Out-of-the-Box Fundraising: The Benefits of Being a Fiscal Sponsor
Many event organizers, nonprofits pending 501(c)(3) status, or individuals benefiting from a specific social cause seek a fiscal sponsor, such as a nonprofit, to manage all sponsorships received through corporations and possibly other funding. The fiscal sponsor’s primary duties are receiving funds, bookkeeping, and administration, paying vendors, and monitoring expenses. Nonprofits may charge a fee for this service, have exposure to new constituents, and expand their network; all of which are beneficial to the organization’s fundraising efforts.
Fiscal Sponsorship: A Balanced Overview
A person, group, or business may obtain philanthropic donations through fiscal sponsorship without having to establish a charity. For example, it may enable an individual artist to fund the construction of a mural, a group to launch a crowdfunding campaign for pediatric cancer research or a company to make and distribute products to areas affected by recent natural disasters.
Fiscal sponsorship, when done correctly, is a valuable alternative to forming a charity, resulting in private and public efficiencies because of shared administration and fewer charities requiring fiduciary and regulatory oversight.
When done incorrectly, however, fiscal sponsorship can lead to an individual or for-profit company receiving an improper private advantage from charity contributions. This can happen if the fiscal sponsor acts as a conduit for donations to flow to the individual or company without exercising the necessary control and monitoring.
How Fiscal Sponsorship Works
Donations to fiscally sponsored initiatives go to a tax-exempt nonprofit fiscal sponsor. The fiscal sponsor is often a public charity exempt under Section 501(c)(3) of the Internal Revenue Code and a qualified beneficiary of tax-deductible charitable contributions. Donations made to a specific project are treated as limited (restricted) funds dedicated to furthering the project’s charity goals.
After that, the fiscal sponsor must select how to spend the monies. It cannot hand over all management and decision-making authority over the funds to the project executives. However, the fiscal sponsor may delegate money administration to specified fiscal sponsor employees, contractors, or volunteers (comprehensive fiscal sponsorship).
Comprehensive Fiscal Sponsorship
In the comprehensive model, the party entering into a fiscal sponsorship agreement with the fiscal sponsor generally gives up all ownership and control of the project to the sponsor, with only the right to enforce, amend, or terminate the agreement and have the project transferred to another qualified fiscal sponsor remaining. In contrast to the fiscal sponsor, the other party to the arrangement is generally not properly registered to solicit charity funds or assets and is not a tax-exempt entity allowed to directly collect deductible charitable donations. Most of the time, it’s only a steering committee with little to no action of its own, which serves to mitigate any risk that its members would otherwise bear.
Individuals linked with the opposite party to the agreement work as employees, volunteers, or other agents of the fiscal sponsor when working on the fiscally sponsored project. As a result, if they are generating funds for the project, they are doing so on behalf of the fiscal sponsor and acting as agents for the fiscal sponsor. Similarly, if they oversee the project’s activities and affairs, they are acting as agents of the fiscal sponsor, and the sponsor’s insurance may cover them.
The assets and liabilities of the project are the fiscal sponsor’s assets and liabilities in the comprehensive model. Because the initiative supports the sponsor’s charity objective, the fiscal sponsor takes on the project and its risks.
Pre-Approved Grant Relationship
In the pre-approved grant relationship model, the party engaging in the fiscal sponsorship agreement with the fiscal sponsor is the sponsor’s grantee. Unlike the comprehensive model, the grantee owns the project rather than the fiscal sponsor. As a result, the grantee owns the project’s assets and liabilities and is responsible for its tax and reporting duties.
When working on a project, personnel linked with the grantee typically act as agents for the grantee. However, when they raise funds for the project, they act as agents for the fiscal sponsor. Because the grantee lacks the tax status to allow for deductible donations or private foundation qualifying payouts, the fiscal sponsor must continue the fundraising.
The key to this strategy is to make sure the fiscal sponsor isn’t just a conduit for donors and foundations to get money and grants to the grantee of the fiscal sponsor. While the fiscal sponsor can accept contributions and grants with a purpose restriction on how they are used, the fiscal sponsor must have ultimate discretion and control over whether to use such contributions and grants themselves or re-grant them to another entity, including the grantee whose representatives may have raised such funds in their capacity as fiscal sponsor’s agents.
Fiscal Sponsorship Administration Fee
The fiscal sponsor often keeps a portion of the funds raised to further the project’s goal as an administrative fee. However, the fiscal sponsor must consider the enormous administrative obligations and expenditures and the hazards that come with serving as a project’s fiscal sponsor. Management and/or administration of charitable solicitations, donations, grants, human resources (including payroll and benefits), volunteers, financial reporting, audits, government filing requirements, and suitable risk management tools are common difficulties for complete fiscal sponsors (e.g., insurance, legal counsel).
The costs of fiscally sponsoring a project are frequently higher than the administrative charge, especially for smaller enterprises. This may be permitted if the fiscal sponsor considers the project’s usefulness in furthering the sponsor’s objective justifies such a high net cost. However, whether the administrative charge covers the additional expenditures, the fiscal sponsor must manage and oversee the project properly.
Where Things Go Wrong
Some Nonprofits use fiscal sponsorship to supplement their income without properly monitoring or overseeing their projects. In a comprehensive fiscal sponsorship, the fiscal sponsor should have the infrastructure and resources one reasonably anticipates from the project’s legal operator. In line with this expectation, the fiscal sponsor’s delegation of responsibilities to project leaders should occur only after a thorough investigation of such individuals and their intended activities. Furthermore, the fiscal sponsor should guarantee that it has procedures to direct project leaders’ decisions, maintain operational control, and preserve nonprofit assets.
When a fiscal sponsor fails to fulfill his or her obligations, a project may be run in a way that is illegal and/or beyond the sponsor’s capabilities. In addition, if the project’s activities (1) result in an unexpected liability, such as a lawsuit, penalty, or fine; (2) trigger additional registration, licensing, or reporting requirements; (3) fall outside of the sponsor’s stated purpose in its governing documents; or (4) attract significant negative publicity, this scenario can quickly become a nightmare for a fiscal sponsor and its leaders.
When a sponsor consolidates all of its initiatives in its information returns and other reports, it is more difficult for regulators and, indirectly, donors to monitor a project’s actions.
As a result, while it is the fiscal sponsor’s responsibility to properly manage its comprehensively sponsored projects, the additional layer of protection against charitable asset misuse can be jeopardized if the sponsor fails to keep proper records and the project becomes “hidden” among the sponsor’s other projects.
Conclusion
A fiscal sponsor thoroughly supported (Model A) project is generally no different from any other nonprofit’s internal program, except for the parties’ rights to transfer the program to another eligible successor nonprofit. A pre-approved grantee of a fiscal sponsor housing the sponsored (Model C) project is generally no different from a grantee of any nonprofit that elects to grant funds to an individual or nonexempt entity, which is a permissible form of grant-making for any charity as long as appropriate restrictions on use are in place.
Learn more about classic and innovative fundraising by attending the June 20 Sunshine Certificate in Nonprofit Management class on Campaigning to Potential-Part I (Sponsorship and Fundraising) on Monday, June 20, 2022, from 5:30 to 9:00 pm
Source: Nonprofit Quarterly Nonprofit Quarterly has been a trusted source for Florida Nonprofits since 2005.
Author: Gene Takagi – https://nonprofitquarterly.org/fiscal-sponsorship-a-balanced-overview/