Click here to get this post in PDF
Fiscal sponsorship is an option that is available to individuals, groups, or businesses who want to attract a fiscal sponsorship fund without starting a nonprofit. This allows an individual such as an artist, to fund the creation of a painting. But how does this work?
Fiscal sponsorship is a very important alternative to starting a nonprofit that offer private and public efficiencies through a shared administration. However, if it is done incorrectly, it may end up with an individual or for-profit company deriving a private benefit from charitable contributions inappropriately. This can happen if the fiscal sponsor acts as a conduit for the contributions to flow to the company, without exercising the necessary control and oversight.
What is a Fiscal Sponsorship Fund?
A fiscal sponsorship fund is the pool of all the funds collected by the tax-exempt nonprofit organization for the particular charitable project they are associated with. Fiscal sponsorship refers to the arrangement that a nonprofit organization has with a charitable project. In this situation, the nonprofit organization has been granted a 501 (c)(3) tax-exempt status, while the charitable project hasn’t been granted the same 501 (c)(3) tax-exempt status. The charitable project must be new and supports the same cause as the nonprofit organization supports.
Their arrangement allows the tax-exempt nonprofit (the sponsor) to accept funds on the charitable project’s behalf. The sponsor then controls the project and becomes responsible for the allocation of the funds. The sponsor must make sure that the collected funds are spent to achieve the project’s goals.
How Fiscal Sponsorship Funding Works
The tax-exempt fiscal sponsor receives all the donations to fiscally sponsored projects. Typically, the fiscal sponsor is a public charity and is qualified to receive charitable contributions deductible to the donor. These donations are then treated as “restricted funds” to further the project’s charitable purpose.
The fiscal sponsor then decides how to use the funds. The sponsor may not cede the control and decision-making authority over the funds to the project leaders, but the sponsor can always delegate the management of the funds to contractors, employees, or volunteers of the fiscal sponsor. This is what we call comprehensive fiscal sponsorship.
What are the forms of Fiscal Sponsorship?
Fiscal sponsorship isn’t defined by law, so the relationship between a sponsor 501 (c)(3) organization and the charity project may take many forms. The most common approach involves the charitable project becoming an internal operation, program, or fund of the fiscal sponsor. Other approaches involve the fiscal sponsor entering into an independent contractor agreement with the charitable project, or the fiscal sponsor developing a pre-arranged grant relationship with the charitable project.
For example, the pre-arranged relationship may be fitting if the fiscal sponsorship agreement is only temporary. This is when the charitable project submits its own application for tax exemption but hasn’t been granted the 501 (c)(3) tax-exempt status yet.
One of the considerations with any fiscal sponsorship relationship is that the fiscal sponsor should maintain discretion and control over the use of the fiscal sponsorship fund. However, the charitable project may name advisors to give input to the fiscal sponsor on how to spend the funds.
What Are the Risks of Fiscal Sponsorship Funding?
There are nonprofit organizations that offer fiscal sponsorship as a way to generate additional revenue without managing or overseeing their projects. In a comprehensive fiscal sponsorship setting, the fiscal sponsor must have the right resources and infrastructure to operate the project. This is something people would expect the sponsor to have. Along with this, people also expect the delegation of duties to follow only after sufficient due diligence of individuals and their planned activities.
The fiscal sponsor must ensure that it has the policies that will guide the project leaders’ actions and maintain oversight of the operations. This will ensure the protection of the charitable assets.
What happens if a fiscal sponsor neglects its responsibilities?
If the fiscal sponsor doesn’t perform its job and neglects its responsibilities, the project will still be operational. However, its applicable laws will be inconsistent and will render the fiscal sponsor incompetent. This scenario will haunt the sponsor and its leaders if the project’s activities:
- Fall outside of the sponsor’s stated purpose in its governing documents
- Result in an unexpected liability, such as stemming from a penalty, fine, or a lawsuit
- Attract negative publicity
- Trigger additional registration, reporting, or licensing requirements.
If the fiscal sponsor consolidates all its projects in the information returns and other reports, then the oversight of the project’s activities will become more challenging. While the responsibility is on the fiscal sponsor to make sure to manage its comprehensively sponsored projects properly, it will compromise the additional layer of protection against misuse of charitable assets if the fiscal sponsor doesn’t keep proper records. The fiscal sponsor may end up losing a project. The project just becomes hidden among all of the other projects.
In the end, a fiscal sponsor who doesn’t have enough capacity to perform the tasks may end up jeopardizing the assets raised for each of its programs. The sponsor may misdirect or misuse those assets to pay for general administrative costs and inappropriate expenses instead of spending them to further the project’s charitable purpose.
How to Choose a Fiscal Sponsor
If you’re considering starting a charitable project, raising funds through fiscal sponsorship would be a good option. However, choosing a fiscal sponsor isn’t as simple as you think. First, you need to have a relationship that will help you meet the given IRS criteria for fiscal sponsorships.
When choosing a fiscal sponsor, the most important thing that you need to consider is their vision. Just because raising funds will be easier doesn’t mean that you have to compromise who or what you’re supporting or fighting for. Make sure that the fiscal sponsor you’re choosing has the same vision as your charitable project. If your chosen fiscal sponsor supports a completely different vision from what you are supporting, then your relationship isn’t going to be strong.
You may also like: How to Build a Crowdfunding Business
