Nonprofit organizations often have more charitable activities to accomplish than they have time or resources to spend. Conversely, many unincorporated organizations or for-profit entities have the enthusiasm and resources to accomplish charitable purposes but lack the Section 501(c)(3) status that would exempt them from taxes incurred related to those activities.

Fiscal sponsorship can provide the solution to both problems. The processes required to obtain Section 501(c)(3) status can be expensive and time consuming for new nonprofits. But through fiscal sponsorship, nonprofits can support individuals and nonexempt organizations to further exempt charitable purposes. Fiscal sponsors share their tax-exempt status with non-exempt organizations to allow more people to access the benefits of the philanthropic community and to reduce barriers to entry.

Most commonly, fiscal sponsorships are structured so that a public charity acts as the fiscal sponsor (Sponsor) and provides aid to a new (not 501(c)(3) exempt) charitable project (Project). The Sponsor might provide technical know-how, administrative resources, or funding to support the Project. If the Sponsor receives donations that it regrants to the Project, the Sponsor must maintain complete discretion and control over the use of the funds in order to avoid jeopardizing the donation’s tax exemption.¹ The Sponsor must also ensure the payments to the new Project further the charity’s exempt purpose.

The Models

Fiscal sponsorship experts have successfully structured fiscal sponsorships in a variety of ways.² The best structure depends on the project’s individual circumstances. Often the main question when determining how to structure the Sponsor-Project relationship is how much control each party will have over the activities and result. This article reviews some of those structures.

Model A: The “Direct Project” Model³

One of the most common ways to structure a fiscal sponsorship to give the Sponsor maximum control is the Direct Project Model. In this model, the Project is internal to the Sponsor’s tax-exempt entity. The Project organizers may have the energy to accomplish a charitable project, but, for whatever reason, they do not want to form their own Section 501(c)(3) entity immediately. In Model A, the Project organizers approach a Sponsor with their idea, the Sponsor does due diligence to ensure the Project furthers its exempt purposes, and the Project organizers become the Sponsor’s direct employees or volunteers.⁴ The Sponsor is responsible for all management of the Project: executing the Project, insuring the Project, funding the Project. It is also responsible for any liabilities or taxes the Project might incur. This Model is the most labor intensive for the Sponsor, but it also provides the Sponsor with the most direct influence over the Project’s activities. It also leaves open the possibility of spinning the Project into its own Section 501(c)(3) organization once the Project can stand on its own.

Model C: The “Preapproved Grant Relationship” Model

In another common structure, the Sponsor indirectly furthers its exempt purposes through grants to a Project entity. In this model, the Sponsor is and remains a separate legal entity from the Project entity. The Sponsor and Project entity enter into a grant agreement that preapproves the entity as a grantee. The Sponsor then receives funding from outside sources and regrants those funds to the Project entity in accordance with the terms of the grant agreement. The Sponsor has less control over the Project, but it also bears fewer Project liabilities. The Project entity is responsible for the day-to-day needs like Project activities, employment matters, contracting, risk-management, legal obligations, and insurance. The Sponsor has a duty to monitor the Project and ensure the funds are spent in accordance with the Sponsor’s charitable purposes.

Other Models

Models A and C are the most often utilized forms of fiscal sponsorship, but others exist as well.

• Model D—the “Group Exemption” Model. A sponsor shares its tax-exempt status with subordinate Project entities by obtaining a “group exemption letter” from the IRS. The subordinate entities avoid the lengthy 501(c)(3) application process, but they still fundraise and receive donations in their own name.
• Model F—the “Technical Assistance” Model. The Sponsor only provides the Project practical administrative help like bookkeeping, accounting, or payroll services.
• Model L—the “Single-Member LLC” Model. The Project is a single-member LLC where the Sponsor is the single member. The IRS considers the LLC’s tax status to be that of its single member: tax-exempt. Accordingly, the LLC can receive donations in its own name. Alternatively, the Sponsor can receive donations in its own name, regranting them to the LLC or even making capital contributions to the LLC. Throughout, the LLC maintains administrative independence, and the Sponsor is protected from many Project liabilities.

Risks of Fiscal Sponsorship

Fiscal sponsorship has received criticism as well. Recently, members of Congress have expressed concern that tax-exempt entities are using fiscal sponsorship structures to fund entities with ties to foreign countries or illegal activities. The risk for Sponsors is that they often materially fund entities they have little control over, and certain movements in Congress aim at attributing actions of individual subordinates to entire exempt entities.

Likewise, if a Sponsor fails to oversee and control the Project, the relationship could be seen as nothing more than a series of pass-through or conduit transactions, which jeopardizes the Sponsor’s tax-exempt status. Also, by connecting itself to a Project, the Sponsor puts its reputation on the line.

Finally, sponsorship can result in additional operational, administrative, and financial responsibilities on the Sponsor’s staff and systems. Organizations should consider these risks and consult professionals when evaluating whether to enter into a fiscal sponsorship relationship.

Conclusion

Though some risks exist, fiscal sponsorship is an effective and increasingly common way for nonprofit organizations to enhance their impact by assisting others to further the nonprofit’s charitable purposes.