Understanding Fiscal Sponsorship – Post 2

A few posts back, I promised a follow up post on more commonly used types of fiscal sponsorships.  I apologize for the delay on that post – it is finally here.  Fiscal sponsorship is definitely a trap for the unwary – and the relationship should be treated differently, depending on the type.  In this post I will provide a quick (read: not exhaustive coverage, I am only hitting the high points) summary of the two most common types of fiscal sponsorship.

The two most commonly used* types of fiscal sponsorship are what are referred to as Model A and Model C.**

Model A

Model A fiscal sponsorship is used to describe situations in which a non-exempt project (Project) with no separate legal existence is taken in by an exempt organization (Sponsor).  The Project has no legal existence.  This often happens with new organizations who either don’t yet have the capacity to manage all aspects of an exempt organization, don’t know if the project/model is viable, or it is a short-term project (like an artistic endeavor).  This model is the safest for the sponsor (in terms of IRS challenges), but also involves the most amount of control (which can be desirable, or not).

When a Model A project is taken in by a Sponsor, it truly becomes a project of the Sponsor.  How this plays out:

  • The project has no separate existence from the sponsor.  All activities are conducted in the name of the sponsor, the sponsor owns the results of the project.
  • Those conducting the activities of the Project are the employees/volunteers of the Sponsor.
  • Project expenses are paid directly by the Sponsor.
  • Sponsor is ultimately responsible for overseeing all aspects of Project.
  • All sponsor policies (e.g., internal policies related to operations, employee handbooks, worker’s comp, etc.) all apply to Project.
  • The Sponsor is responsible for reporting all of the income, expenses, program activity, etc. on its own Form 990.
  • Donations and grants are raised in the Sponsor’s name.

In short, the Sponsor has complete discretion and control over the funds and activities of project.

Model C

Model C fiscal sponsorship is essentially a regranting relationship.  It often occurs when a non-exempt entity (Entity) wishes to raise charitable dollars for its work but does not yet (or cannot ever) have tax-exempt status.  This model is much easier to misstep (and cause issues with the IRS).  Model C fiscal sponsorship arrangement are characterized by the following:

  • Donations/grants are made to the Sponsor (often into a restricted fund).
  • The Sponsor chooses to regrant the funds to the sponsored Entity (just as it would with other grants).  The key here is that it must be a choice – the Sponsor is in control of the money it receives, and has a choice as to what it does with it (in accordance with charitable trust laws on honoring the purposes (does not mean eventual donor) of the donation).
  • The Entity is a separate legal entity with its own taxpayer ID number, it files its own tax filings, etc., Sponsor does not own the results of the work, Entity’s employees/volunteers are not employees/volunteers of Sponsor
  • The Sponsor must exercise oversight of its grants (much like it would do with other grantees) – but the approval process for these grants should be more involved.

Model C should not be used as a way to gather and funnel money through the Sponsor to Entity.  In the IRS’ eyes, the Sponsor would be engaging in a conduit transaction — basically, laundering the money through a 501(c)(3) (for the donor’s benefit) to a non-501(c)(3) entity.  If that occurs, the IRS (were it to discover the transaction) would recharacterize the gift to Sponsor as a gift directly to Entity.  Participating in that kind of transaction could cost the Sponsor its exempt status, and could have unexpected consequences for the donor.


Organizations engaging in fiscal sponsorship relationships should consult with legal counsel to ensure that the structure and procedures used to manage the process are handled correctly.  Regardless of which of the above types of fiscal sponsorship arrangement are used, a written agreement between the sponsor and the sponsoree should be in place to clarify the specifics of the relationship.  Sponsoring organizations risk entering into a situation which they don’t have capacity to handle, ruining their reputation and/or losing their exempt status.  Sponsorees risk losing credibility with donors/supporters, and in some situations, even risk losing all their money.

For more information on this topic, here are a few good resources:

Greg Colvin’s Fiscal Sponsorship site/book — http://www.fiscalsponsorship.com/

The Fiscal Sponsor Directory — http://www.fiscalsponsordirectory.org/ 

A few fiscal sponsors:

The Tides Foundation 

Springboard for the Arts

Fractured Atlas


* There are at least 7 types of fiscal sponsorship.

** I want to give a nod here to Greg Colvin, of Adler and Colvin in San Francisco.  He literally wrote the book on fiscal sponsorship, and is definitely a thought leader in this arena.

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