Are you keen to start your charitable project? You might benefit from a fiscal sponsorship arrangement.
They can be a helpful way for charitable projects to attract donors without being recognized as tax-exempt under Internal Revenue Code Section 501(c)(3). These charitable projects can be referred to as a ‘Sponsored Project’.
In these types of arrangements, the sponsor essentially serves as the legal and administrative ‘home’ of the project.
Please note this article was prepared by a legal intern, and the information contained herein is for informational purposes only, and should not be taken as legal advice.
Who Is The Fiscal Sponsor?
A fiscal sponsor can be virtually any organization that has its 501(c)(3) status and agrees to accept tax-deductible donations on behalf of an organization or project that does not have this tax-exempt status.
The fiscal sponsor maintains control of incoming donations and typically provides administrative and back-office support. The fiscal sponsor disburses donated funds to the charitable organization or project in a manner that furthers the mission of the sponsored project. Since a fiscal sponsor must itself comply with applicable 501(c)(3) requirements, it must properly document each disbursement of donated funds.
This process allows donations to be tax deductible to the donor, which also serves to incentivize donations.
Advantages Of Fiscal Sponsorship
There are many advantages in entering a fiscal sponsorship arrangement, particularly for nonprofits who need to efficiently gather funds during the start-up phase, or before they are granted 501(c)(3) status.
Not only does it serve to provide tax deductible donations, it also provides administrative support, which relieves pressure on many nonprofit start-ups.
Fiscal sponsorships also enable the Sponsored Project to apply for grants and fundraise. While the Sponsor may take an administrative fee, the trade off may be very well worth it!
Different Models of Fiscal Sponsorship
There are many different forms of fiscal sponsorship. Some of these include:
Direct Project: this involves the Sponsor having a more hands-on approach and taking on the project “in-house” within their organization. The Sponsor’s staff assists with the project and similarly, the employees of the project become a part of the Sponsor organization for the duration of the project. The Sponsored Project creates the same liabilities for the Sponsor, and in some cases there may be restrictions on the way funds are kept by the Sponsor.
Independent Contractor Project: This is where the project still belongs to the Sponsor, but the operations of it are outsourced to an independent contractor, which could be another individual, firm, or organization. It is important in this model that the people carrying out the project are considered independent contractors and must be treated accordingly.
Pre-Approved Grant: This model requires the Sponsor to maintain control over the funds received for the project, but it mandates the project to be responsible for its own tax returns, employment taxes, insurance, debts, liabilities and other legal obligations. This is a more hands off approach, where the Sponsor is merely responsible for properly selecting and paying the grantee and ensuring the funds are spent according to the grant agreement.
Group Exemption: This allows the project to receive 501(c)(3) status from the Sponsor, but the project must still meet a public support test.
Supporting Organization: This allows the project to derive its 501(c)(3) status from the Sponsor, but it still applies for its own tax-exempt status.
Technical Assistance: This is where the project has its own 501(c)(3) status, but the funds are handled by the Sponsor, who are still undertaking some administrative tasks for the project.
What Could Go Wrong?
There are many different models that can be engaged for a fiscal sponsorship arrangement.
They vary in degrees of involvement. For some Sponsors, fiscal sponsorship is merely an additional revenue source - so it’s important to choose wisely.
If a project and Sponsor have chosen a model that requires a more hands-on approach, it is important to ensure that the Sponsor has adequate resources and infrastructure to support the sponsorship.
Similarly, it is important that the Sponsor conducts due diligence into the project before engaging this arrangement and delegating duties.
While there may be cases where these sponsorship arrangements may not work out, it is important (on part of the Sponsor and the project) that the appropriate policies are in place - particularly if there are many charitable assets involved.
Our Fiscal Sponsees: Special Shout-outs
We here at Good Counsel love and appreciate the opportunity to be Fiscal Sponsors to so many different and exciting projects. We want to shout-out some of the awesome projects we’re sponsoring.
African Women in Tech were born out of a desire to connect, educate and empower women who are determined to advance their tech careers. They are dedicated to providing opportunities and a safe space for women to grow and lead in the tech space. You can read more about their cause here.
Future Meets Present are on a mission to create a sustainable future, one where renewable energy, electrical cars and rooftop gardens are the norm! They’re all about environmental futurism and you can read more about their cause here.
Indie Living creates innovative housing opportunities for adults with Autism. They create beautiful spaces where their tenants can live with independence in safe and supportive community environments. You can read more about their cause here.
Renew Today supports many different initiatives that foster mercy, justice and community. They provide many different services including event planning, marketing, media support, strategy and fundraising. You can read more about their cause here.
Wear Works is a haptic design company that delivers details and nuanced information, through touch. They’re currently working on the Wayband - an innovative product that allows visually impaired people to navigate without the need for any visual or audio cues. You can read more about their cause and product here.
Fiscal sponsorship arrangements can address many legal and tax responsibilities for an organization or project.
There are also many obligations that need to be fulfilled contractually between the Sponsor and the project.
If you’re interested in finding out more, or looking to get your project underway, get in touch!
A special thanks to our friends at Paul Hastings LLP for their help on this piece.