Fiscal Sponsorship: Many Organizations Still Finding Much Value in Umbrella Structure

We wrote our last post on fiscal sponsorship in early 2013, when the IRS was in the midst of a severe backlog in processing applications for 501(c)(3) status. There has finally been some progress at the IRS, but nonetheless many organizations still are interested in fiscal sponsorship—whether serving as sponsors, seeking sponsors or making a grant to a sponsor for a project. On that note, we’d like to reprise some of the high points of fiscal sponsorship here.

Note: Karen Leaffer presented on fiscal sponsorship at the Colorado Nonprofit Association’s 2014 Fall Conference & Exhibition, on Monday, October 6. For a copy of her presentation, click here.

Two main models of fiscal sponsorship

Fiscal sponsorship is an arrangement in which an established 501(c)(3) organization—generally a public charity—agrees to provide oversight and assume legal and financial responsibility for the activities of a non-501(c)(3) project (or a project awaiting 501(c)(3) determination). Often, administrative services are offered as well, and an administrative fee is charged. Above all, the sponsored project must engage in work that furthers the fiscal sponsor’s charitable mission.

Most fiscal sponsorships are structured using either the “project model” or the “re-grant model.”

  • Under the project model, the fiscal sponsor owns and operates the sponsored project. The fiscal sponsor may hire project staff as employees to carry out the project, or may hire independent contractors (including the sponsored entity itself) to carry out the project. The fiscal sponsor accepts donations for the project and has full legal ownership of funds, and monitors project expenditures. Because the project is essentially operating as a division of the fiscal sponsor, this model implicates more liability issues for the fiscal sponsor, including general liability to the public, employment liability and actions affecting 501(c)(3) status (e.g., lobbying and political activity).
  • Under the re-grant model, the sponsored entity owns and operates the sponsored project, and the fiscal sponsor controls the project through its control of grant funding. The sponsored entity will help to raise money from donors that is re-granted by the fiscal sponsor to the sponsored entity for the project, subject to the fiscal sponsor’s ensuring that grant funds are properly expended for charitable purposes. This model raises fewer liability issues, since the sponsored entity is considered the operator of the project, but it is more likely to run afoul of the pass-through issue discussed below.

Potential traps for fiscal sponsorships

While fiscal sponsorship can be a great fit in many situations, it can present complex structural issues. If the relationship lacks certain attributes, or is undertaken with a less-than-ideal partner, there can be serious consequences. Following is a sampling of some potential traps in this area:

  • Lack of control: Fundamentally, it is crucial to understand that a fiscal sponsor cannot function as a mere conduit or pass-through for funds to non-501(c)(3)s (which includes, for this purpose, entities awaiting 501(c)(3) determinations). It is not enough to find a 501(c)(3) organization willing to call itself a fiscal sponsor and accept contributions for a non-501(c)(3) (and thus give rise to a charitable contribution deduction that would not otherwise be possible). Rather, the fiscal sponsor must have control and discretion over donated funds. Under the project model, this means that the fiscal sponsor retains the right to decide how to spend funds designated for a project’s mission. Under the re-grant model, a fiscal sponsor needs to retain the right to withhold or demand the return of grant funds if performance requirements are not being met, or to redirect grant funds to another person or entity who can complete the project.
  • No written agreement: this increases the likelihood of misunderstanding with respect to the relationship. A written agreement should be used to clarify key issues such as handling of fundraising, description and handling of liability issues, prohibition on activities that threaten 501(c)(3) status, ownership of any assets created by the project, and winding up/termination of the project.
  • Misunderstanding of liability issues: it is especially key to understand under the project model that the fiscal sponsor is the owner and operator, and as such could be entirely liable for project debts and obligations. In addition, as discussed above, other liability can arise in the project model situation. And while it is less likely, liability can arise under the re-grant model as well, and can be addressed through indemnification in the grant agreement.
  • Lack of due diligence: this applies to both a potential fiscal sponsor and a potential project. A fiscal sponsor needs to conduct due diligence before entering into an arrangement in order to ensure that the project will further its exempt purpose, is viable, and has qualified leadership on board. A potential project, in turn, should examine a potential fiscal sponsor to ensure that it has experience with the legal requirements of the relationship, that its mission is a good fit, that it is a qualified 501(c)(3) organization, and that its finances are in order. Last year, International Humanities Center—a fiscal sponsor with more than 200 charitable projects—closed down and in the process resulted in the loss of an estimated $1 million in donated project funds. This illustrates the importance of putting in some work up-front and selecting the right fiscal sponsor.

Resources for more information

Fiscal sponsorship is a complex topic, and this post has touched on some of the basics. We will post on other aspects of fiscal sponsorship in the near future. In the interim, for those interested in learning more, the following resources are extremely helpful:

Additionally, here are some organizations that actively conduct fiscal sponsorship as well as a directory of fiscal sponsors:

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