A fiscal sponsorship is a relationship between a nonprofit organization and a third-party entity engaged in a project or activity related to its mission – the nonprofit extends its legal and tax-exempt status to that third party in exchange for an administrative fee. The nonprofit is the "Fiscal Sponsor," and the partner organization is the "Sponsored Partner."
How Does a Fiscal Sponsorship Work?
Typically, fiscal sponsorships are strategic alliances that allow the sponsored partner to apply for grants and to collect tax-exempt donations when they otherwise would not be able to. These benefits allow sponsored partners to reduce their overhead on charitable projects and cut demand for specialized personnel within the sponsored partner's four walls. Additionally, existing organizations in the process of converting their incorporation status to a 501(c)(3) may utilize a fiscal sponsorship structure before their legal status change to jump-start their mission.
Fiscal Sponsorships vs. Sponsored Projects
It is important to note that fiscal sponsorships differ from sponsored projects, which are projects funded by an external organization. Sponsored projects require financial accountability and reporting to the sponsoring organization; they are necessarily limited in time and scope and typically require a final technical report at the close of the relationship. Fiscal sponsorships involve less direct reporting to the fiscal sponsor and do not necessarily need to be limited in time.
How Involved is a Fiscal Sponsor?
That depends on the specific type of agreement. Several models of fiscal sponsorship are increasingly common.
Comprehensive Fiscal Sponsor Model
The first is the Comprehensive Fiscal Sponsor Model. Under this model, the sponsored partner is an individual or group not part of a separate legal business entity. These sponsored partners are usually small community groups or individuals with philanthropic missions. In these cases, the fiscal sponsor employs the sponsored partner's personnel (or considers them "volunteers"), all fundraising is done in the sponsor's name, and all resultant work product is the property of the fiscal sponsor. A common example of this type of fiscal sponsorship is an incubator program – many universities use this model to empower students to conduct socially entrepreneurial work.
Independent Contractor Model
The second type of fiscal sponsorship is the Independent Contractor Model. Under this model, a separate legal entity exists as the sponsored partner, and the fiscal sponsor does not employ any of the partner's personnel. Essentially, the fiscal sponsor employs the partner entity as an independent contractor, all donations flow through the sponsor to the partner, and the financial oversight ends there.
Pre-Approved Grant Relationship Model
The third model is the Pre-Approved Grant Relationship Model. This type of sponsorship occurs when the sponsored partner has been approved for a grant to complete a project. The fiscal sponsor arranges for the partner to obtain the proceeds of that grant from a sponsor, foundation, or other entity, and this agreement can include future fundraising. The sponsor receives the grant funds and then makes them available to the partner, again ending the oversight.
Technical Assistance Model
The last model is referred to as the Technical Assistance Model. This relationship is unique because it is a partnership between multiple 501(c)(3) organizations. Typically, a smaller entity needs financial management assistance, and a larger nonprofit organization will partner with them to provide that. This model is also unique in that all of the funds are raised in the partner's name, and all of the work product produced from the sponsorship relationship remains in the partner's possession.
What Incentive Does a Fiscal Sponsor Have to Assist a Sponsored Partner?
Fiscal Sponsors, first and foremost, do not typically offer their services for free. A small administrative fee is usually addended to the sponsor's services, but this alone is not incentive enough for an organization to take such responsibility and liability on itself. The main rationale behind sponsoring an outside entity for nonprofit work is the same reason for establishing a nonprofit – altruism. When a potential sponsored partner has an idea for a project that would benefit a nonprofit organization's target demographic, their mission will dictate their interest and support.
While 501(c)(3) organizations are not required to assist individuals, entities, or organizations with similar missions, a fiscal sponsorship may make sense if a strategic partnership can be formed to do so. Further, when a nonprofit organization receives donations from donors interested in their sponsored partner's work, those donors inherently become aware of the nonprofit's mission. They are likely to continue supporting them after the partnership's conclusion. A successful fiscal sponsorship naturally lends credibility and prestige to the sponsoring organization's name.
What You Should Consider Before Becoming a Fiscal Sponsor
If your organization is considering becoming a fiscal sponsor, the main considerations to protect your assets are:
- Assessing the liability inherent in the project,
- Your organization's reputation,
- Your mission's alignment, and
- Your infrastructural availability.
Are you at risk?
The most important question is: Would this project put our organization's 501(c)(3) status at risk? When considering this, analyzing the project's true purpose, the reputation of the sponsored partner and its members, and the implications of the final product are incredibly important. While it is impossible to predict every possible outcome of a partnership or project, it is vital to consider what unintended consequences may stem from the alliance and whether they would ultimately help or harm your organization's mission.
Do you have the infrastructure?
Another issue to scrutinize is whether or not your organization has the infrastructure to take on a project of this magnitude. Will you need to hire additional staff? Are your staff already operating at full capacity? Most nonprofit organizations operate on a thin financial margin, and stretching resources to sponsor an outside project may unbalance that precarious financial state.
Are there other methods?
Last, considering other collaboration, support, and cooperation methods may be fruitful. Would it be more beneficial to assist the outside organization in becoming 501(c)(3) certified instead? Is there another nonprofit organization with a more closely aligned mission to the project?
What You Should Consider Before Becoming a Sponsored Partner
When beginning the journey to a fiscal sponsorship, you and/or your organization should consider several factors before agreeing to any type of fiscal sponsorship model. The two biggest concerns of the sponsored partners are ownership over the final product and oversight over the project execution. Most fiscal sponsorship models include granting control over any resulting product to the fiscal sponsor. If this is something that your organization or entity is opposed to, it is extremely important to choose the correct model and the correct sponsor for your project. Especially for entities hoping to become 501(c)(3)s and continue their work, hanging onto the rights to any work product becomes paramount.
Finding a fiscal sponsor with a track record of successful collaboration is key. Some nonprofits may offer fiscal sponsorships to generate additional revenue – finding an organization that puts comprehensive effort into managing their fiscal sponsorships is essential to success.
What Should Your Sponsorship Agreement Include?
Fiscal sponsorship agreements should be specific, equitable, and reviewed by a lawyer. Some of the more critical terms to enumerate include:
- Identifying the project
- Choosing a commencement date
- Choosing a finalization date
- Delineating ownership of any work product
- Securing a timeline for the disbursement of funds
- Itemizing the administration fee
- Allowing for auditing by the sponsored partner.
Identifying the Project
Identifying the project with specificity allows the sponsored organization to continue any outside work unencumbered by the oversight requirements of a fiscal sponsorship. Additionally, it mitigates the risk of the fiscal sponsor attempting to claim additional work product as their own at the termination of the agreement.
Choosing a Commencement Date
Choosing a commencement date is pivotal in determining when collections of donations can be attributable to the sponsored partner. Both parties should be concerned about this issue – the sponsored partner wants to receive every donation it can. Still, the fiscal sponsor doesn't want to lose their own contributions if they are ambiguously earmarked.
Furthermore, selecting an end date or mapping a trigger for the end of the relationship protects both parties from indefinite reliance. A fiscal sponsor may not be able to sustain the partnership forever, and a sponsored partner may not want to be beholden to another entity for longer than necessary.
Choosing a Finalization Date
Clauses in the agreement diagramming how the project will conclude, be divided up, and where the work product will reside at the close of the sponsorship are central to the agreement. Assigning all of the spoils to one party may eliminate the purpose for the existence of the other, so negotiations on this point should be zealous.
Last, the financial provisions of the agreement should protect both parties. Allowing the sponsored partner to audit the fiscal sponsor is good accounting practice, and establishing a timeline for disbursement keeps both parties accountable. Being specific about the administration fee is also beneficial – it allows the sponsored partner to understand exactly what to expect and gives the fiscal partner guidance in staffing, covering liability, and overseeing the project.
Becoming a fiscal sponsor is a large responsibility but can often be rewarding for the sponsor and the community. Becoming a sponsored partner can be extremely difficult and involves a lot of consideration of control over a project.
Consulting an attorney before and during the process of establishing or considering a fiscal sponsorship can eliminate a lot of stress and bridge the knowledge gap required to understand 501(c)(3) qualifications. Contact us today for a free consultation.