publicity, fundraising assistance, and training services, sparing projects the necessity of developing these resources and allowing them to focus on programmatic activities.
Projects may seek fiscal sponsorship for various reasons: an anticipated short lifespan, improved access to funding, increased credibility, and low-cost financial and administrative services. Fiscal sponsors can also assist nascent projects in developing the necessary organizational capabilities to eventually spin off as independent non-profits.
Fiscal sponsorship arrangements, if not handled carefully, can be vulnerable to the criticism that they serve merely as conduits for the transmission of deductible donations to entities not qualified to receive them.
However, in the last decade, the phenomenon of fiscal sponsorship has become a common ancillary activity for public charities involved in human service, environmental, and artistic endeavors. Non-profit institutions solely devoted to fiscal sponsorship have sprung up across the country, ranging from documentary film sponsors to public health research groups to separate corporations spun off by community foundations.
Nevertheless, it is important for both sponsors and projects to understand the exact nature of their relationship.
- Sponsors are advised to ensure that the activity of sponsoring a particular project is done in furtherance of its own exempted charitable purposes, as sponsors can be exposed to some liability for the actions of any sponsored projects.
- Projects are advised to recognize that projects will be under the control of their sponsor(s), who may be legally responsible for the operations and activities of the project.
The benefits of immediate tax-exempt status and administrative support must be weighed against the lack of autonomy and fees typically charged by the sponsor.
Models of fiscal sponsorship
Fiscal sponsorship is practiced with many different models, which offer different benefits.
Comprehensive fiscal sponsorship distinctions
In a comprehensive fiscal sponsorship relationship, the fiscally-sponsored project becomes a program of the fiscal sponsor, (a distinct difference from the pre-approved grant relationship), and is a fully integrated part of the fiscal sponsor who maintains all legal and fiduciary responsibility for the sponsored project, its employees, and activities. Any work product is available to the public or to the charitable sector. The fiscal sponsor assures funders that the purposes and any restrictions of all grants and/or contributions will be met.
Pre-approved grant relationship fiscal sponsorship distinctions
In a pre-approved grant relationship sponsorship relationship, the fiscally-sponsored project does not become a program belonging to the sponsor (as is the case with comprehensive sponsorship), but is a separate entity responsible for managing its own tax reporting and liability issues. In addition, the sponsor does not necessarily maintain ownership of any part of the results of the project’s work. Ownership rights should be addressed in the fiscal sponsor agreement, and could potentially result in some type of joint ownership. The sponsor simply assures itself that the project will use the grant funds received to accomplish the ends described in the grant proposal.
Table comparing the models
|Basic Characteristics||Is project a separate legal entity?||Relationship is...||Charitable donations belong to...||Liability of sponsor to 3rd parties||Ownership of result||Payments shown on IRS returns filed by Sponsor||Payments shown on IRS returns filed by Project||Comments|
|DIRECT PROJECT||Project belongs to sponsor and is implemented by its employees and volunteers.||No||Employer- Employee||Sponsor||Total liabilities for acts of employees.||Sponsor||990, payroll tax returns||Individual 1040’s||Legally, the project is no different from any other activity carried on by the sponsor directly.|
|INDEPENDENT CONTRACTOR PROJECT||Project belongs to sponsor but is conducted by separate entity under contract.||Yes||Project- Contract||Sponsor||Varies, may be partial or total.||Sponsor usually||990, 1099 if person||Depends on legal status.||Appropriate where a project is an integral part of the sponsor’s work, but may be legally performed by an independent contractor.|
|PRE-APPROVED GRANT RELATIONSHIP||Project applies to sponsor for one or a series of grants, sponsor funds the project only to the extent that money is received from donors.||Yes||Grantor- Grantee||Sponsor||Selection and payment of grantee, plus terms set by funding source.||Project usually||990||Depends on legal status.||Used by a non-501(c)(3) project, in order to raise tax deductible support from donors, private foundation or government grants.|
|GROUP EXEMPTION||Sponsor obtains federal group tax exemption, confers 501(c)(3) status on subordinate projects.||Yes||Subordinate- Affiliate||Project||Only as provided in affiliation agreement.||Project||Annual listing of organizations, no financial information.||990, separate or group return||Project gets 501(c)(3) status without separate application to IRS; must be subject to general supervision or control of sponsor.|
|SUPPORTING ORGANIZATION||Project gets its own 501(c)(3) exemption, but public charity status is based on support of sponsor’s purposes.||Yes||Varies||Project||None||Project||None||990||Project must apply to IRS for 501(c)(3) status, but can be a public charity even with only one donor.|
|TECHNICAL ASSISTANCE||Project has its own 501(c)(3) exemption but needs help with bookkeeping, tax returns, payroll, management, etc.||Yes||Management- Contract||Project||Only as provided in the contract.||Project||990, if fee charged||990, if fee paid||Sponsor provides financial management to project, but all funds are raised and spent in the name of the project|
|WHOLLY-OWNED LLC||Project is incorporated as a limited-liability company and wholly owned by a sponsor 501(c)(3)||Yes||parent-subsidiary||sponsor||limited liability||sponsor||Yes — financial activity of project is included on sponsor 990||LLC is "disregarded' and files no tax return of its own||Provides some limit to sponsor's liability despite owning the project. Easy to spin off or sell an "incubated" project.|
- Trust for Conservation Innovation (2003-09-29). "Fiscal Sponsorship: the state of a growing service" (PDF). Retrieved 2011-08-30.
- Gregory L. Colvin (2006-11-17). "Fiscal Sponsorship" (PDF). Retrieved 2007-12-12.
- Gene Takagi Law Firm (2006-12-24). "Nonprofit Law Blog: Fiscal Sponsorship Basics". Retrieved 2007-12-12.
- National Network of Fiscal Sponsors (2010-04-25). "Guidelines for Comprehensive Fiscal Sponsorship" (PDF). Retrieved 2010-07-06.
- National Network of Fiscal Sponsors (2010-04-25). "Guidelines for Pre-approved Grant Relationship Fiscal Sponsorship" (PDF). Retrieved 2010-07-06.