Nonprofit Law Basics: What is a Fiscal Sponsor?
A fiscal sponsor is a tax-exempt organization that agrees to shares its tax-exempt status with another group for a specific project, grant, or event. The fiscal sponsor accepts financial donations on behalf of the sponsored group and then grants those donations to the sponsored group, less an administration fee.
One example is when a group of neighbors decides that they want to improve their local park by applying for a grant. The grantor requires that all grant recipients must be tax-exempt under IRS Section 501(c)(3). Since the group of neighbors is not an incorporated organization with tax-exempt status, they would locate a fiscal sponsor with a similar mission to apply for the grant.
Why do groups enter into fiscal sponsorships?
Fiscal sponsorships can be useful in mobilizing grassroots efforts and in helping start-up and emerging nonprofits get the momentum they need to become independent organizations. As a 501(c)(3) tax-exempt organization, the fiscal sponsor is also able to provide donors the opportunity to claim tax deductions for appropriate donations.
Working with a fiscal sponsor can be helpful when time is of an issue. For example, grant money may become available for a time-sensitive activity such as disaster relief. Fiscal sponsorships can also be helpful when a project is short-term and waiting for tax-exempt status would be moot.
What are the responsibilities of a fiscal sponsor?
Fiscal sponsorships can offer benefits, but it is important to recognize the responsibilities that a fiscal sponsor must undertake. The fiscal sponsor has legal liability in this situation since they must ensure compliance with all federal, state, and local laws, in addition to practicing proper fiscal management of the funds. Potential fiscal sponsors should consider whether they have the staff and resources to oversee and support the project.
A majority of the time, the fiscal sponsor will take a small percentage of the funding to offset the cost of managing the funds (often 6 – 10 percent).
Additionally, the fiscal sponsor must ensure that the activity they are sponsoring is aligned with their own charitable purposes.
What other issues do groups need to consider before entering into a partnership with a fiscal sponsor?
Groups seeking a fiscal sponsor should consider the following issues:
- Is the group comfortable sharing autonomy over the project/event with the fiscal sponsor?
- Does the group understand what expenses are allowed and the process for obtaining funds?
- What are the reporting requirements? What data needs to be captured?
Do groups need a written agreement with the fiscal sponsor?
It is recommended that the fiscal sponsor and group have a written agreement in place before funds are transferred. The agreement should clearly outline the roles and responsibilities of each party. Each partnership with a fiscal sponsor must be tailored to meet the needs of the specific project, grant, or event, so it is recommended that each party consult with legal counsel when drafting a fiscal sponsor agreement.
Sign up for a 30-minute consultation with attorneys who work exclusively with nonprofits and social entrepreneurs. We can help you decide if fiscal sponsorship is a good idea for your group, and we can review a fiscal sponsor contract. For as little as $99, you can be assured that you are taking the best steps for your organization.
The Cullinane Law Group works exclusively with the nonprofit sector: new nonprofits, foundations, religious groups, and social entrepreneurs throughout the United States who seek to create positive change. Contact us today to learn how we can help your organization.
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