By Austin Gutierrez
Austin Gutierrez, Community Development Clinic Fellow Spring 2023, pictured in the UMass Law Library
Fiscal Sponsorship Agreement’s (FSAs) are an effective way of starting new nonprofits, social movements, and providing public services. (i). These FSAs are fairly common within the realm of nonprofits. In general, a fiscal sponsorship means that a nonprofit organization, the “fiscal sponsor”, agrees to provide administrative services and oversight to, and assume limited legal and financial responsibility for, the activities of groups or individuals engaged in work that furthers the fiscal sponsor’s mission. (ii).
Typically, when seeking out a fiscal sponsor, the situation is where someone with a new charitable venture or program idea has a relationship with an existing 501(c)(3) organization/public charity, and that organization facilitates the raising of grants and donations for the project. (iii).
There are numerous ways to create an FSA but the majority of the FSA’s fall into three different categories: Model A, Model B, and Model C. Model A and Model B generally entail the fiscal sponsor having total ownership/control over the project being sponsored. (iv). The people who want to create the idea go to the sponsor and under a Model A agreement, those who had the idea are typically the employees of the now fiscal sponsor. Model B is similar, but those with the idea will be overseeing the project as independent contractors instead of as employees like in Model A. (v). Between both these models, the project is ran as if the fiscal sponsor is operating the project.
There is a grantor-grantee relationship that is referred to as Model C. Here, the fiscal sponsor has a more limited role. (vi). They are just receiving funds for the project and making grants to the sponsored organization/project. So instead of having total control of the program, the fiscal sponsor has a more “hands-off” approach.
In all of these versions of a FSA, it is important to recognize that the fiscal sponsor ultimately has control of where the funds go for the sponsored project/organization. (vii). This is typically referred to as a variance power. This is where the fiscal sponsor has discretion and control of what happens with the money.
Organizations would consider fiscal sponsorship when they cannot do the project on their own. The variance power is the “trade-off”. (viii).
The benefit of aligning with a fiscal sponsor is typically because these new projects/organizations don’t usually have 501(c)(3) status. That means, without a fiscal sponsor, the project/organization does not have that immediate access to grant funding from private foundations, government grants, nor tax deductible donations. (ix). This is the benefit the fiscal sponsor provides along with the capacity benefit. Capacity referring to the staffing, administrative expertise, typically know-how of the work environment, and experience the new project generally does not have. (x).
The “trade-off” is that the new project/organization is giving up control, a fee of 3-5% on the low end or 15% on the high end. (xi). Without the variance power, the fiscal sponsor is nothing more than, as the IRS states, a “conduit”. (xii). They are just receiving money and passing it along without exercising any control in-between. This would cause consequences for the fiscal sponsor and jeopardize the deductibility of the contributions offered. Parties must know and understand this trade-off.
Generally, fiscal sponsors are not made to continue “forever”. So, when a project is successful and works well, that sponsored organization/team will typically go off and form their own organization independent of the fiscal sponsor. Use the knowledge that they’ve gained from the experience of the sponsorship and hopefully go on their own after.
Fiscal Sponsorships also work well for the fiscal sponsor when the project does not go as well as they would have hoped. Typically, this can be seen as a test run for the fiscal sponsor and it is easy to “give up” on because they can just shut down the project if it is unsuccessful. (xiii). One concern, if you are looking to get sponsored, is to vet or at least assure that the possible fiscal sponsor is actually able to provide administrative support. (xiv). There have been situations where fiscal sponsors take on too many projects and leave those seeking to get funded on the backburner.
When fiscal sponsorship comes to an end, many fiscal sponsors believe they have a lot more rights than they actually do. Due to the fiscal sponsor’s variance power, the fiscal sponsor has the final say on where the money goes at the end of the relationship. (xv). Typically, the project/organization does not get a say on where the raised money ends up, this is at the discretion of the fiscal sponsor. (xvi). To avoid these awkward situations, one can hopefully establish some planning in the initial agreement when the termination occurs, be that final expenses or other termination matters. But generally, the fiscal sponsor should have the final say in what happens to the funds come the termination of the agreement.
On a final note, some FSAs provide a provision that establishes after a certain amount of time, the parties will regroup and reassess the agreement as the project has evolved. (xvii). This allows both parties the option to re-negotiate the agreement and see if they want to “renew” the agreement or part their separate ways. This provision encourages cooperation between the two parties and builds an expectation that the parties will plan their next steps and if it is appropriate to continue.
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(i) Guidelines for Pre-Approved Grant Relationship Fiscal Sponsorship, Nat. Net. Fis. Spon. at 1,https://static1.squarespace.com/static/5e5e9444031f011bf0e6a0f8/t/5ee917ad16f2fa739ca32b8c/1592334254300/NNFS+Guidelines+for+Pre-Approved+Grant+Fiscal+Sponsorship.pdf
(ii) Id.
(iii) Benjamin Takis, Q&A #71 – What’s the difference between model A and Model C fiscal sponsorship?, Se4., Aug. 4, 2021, https://www.se4nonprofits.com/blog/qa-71-whats-the-difference-between-model-a-and-model-c-fiscal-sponsorship
(iv) Michael Gellman & Benjamin Takis, Video: Fiscal Sponsorship Basics for Nonprofits, Se4., Dec. 17, 2021, https://www.se4nonprofits.com/blog/video-fiscal-sponsorship-basics-for-nonprofits
(v) Id.