Fiscal sponsorship


Fiscal sponsorship refers to the practice of non-profit organizations offering their legal and tax-exempt status to groups—typically projects—engaged in activities related to the sponsoring organization's mission. It typically involves a fee-based contractual arrangement between a project and an established non-profit.

Advantages of fiscal sponsorship

Fiscal sponsorship can enable projects to share a common administrative platform with a larger organization, thus increasing efficiency. In addition to legal status, sponsors can provide payroll, employee benefits, office space, publicity, fundraising assistance, and training services, sparing projects the necessity of developing these resources and allowing them to focus on programmatic activities.
Projects may seek fiscal sponsorship for various reasons: an anticipated short lifespan, improved access to funding, increased credibility, and low-cost financial and administrative services. Fiscal sponsors can also assist nascent projects in developing the necessary organizational capabilities to eventually spin off as independent non-profits.

Risks

Fiscal sponsorship arrangements, if not handled carefully, can be vulnerable to the criticism that they serve merely as conduits for the transmission of deductible donations to entities not qualified to receive them.
However, in the last decade, the phenomenon of fiscal sponsorship has become a common ancillary activity for public charities involved in human service, environmental, and artistic endeavors. Non-profit institutions solely devoted to fiscal sponsorship have sprung up across the
country, ranging from documentary film sponsors to public health research groups to separate corporations spun off by community foundations.
Nevertheless, it is important for both sponsors and projects to understand the exact nature of their relationship.
The benefits of immediate tax-exempt status and administrative support must be weighed against the lack of autonomy and fees typically charged by the sponsor.

Models of fiscal sponsorship

Fiscal sponsorship is practiced with many different models, which offer different benefits.

Comprehensive fiscal sponsorship distinctions

In a comprehensive fiscal sponsorship relationship, the fiscally-sponsored project
becomes a program of the fiscal sponsor,, and is a fully integrated part of the fiscal sponsor who maintains
all legal and fiduciary responsibility for the sponsored project, its employees, and
activities. Any work product is available to the public or to the charitable sector.
The fiscal sponsor assures funders that the purposes and any restrictions of all grants
and/or contributions will be met.

Pre-approved grant relationship fiscal sponsorship distinctions

In a pre-approved grant relationship sponsorship relationship, the fiscally-sponsored project does not become a program belonging to the sponsor, but is a separate entity responsible
for managing its own tax reporting and liability issues. In addition, the sponsor
does not necessarily maintain ownership of any part of the results of the
project's work. Ownership rights should be addressed in the fiscal sponsor
agreement, and could potentially result in some type of joint ownership. The
sponsor simply assures itself that the project will use the grant funds received
to accomplish the ends described in the grant proposal.

Table comparing the models

Basic CharacteristicsIs project a separate legal entity?Relationship is...Charitable donations belong to...Liability of sponsor to 3rd partiesOwnership of resultPayments shown on IRS returns filed by SponsorPayments shown on IRS returns filed by ProjectComments
DIRECT PROJECTProject belongs to sponsor and is implemented by its employees and volunteers.NoEmployer- EmployeeSponsorTotal liabilities for acts of employees.Sponsor990, payroll tax returnsIndividual 1040'sLegally, the project is no different from any other activity carried on by the sponsor directly.
INDEPENDENT CONTRACTOR PROJECTProject belongs to sponsor but is conducted by separate entity under contract.YesProject- ContractSponsorVaries, may be partial or total.Sponsor usually990, 1099 if personDepends on legal status.Appropriate where a project is an integral part of the sponsor's work, but may be legally performed by an independent contractor.
PRE-APPROVED GRANT RELATIONSHIPProject applies to sponsor for one or a series of grants, sponsor funds the project only to the extent that money is received from donors.YesGrantor- GranteeSponsorSelection and payment of grantee, plus terms set by funding source.Project usually990Depends on legal status.Used by a non-501 project, in order to raise tax deductible support from donors, private foundation or government grants.
GROUP EXEMPTIONSponsor obtains federal group tax exemption, confers 501 status on subordinate projects.YesSubordinate- AffiliateProjectOnly as provided in affiliation agreement.ProjectAnnual listing of organizations, no financial information.990, separate or group returnProject gets 501 status without separate application to IRS; must be subject to general supervision or control of sponsor.
SUPPORTING ORGANIZATIONProject gets its own 501 exemption, but public charity status is based on support of sponsor's purposes.YesVariesProject-Project-990Project must apply to IRS for 501 status, but can be a public charity even with only one donor.
TECHNICAL ASSISTANCEProject has its own 501 exemption but needs help with bookkeeping, tax returns, payroll, management, etc.YesManagement- ContractProjectOnly as provided in the contract.Project990, if fee charged990, if fee paidSponsor provides financial management to project, but all funds are raised and spent in the name of the project
WHOLLY OWNED LLCProject is incorporated as a limited-liability company and wholly owned by a sponsor 501Yesparent-subsidiarysponsorlimited liabilitysponsorYes — financial activity of project is included on sponsor 990LLC is "disregarded' and files no tax return of its ownProvides some limit to sponsor's liability despite owning the project. Easy to spin off or sell an "incubated" project.