Fiscal sponsorship models have emerged as a critical alternative for organizations seeking to launch charitable initiatives without navigating the complex process of obtaining independent 501(c)(3) status. Organizations like Global Impact Ventures report 200% growth in their fiscally sponsored work over recent years, while three times as many programs were created in the last 20 years than in the 40 years prior to 2000, making these models increasingly popular for mission-driven organizations.
What Is Fiscal Sponsorship?
Fiscal sponsorship enables a program or organization that does not itself qualify as tax-exempt to attract funding for its operations that will be tax-deductible to donors through the fiscal sponsor. The sponsoring organization serves as the administrative home, receiving charitable contributions and ensuring proper financial management while the sponsored project focuses on mission delivery.
This arrangement benefits both emerging organizations and established nonprofits looking to test new initiatives. Some organizations remain in a fiscal sponsorship relationship for a long time, deciding that their mission can be achieved in that structure without creating a new entity.
Primary Fiscal Sponsorship Models
Understanding the different fiscal sponsorship models helps organizations choose the right approach for their specific needs and capacity.
Model A: Comprehensive Fiscal Sponsorship
Also known as “direct” or “comprehensive” fiscal sponsorship, Model A is an all-in-one solution where you focus only on fundraising and impact, and the sponsor takes care of everything else, from accounting to HR to operations and more. Under this model, the sponsored project becomes a program of the sponsoring organization.
The sponsor assumes complete responsibility for financial management, tax compliance, insurance, and employment matters. The sponsor NFP accounts for the sponsored project or activity as one of its own activities, with assets and liabilities reported on the balance sheet of the sponsor NFP. This arrangement works best for projects that need extensive administrative support and want to minimize operational overhead.
Model C: Grant Relationship Model
The most common model, known as Model C or the “preapproved grant relationship,” involves the fiscal sponsor receiving and managing funds on behalf of the project. Model C is sometimes called “indirect” fiscal sponsorship and is focused much more on finances and much less on in-depth management and support from the sponsor.
Under this model, the sponsored organization maintains more independence while still benefiting from the sponsor’s tax-exempt status. The sponsor receives donations and makes grants to support the project’s charitable activities. This approach suits organizations with sufficient operational capacity who primarily need access to tax-deductible funding.
Financial and Accounting Considerations
Proper financial management represents a core responsibility for fiscal sponsors and requires careful attention to accounting practices and compliance requirements.
Revenue Recognition and Reporting
Usually, the contributions received for the sponsored project or activity are donor-restricted and reported as an inflow to net assets with donor restrictions. Sponsors must maintain clear records separating sponsored project funds from general operating funds and ensure proper reporting on Form 990 returns.
The fiscal sponsor is responsible for sending donors gift acknowledgements and for reporting the income and expenditures in its own financial records. This creates additional administrative burden but ensures compliance with IRS requirements for charitable deductions.
Administrative Fees and Cost Management
It is quite common and perfectly acceptable for the fiscal sponsor to charge an administrative fee for its services, which is usually a percentage of the budget of the sponsored organization or program. In many cases, particularly with smaller projects, the costs associated with fiscally sponsoring a project are higher than the administrative fee.
Organizations should carefully evaluate the true cost of providing fiscal sponsorship services, including staff time, compliance requirements, insurance, and oversight responsibilities. Transparent fee structures help both parties understand the financial commitment involved.
Compliance and Risk Management
Fiscal sponsorship creates legal responsibilities that require careful management and ongoing oversight.
Due Diligence Requirements
Any project/organization that you fiscally sponsor must be nonprofit/charitable in nature, not engaged in anything that would endanger your own 501(c)(3) status, and be doing work that is in line with your own mission statement. Sponsors must conduct thorough vetting before entering sponsorship agreements.
Using a fiscal sponsor satisfies IRS requirements as long as the fiscal sponsor maintains the right to decide, at its own discretion, how it will use contributions. This discretionary control cannot be surrendered to the sponsored project while maintaining tax-deductible status for donations.
Insurance and Liability Considerations
Under the Direct Model of fiscal sponsorship, the sponsor is responsible for the project in every way. The sponsoring nonprofit must include the project as though it is a program of the sponsor, as it is liable for everything that the project does. This includes general liability, directors and officers coverage, employment practices liability, and workers’ compensation insurance.
Proper insurance coverage must extend to all sponsored activities, and carriers may require disclosure of fiscal sponsorship arrangements during the application process.
Strategic Decision-Making Framework
Organizations considering fiscal sponsorship models should evaluate several key factors to determine the best path forward.
When Fiscal Sponsorship Makes Sense
Fiscal sponsorship is often used by newly formed nonprofits that need to raise money during the start-up phase, before they are recognized as tax-exempt by the IRS. This arrangement also works well for projects testing new ideas, temporary initiatives, or organizations that prefer to focus entirely on program delivery rather than administrative management.
Some organizations – including those that are tax-exempt – find that utilizing a fiscal sponsor to outsource administrative responsibilities, whether back-office tasks, or those relating to fundraising and disbursement of funds, is the right business model for them.
Planning for Independence
Many sponsored projects eventually seek independent 501(c)(3) status, though this transition requires careful planning. A recent survey found that only 30-40% of fiscally sponsored projects were interested in becoming their own 501(c)(3) organization, indicating that long-term sponsorship relationships can provide lasting value.
Organizations should establish clear expectations about the duration and goals of the sponsorship relationship during initial negotiations. Written agreements should address potential separation processes and asset transfer procedures.
Building Effective Partnerships
Successful fiscal sponsorship relationships require ongoing communication, clear expectations, and mutual commitment to the shared mission. Both sponsors and sponsored projects benefit from regular review of the arrangement to ensure it continues serving both parties effectively.
Choosing the right fiscal sponsor involves evaluating their financial stability, relevant experience, administrative capacity, and cultural alignment with your mission. The lowest administrative fee should not be the primary selection criterion.
Professional Guidance for Fiscal Sponsorship
Fiscal sponsorship models involve complex accounting, legal, and tax considerations that require professional expertise to implement correctly. Whether you’re considering becoming a fiscal sponsor or seeking sponsorship for your project, proper planning and compliance are essential for success.
Contact us today to learn how we can help navigate the complexities of fiscal sponsorship arrangements. Our team offers professional guidance on accounting best practices, compliance requirements, and financial management systems to ensure your sponsorship relationships operate smoothly while you focus on your charitable mission.
Jo-Anne Williams Barnes, is a Certified Public Accountant (CPA) and Chartered Global Management Accountant (CGMA) holding a Master’s of Science in Accounting (MSA) and a Master’s in Business Administration (MBA). Additionally, she holds a Bachelor of Science (BS) in Accounting from the University of Baltimore and is a seasoned accounting professional with several years of experience in the field of managing financial records for non-profits, small, medium, and large businesses. Jo-Anne is a certified Sage Intacct Accounting and Implementation Specialist, a certified QuickBooks ProAdvisor, an AICPA Not-for-Profit Certificate II holder, and Standard for Excellence Licensed Consultant. Additionally, Jo-Anne is a member of American Institute of Certified Public Accountant (AICPA), Maryland Association of Certified Public Accountants (MACPA), and Greater Washington Society of Certified Public Accountants (GWSCPA) where she continues to keep abreast on the latest industry trends and changes.