How Fiscal Sponsorship Works and What You Need to Know

Fiscal sponsorship offers a structured solution for charitable projects seeking to attract tax-deductible donations without establishing their own independent 501(c)(3) nonprofit status. This arrangement allows a project to operate under the legal and tax-exempt umbrella of an existing nonprofit organization, known as the fiscal sponsor. The fundamental purpose is to enable projects to access funding that requires 501(c)(3) status, such as grants from foundations or tax-deductible contributions from individual donors.

The fiscal sponsor assumes legal and financial responsibility for the sponsored project, ensuring funds are used for charitable purposes aligned with its own mission. This is beneficial for projects that are temporary, small-scale, or in early stages, as obtaining 501(c)(3) status is a lengthy and resource-intensive process.

Models of Fiscal Sponsorship

Fiscal sponsorship arrangements are structured in various ways, often categorized into different models that define the legal and operational relationship between the sponsor and the project. These models dictate how funds flow, who holds legal responsibility, and the degree of integration between the two entities. Several common models are widely recognized.

Model A: Comprehensive Sponsorship

Model A, often termed “Direct Project” or “Comprehensive Sponsorship,” integrates the sponsored project directly into the fiscal sponsor’s operations. The project does not maintain a separate legal identity; instead, it becomes an internal program of the fiscal sponsor. The fiscal sponsor holds all legal and fiduciary responsibility, directly receiving donations, paying expenses, and managing all financial and administrative aspects, including payroll for project staff.

Model B: Independent Contractor Project

Model B, known as the “Independent Contractor Project,” involves the project’s work being carried out by a separate legal entity or individual under contract with the fiscal sponsor. The fiscal sponsor retains control and ownership of the project’s results. It pays the independent contractor with donated funds, and the contractor is responsible for their own income and expenses. This model is suitable for short-term projects where personnel operate on an independent contract basis.

Model C: Pre-Approved Grant Relationship

Model C, or the “Pre-Approved Grant Relationship,” establishes a grantor-grantee dynamic between the fiscal sponsor and the sponsored project. In this model, the project typically exists as a separate legal entity, such as an LLC or an unincorporated association. The fiscal sponsor receives donations and grants on behalf of the project but then regrants these funds, maintaining discretion and control over their use to ensure alignment with charitable purposes. The project maintains more autonomy over its day-to-day operations and financial record-keeping, often being responsible for its own tax reporting if incorporated.

Other models exist, such as Model L (LLC) where the project is structured as a single-member limited liability company owned by the fiscal sponsor, or Model D (Group Exemption) which allows separate legal entities to operate under the fiscal sponsor’s group 501(c)(3) status. Model A and C are the most frequently utilized.

Responsibilities of the Sponsored Project and Fiscal Sponsor

Once a fiscal sponsorship arrangement is in place, both the sponsored project and the fiscal sponsor assume distinct operational duties to ensure compliance and effective program delivery. This collaboration requires clear communication and adherence to established guidelines.

Sponsored Project Responsibilities

The sponsored project is responsible for the day-to-day management and execution of its programmatic activities. This includes developing and delivering charitable programs, managing project staff and volunteers, and ensuring all activities align with the project’s mission and the fiscal sponsor’s broader charitable purpose. Projects are tasked with actively fundraising to support their work, adhering to the fiscal sponsor’s policies regarding fundraising practices. They must also provide regular updates and reports to the fiscal sponsor on program progress, financial expenditures, and any significant developments.

Fiscal Sponsor Responsibilities

The fiscal sponsor carries the legal and fiduciary responsibilities. A duty is maintaining its 501(c)(3) tax-exempt status with the IRS and ensuring all activities conducted under its umbrella, including those of the sponsored project, comply with federal and state laws. This includes rigorous financial oversight, proper accounting for all funds received and disbursed, and ensuring donor restrictions are honored. The fiscal sponsor is responsible for issuing tax-deductible receipts to donors, as contributions are made in the sponsor’s name. They also provide administrative oversight, which may include managing payroll, benefits, and insurance for project personnel, depending on the sponsorship model.

The fiscal sponsor must exercise “complete discretion and control” over funds received on behalf of the project, as required by the IRS, to avoid being considered a “pass-through” entity. This control ensures funds are used exclusively for charitable purposes consistent with the sponsor’s mission. Regular financial review and auditing of the project’s activities are part of this oversight, with the sponsor often requiring periodic financial reports from the project. The sponsor’s board of directors maintains legal oversight and fiduciary responsibility for all sponsored projects, retaining final authority.

Initiating a Fiscal Sponsorship Arrangement

Entering into a fiscal sponsorship arrangement involves a structured process, beginning with thorough preparation by the project seeking sponsorship and culminating in a formal agreement. Projects need to gather specific information to demonstrate their readiness and alignment with a potential fiscal sponsor’s mission.

Project Preparation

Before approaching a sponsor, a project should have a clear mission statement, a detailed project plan outlining its activities and goals, and a comprehensive budget. Understanding the project’s target audience and developing a fundraising strategy are important preparatory steps. When identifying potential fiscal sponsors, projects should consider mission alignment, the sponsor’s experience with similar initiatives, and the administrative fees charged, which typically range from 5% to 15% of funds received. Compatibility in communication style, reporting expectations, and administrative support are also important considerations.

Application and Due Diligence

The application process generally involves submitting a project proposal, the detailed budget, and often resumes of key project personnel. Many fiscal sponsors conduct a due diligence review, which may include interviews, to assess the project’s viability and its alignment with the sponsor’s charitable purposes. This ensures that sponsoring the project furthers the fiscal sponsor’s own mission, a requirement for lawful arrangements. The timeline for approval can vary depending on the sponsor’s internal processes.

Formal Agreement

Once a suitable fiscal sponsor is identified and the project is approved, a formal fiscal sponsorship agreement is drafted. This legally binding document outlines the terms of the relationship. Key components of the agreement include the chosen model of fiscal sponsorship, the scope of services the sponsor will provide, and the financial terms, such as administrative fees. The agreement also addresses the term of the arrangement, conditions for termination, and provisions for handling remaining funds or intellectual property upon separation.

Financial Management and Oversight

Financial management under a fiscal sponsorship is a structured process designed to ensure accountability, transparency, and compliance with tax regulations. The fiscal sponsor plays a central role in handling all financial transactions related to the sponsored project.

Receiving Donations

Donations intended for the sponsored project are received directly by the fiscal sponsor. These funds are typically deposited into the sponsor’s bank accounts, often tracked separately within the sponsor’s accounting system as restricted funds for the project. The fiscal sponsor is responsible for issuing official tax-deductible receipts to donors, as the contribution is legally made to the 501(c)(3) organization. This centralized processing ensures proper acknowledgment and compliance with IRS guidelines for charitable contributions.

Disbursing Funds

The process for disbursing funds from the fiscal sponsor to the sponsored project for its activities is governed by the fiscal sponsorship agreement. Projects typically submit requests for funds, often accompanied by invoices or documentation of expenses. The fiscal sponsor reviews and approves these requests based on the agreed-upon budget and charitable purpose. The sponsor then disburses the funds, either directly paying vendors, contractors, or employees of the project (common in Model A), or regranting funds to the project (in Model C).

Record Keeping and Reporting

The fiscal sponsor maintains comprehensive financial records for the sponsored project, ensuring accurate accounting and adherence to generally accepted accounting principles (GAAP). This includes tracking all revenues and expenditures, managing payroll (if applicable), and ensuring all disbursements comply with donor restrictions and IRS regulations. The sponsored project is required to provide regular financial updates and expenditure reports to the fiscal sponsor, allowing the sponsor to fulfill its oversight responsibilities.

Ultimately, the fiscal sponsor is responsible for the preparation and filing of its annual tax returns, specifically IRS Form 990. The financial activities of the sponsored project are consolidated and reported as part of the fiscal sponsor’s Form 990, as the project operates under the sponsor’s tax-exempt status. The sponsor’s overall financial health and charitable activities, including those of its sponsored projects, are reflected in this public document.