Fiscal sponsorship (often incorrectly referred to as fiscal agency) is the term used to describe any number of relationships that provide assistance to a non-charitable project to conduct charitable activities. Like many relationships, if properly handled it can be fruitful and beneficial. If not properly handled, it can be a disaster. The following is an overview of fiscal sponsorship in general, I will address some of the most commonly used types of fiscal sponsorship in future posts.
Fiscal Sponsors v. Fiscal Agent
The use of the term “agent” in this relationship implies that the sponsoring organization is under the control of the non-exempt project/organization. In order to comply with tax laws, the sponsoring organization must, in fact, be in control, and any sponsored activities must be in furtherance of its exempt purposes. The use of the word sponsor more accurately captures the way the relationship must be structured. The sponsoring organization is making the choice to support (financially and perhaps administratively) the activities of the sponsored project or organization. In fact, one of the main risks associated with fiscal sponsorship is that the IRS will view the sponsor as acting merely as a conduit between the donor and the project. If that occurs, the contribution will not be considered tax-deductible if the project is not exempt under §501(c)(3). The IRS requires that the sponsor exercise “complete discretion and control” over the money and ensures that is used to further the sponsor’s §501(c)(3) purpose.
Why Use Fiscal Sponsorship?
There are many reasons why a project might need a fiscal sponsor, I will mention a few of the most common.
- Fundraising can be very difficult for a project that does not have tax-exempt status under §501(c)(3). Individual donors and private foundations are much more likely to give money (or give much more money) if the contribution is tax deductible.
- The project may be temporary (a single event or undertaking) and thus it may not make sense to go through the time and expense of obtaining tax-exempt status (not to mention that it may not be feasible to obtain that status in the needed amount of time).
- Alternatively, the project may have long terms goals but be unsure of whether or not the project will be successful long term.
- The project may not have the capacity to meet the administrative and operational requirements associated with running a charity.
- The project may be waiting for the IRS to grant tax-exempt status.
Who Can Use Fiscal Sponsorship?
Any kind of entity can be a fiscally sponsored project – this includes individuals, businesses, or a new nonprofit that simply has not yet obtained tax-exempt status.
Don’t Jump Into a Fiscal Sponsorship Relationship Lightly
There are a variety of ways that fiscal sponsorship can be arranged. Depending on the arrangement, the legal implications are different for the project, the sponsor, and the funder. In order to avoid risk in this arena, any of those parties (projects, sponsors, or donors) should consider consulting with competent counsel to ensure that the relationship is being handled properly.
Please check back for upcoming posts on some of the more common types of fiscal sponsorship!