FISCAL SPONSORSHIPS

1.      What is a Fiscal Sponsorship?

Even when a charitable organization is not yet recognized as a tax-exempt entity, fundraising is possible through a “fiscal sponsorship” arrangement.

Fiscal Sponsorships are arrangements where a 501(c)(3) tax-exempt entity (the “Sponsor” or “Fiscal Agent”) agrees to accept donations (“Funds”) on behalf of an entity that is not tax-exempt (the “Project”).  A Fiscal Sponsorship allows a Project not currently recognized as a tax-exempt charity to apply for grants, conduct fundraising activities and accept tax-deductible donations through its Sponsor, as if it were a tax-exempt entity.  As discussed in more detail below, often the Sponsor also provides the Project with administrative support.

While Fiscal Sponsorships are not mentioned anywhere in the Internal Revenue Code, they are universally regarded as lawful arrangements so long as:

1.      the Sponsor exercises supervision and control over funds raised for the Project; i.e., the Sponsor’s board makes an independent determination that by giving funds to the Project, the Sponsor is furthering its own mission.  The Sponsor cannot simply act as a pass through; and

2.      the Funds are used by the Project in a manner that is in fact consistent with, and in furtherance of, the Sponsor’s charitable mission. 

2. Why Have a Fiscal Sponsorship Arrangement?

Fledgling organizations often do not have the infrastructure (staff, accounting and recordkeeping procedures, fundraising capabilities, and other organizational expertise) necessary to ensure their ongoing success as an independent nonprofit organization.  In addition, donors and other funding sources may be wary of funding an organization with no established performance record.  By giving donations directly to a Sponsor for use by the Project, these concerns can be alleviated. Also, having a Sponsor that is a well known and respected organization may lend credibility to your Project, thereby making it easier to attract funding.

3. What Services are Provided by a Fiscal Sponsor?

A Sponsor can provide a wide variety of services for a Project, including:

Ø      providing a Project with the means to accept tax-deductible donations (in which case the Sponsor would issue the required donation substantiation letters, and would report those donations as income on the Sponsor’s IRS Form 990);

Ø      administrative and back office support;

Ø      payroll services;

Ø      fundraising help;

Ø      insurance coverage;

Ø      and much more.

The services to be provided by the Sponsor are usually negotiated beforehand and set forth in a written agreement between the Sponsor and the Project.

4. Finding a Sponsor

A Sponsor may be any 501(c)(3) tax exempt organization (including a church) that is willing to serve as a Sponsor.  More often than not, a Project identifies potential Sponsors by looking at organizations in its geographic area with missions that are consistent with the Project’s mission.  However, a Sponsor can also be a national organization.  Also, there are organizations that are “in the business” of acting as Fiscal Sponsors. 

5. Agreement between the Project and the Sponsor

The terms of a fiscal sponsorship should be in writing and reviewed by an attorney.  While each arrangement will include different issues, there are a number of items that groups considering Fiscal Sponsorship should consider and address in the written agreement.  These include:

Ø      Will the Project be incorporated, or unincorporated? Some Sponsors may only agree to sponsor incorporated entities; others prefer to work with unincorporated groups.

Ø      How does the sponsoring organization plan to maintain the funds?  A separate account is the clearest way to segregate funds on the Sponsor’s books.

Ø      What process will the Sponsor require for release of monies to the program, including the documentation required to confirm that the expenses are legitimate? 

Ø      What type, extent and frequency of reporting will the Sponsor require of the Project?

Ø      Which entity will have primary responsibility for writing grant proposals?  The Sponsor may want control over the process, or prefer that the Project prepare the proposal and submit it to the sponsor for review.

Ø      Will the Sponsor charge an administrative fee?  Such fees are negotiable and usually range between 5% and 10% of donations received on behalf of the Project.

Ø      What other support, if any, will the Sponsor provide the Project, such as allowing the Project to benefit from the Sponsor’s state tax exemption, providing administrative support, office space or technical assistance?  (Any of these may affect the fees charged.)

Ø      Will Project staff be employees of the Project, or employees of the Sponsor?

Ø      What type of supervision will the Sponsor want over the Project’s activities? 

Ø      Who will own any intellectual property that results from the Project’s activities while under the sponsorship arrangement? 

Ø      How long will the relationship last? 

Ø      Will the Project indemnify the Sponsor for any claims related to the Project’s operations?

Ø      Whose insurance will cover the Project’s activities? 

6. Pros and Cons of Fiscal Sponsorship

               Pros

Ø      Fiscal Sponsorship allows a Project to concentrate on building its programs, without having to spend precious resources on administrative and organizational issues.

Ø      Having an established and well-known sponsor can lend credibility to your Project.

Ø      The Sponsor can offer valuable guidance and support to the Project.

Ø      Having a sponsor is particularly good for groups that will only be in existence for a short period of time, and don’t need the “perpetual existence” that comes with incorporating your own entity.

               Cons

Ø      Less autonomy and possible loss of control over the Project.

Ø      Possible loss of identity of the Project.

 For more information about Fiscal Sponsorships, contact the Partnership at (914) 328-0674 or, in NJ, at (973) 968-7043.