If you’ve been on this site for a bit, there’s one question you might need to answer before most of it makes any sense. So let’s start at the beginning – what is fiscal sponsorship?
Fiscal sponsorship is an umbrella term that includes several different variations, but at its core, it’s legal concept that allows two nonprofit organizations to partner in a very specific way.
The Nonprofit Law Blog defines fiscal sponsorship this way:
Fiscal sponsorship describes a number of varying contractual relationships that have through custom and practice developed between “sponsors” and “projects,” allowing charitable projects to receive deductible contributions.
Legally, fiscal sponsorship allows one organization (that often doesn’t have its own 501(c)(3) status) to use the nonprofit status of another organization – to raise funds that are tax deductible for donors.
That’s the legal definition. But in practice, fiscal sponsorship has come to take on many forms and mean different things to different people — more on that in a bit.
Before we get into that, let’s define a few key terms:
- Fiscal Sponsor, Sponsor or Sponsor Organization – this is the organization providing the tax exempt status, and usually other services as well
- Fiscally-Sponsored Project, or Project – this is the organization or individual that is using the Sponsor’s 501(c)(3) status to accept tax deductible donations
- Fiscal Sponsorship Models – these represent the specific legal forms that fiscal sponsorship can take. There are currently at least seven recognized models (A, B, C, D, E, F and L), although two models – A and C – are the most commonly used
Now, if you’re like most people in nonprofit, you may have heard of a specific instance where fiscal sponsorship was used, but it’s important to note that there are a wide variety of scenarios where it may come into play.
Further, while technically any nonprofit can be a fiscal sponsor, and most people are familiar with a local community foundation or religious institution providing sponsorship to an upstart organization until it receives its own tax exemption, there is a whole group of nonprofits whose missions revolve around being fiscal sponsors.
With that background, let’s dig a little deeper into Models A and C.
In Model A, also known as “comprehensive fiscal sponsorship,” the project does not have its own 501(c)(3) status and legally becomes part of the sponsoring organization. In doing so, the project is treated, legally, as an internal program of the sponsor. As such, the sponsor handles all of the administrative activities of the project, including:
- accounting/financial management
- IRS filings and the annual audit,
- processing donations,
- approving and signing contracts,
- conducting HR activities,
- overseeing corporate insurance,
- and often others…
And those who wish to donate to the project, must make their checks out to the sponsoring organization, who will them allocate them to the project and make them available upon request for approved expenses.
In Model C, usually known as the “grantor-grantee sponsorship” or a “pre-approved grant relationship,” the project does not have its own 501(c)(3) status, but it remains a separate legal entity (either a corporation, an individual or a group of people) and is responsible for its own administration. This relationship hinges on the management of grants and donation funds solicited by the project. Those grants and donations must be directed to the sponsor, which has assumed fiduciary responsibility to manage those funds. That is a critical part of this arrangement – the sponsor cannot simply act as a pass-through for the project – if this happens, both organizations will be running afoul of the IRS. Model C is known as a “pre-approved grant relationship” because the sponsorship can revolve a single grant or donation that the project and sponsor have discussed ahead of time. In other cases, the relationship can be more expansive and include multiple grants and even general fundraising activity.
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