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Fiscal Sponsorships


If you are considering testing a charitable project but have not gone through the process to create a recognized non-profit that can receive tax deductible charitable donations, a fiscal sponsorship may be the solution. The links provided throughout this introduction will help you navigate to each relevant section of the page. For more information on the purposes served by creating a fiscal sponsorship see What is a Fiscal Sponsorship? If you determine that a fiscal sponsorship is a desirable route to pursue your charitable project, you must decide the fiscal sponsorship model that will work best. The Types of Fiscal Sponsorship Models further discusses the different forms these agreements may take. The next challenge will be finding an organization that is willing and able to serve as a fiscal sponsor. The Important Fiscal Sponsorship Considerations section will provide information that will help you seek out potential sponsors and determine whether they are a good fit. After you have identified an appropriate sponsor that meets your project’s needs, the next step is to agree on the terms and enter into a fiscal sponsorship agreement. The Elements of a Fiscal Sponsorship Agreement section covers some of the important terms common to such agreements. There are also Sample Fiscal Sponsorship Agreements available, in addition to an interview with an industry practitioner discussing the issues of Why/Who Should Use Fiscal Sponsorship. Finally, you may find a list of general Factors to Consider when and if you decide such an arrangement is the best course of action for you and your mission.

A fiscal sponsorship involves a 501(c)(3) charitable organization as funder, and either a start-up with a charitable purpose or a recently created group or organization as the recipient of funds. The sponsor 501(c)(3) not-for-profit lends its tax-exempt status to a charitable project that does not have the status itself. A fiscal sponsor must keep in mind the requirement that it should only agree to sponsor a group or organization if the charitable project furthers its own charitable purposes. Through this agreement, the budding charitable project can conduct fundraising activities and solicit contributions through the fiscal sponsor. However, both parties must understand and agree that the fiscal sponsor will maintain control of the funds generated by the organization or group it is sponsoring. For more information, please view the video Venable LLP: Fiscal Sponsorships: A Review of Legal and Practical Issues on YouTube which gives a comprehensive overview on the important considerations and requirements of fiscal sponsorships. Accesibile transcript of fiscal sponsorship video here (PDF).

In addition to sponsoring pre-existing charitable organizations that share a similar purpose, fiscal sponsorships may also serve as a path to inception. More specifically, it offers an unorganized project an opportunity to gauge how successful its proposed operations might be without having to take on the expense and responsibility of forming its own corporation. If the program is successful, it may then wish to organize as a separate entity.

There are two different methods a fiscal sponsor can use when entering into a sponsorship: the fiscal sponsor could conduct the sponsored project directly by using its own employees, volunteers, and directly paying expenses or through the “preapproved grant” model. The most common method is the “preapproved grant” model where the fiscal sponsor accepts donations for the sponsored project and makes periodic grants to the sponsored project in response to specific funding requests. The NYLPI Fiscal Sponsorship Guide (PDF) states that the requirement for this model is that the sponsored project must report back to the fiscal sponsor periodically about the use of the granted funds. One important aspect to keep in mind concerning the preapproved grant model is the fiscal sponsor cannot purely act as a channel from which the sponsored project solicits contributions from donors. See the NYLPI Fiscal Sponsorship Guide (PDF). If this occurs, the result could cause an individual or corporation making a donation to the fiscal sponsor in support of the sponsored project to lose the ability to claim a charitable income-tax deduction for federal tax purposes. Although these adverse tax consequences would directly affect the donors and not the sponsored project itself, this would result in donors viewing the sponsored project in a negative light, which could hinder the fundraising process.

Please see A Board's Guide to Fiscal Sponsorship which is a website created by not-for-profits acting as fiscal sponsors to inform others of the benefits, drawbacks, and requirements of acting as a fiscal sponsor.

The organizational status of the sponsored project is important – the sponsored project cannot raise tax-deductible funds independently if it is not organized.

These are questions to consider regarding the current status of the charitable project when it is beginning the process of entering into a fiscal sponsorship agreement.

  • Will the charitable project be legally incorporated?

This is an important question because in order to be considered for tax-exemption status as a charitable organization, the charitable project must be legally incorporated to do so. This does not mean that the project cannot enter into a fiscal sponsorship while it is unincorporated, however, it is something to keep in mind during the process. This is another benefit to using a fiscal sponsorship because it allows the charitable project to focus on applying for tax-exempt status of its own while still generating funds through the fiscal sponsor. See page 7 of the NYLPI Fiscal Sponsorship Guide (PDF) for more information on how to incorporate and seek tax-emption status as well as the forms needed to be filed.

  • What model will be used to sponsor the charitable project?

Please see the Types of Fiscal Sponsorship Models section for information about which model will best serve your charitable project.

It is the fiscal sponsor’s responsibility to collect and maintain the funds, which should remain segregated.

Consider these questions when choosing a fiscal sponsor as it relates to the sponsored funds:

  • Will project-specific funds be kept in a separate bank account by the Fiscal Sponsor?
  • Will any or all project funds be commingled with the Fiscal Sponsor’s general assets?
  • Will intangible property (for example, copyrighted works created by managers of the charitable project) and charitable project results be owned by the Fiscal Sponsor or by the managers of the charitable project?

These questions highlight the importance of choosing a fiscal sponsor who will best manage and protect the charitable project’s funds. It is ultimately the responsibility of the board of directors of the sponsoring organization to maintain complete control of the project’s funds and ensure they are being properly accounted for and are not being used to supplement the sponsoring organization’s cash flow. To avoid commingling funds, a best practice would be holding all fiscally sponsored project funds in a separate bank account which allows the sponsoring organization to keep the project funds separate from its own assets. One way to do this is by keeping clear operational records to supplement and support financial documents. For a more complete explanation of the importance of keeping funds separate please see A Board's Guide to Fiscal Sponsorship (PDF) which goes into further detail and gives an example balance sheet which showcases that one of the simplest checks for this model that a board can exercise is ensuring that fiscally sponsored assets and liabilities zero out.

The method for dispersing funds to the sponsored project must be predetermined – you may also require periodic accounting.

It is important to answer the following questions as they related to the sponsored project receiving funds from the fiscal sponsor:

  • Will the managers of the charitable project be required to request a new grant for each payment of funds from the Fiscal Sponsor?
  • How much detail is necessary in reporting/describing the need for cash to the Fiscal Sponsor?

These questions assume that the preapproved grant model is being used and call attention to the ways in which a charitable project will request funds from its fiscal sponsor. In the typical fiscal sponsorship arrangement, the sponsor accepts donations for the project and makes periodic grants to them in response to specific funding requests. Another thing to keep in mind is that the charitable project is required to report back to the Fiscal Sponsor periodically about the use of the granted funds.

The reporting system may be included in the agreement.

Questions to consider are:

  • How often will managers of the charitable project be required to report and update results to the Fiscal Sponsor?
  • What level of detail will be required in reporting?
  • What are the consequences for failure to report?

Fundraising is critical for any charitable project to be successful.

An important aspect to keep in mind when creating the fiscal sponsorship agreement is who will be responsible for fundraising. Either the fiscal sponsor or the charitable project can manage it, however, it is important to agree beforehand so there are no miscommunications.

  • Which party will have responsibility to fundraise?
  • Which party will bear the burden of writing grant proposals?

Fiscal sponsors may provide services to the project beyond merely holding funds/lending its tax-exempt status.

Besides sponsorship, what other services will be performed by the Fiscal Sponsor for the managers of the charitable project? The Fiscal Sponsor may also provide the following services to a Sponsored Project:

  • Financial services (e.g., accounting/bookkeeping, tax filings, etc.);
  • Administrative/human resources services (e.g., staff, payroll processing, employee benefits, training services, insurance, legal advice, etc.);
  • Office space;
  • Publicity; and
  • Capacity building (e.g., assist a Sponsored Project in developing the necessary organizational capabilities to ultimately become independent).

For more information on types of services offered by a fiscal sponsor please see the NYLPI Fiscal Sponsorship Guide. (PDF)

Fiscal sponsors often charge administrative/maintenance fees – the amount or method of calculating must be included in the agreement.

A Fiscal Sponsor typically charges a monthly or annual administrative fee based on the amount of donations received to support the Sponsored Project. This fee is often calculated as a percentage of donations received (generally no higher than 10%). A Fiscal Sponsor may also charge an initial “set-up” or due diligence fee.

  • How will the Fiscal Sponsor charge the managers of the charitable project for the sponsorship?
    • Flat fee, budget based, hourly?

The agreement must reflect the duration of the fiscal sponsorship arrangement.

These questions are important to keep in mind as you enter the fiscal sponsorship agreement.

  • How long will the fiscal sponsorship last?
  • How will the fiscal sponsorship be unwound or dissolved?

The following link provides an example of fiscal sponsorship agreement (PDF).

Below is an excerpt from an interview with David Craft who is a staff attorney at the Community Economic Development Clinic through the Justice Center at Albany Law School. The clinic aims to assist not-for-profits, small businesses, and community groups on a variety of regulatory compliance and transactional matters, including entity formation, governance, contracts, leasing, and loan/related financial closings.

David Craft Interview

Q: Are there certain not-for-profits that you would recommend start with a fiscal sponsorship, more so than others, or do you think it's a good route for any new not-for-profit to take?

A: I think all new not-for-profits, especially ones that don't have a well-developed business plan, should all do fiscal sponsorships. Even though it is for a charitable or social purpose it's still a business at the end of the day and you have revenue and expenses you have to keep track of, and how are you going to get your revenue, who are you paying etc. Having a fiscal sponsorship in the beginning allows a project to get off the ground without having to worry so much about the tax-exempt qualifications, generating revenue, and other issues associated with budding not-for-profits.

See David Craft Interview for factors to consider when starting a fiscal sponsorship agreement.

David Craft lists these important factors for both the fiscal sponsor and the sponsored organization to keep in mind when drafting a fiscal sponsorship agreement: