Fiscal Sponsorships: Compliance and Best Practices

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1 Fiscal Sponsorships: Compliance and Best Practices Madhu Singh The Foundry Law Group November 2, 2017 Seattle, Washington

2 Broad Overview - What is a Fiscal Sponsorship? Arrangement between two organizations that allows one group (entity or project) to piggy back off of an already established organization with tax-exempt status.

3 Common Terms Fiscal Sponsorship: The arrangement between the two parties listed below generally in the form of an agreement. Fiscal Sponsor or Sponsoring Organization: The sponsoring organization that has 501c3 tax-exemption Sponsoree or Sponsored Organization: The organization that does not have its own 501c3 status and is borrowing the fiscal sponsor s 501c3 status.

4 Why use a fiscal sponsor? New organization- testing waters Alignment Seeking funding vehicle or access to grants Access to resources Administrative support

5 Why does all this matter? The IRS grants nonprofits 501c3 taxexemption for the purpose of carrying out a specific charitable mission. The IRS wants to make sure that any money and activities of nonprofit is within that stated charitable mission.

6 The IRS does NOT like it when a Sponsoree uses a Fiscal Sponsor s 501c3 tax-exempt status AND The Fiscal Sponsor doesn t make sure it aligns with its charitable mission and/or does not monitor the sponsoree s spending or activities. Why? Because it could be using the money for purposes that are not within the Sponsor s mission.

7 What happens when the IRS is not happy? If the IRS thinks it is not a Real Fiscal Sponsorship relationship, the sponsoring organization risks: Losing its 501c3 tax-exempt status; or Have to pay a hefty fine.

8 Where is the downside to all this? Have to pay an administrative fee to Fiscal Sponsor (2-10%) Less control and autonomy over the project and money Difficult to create a strong identity/brand when the project is under the umbrella of another organization.

9 Benefits for Fiscal Sponsor Mission Enhanced public image through the work of the sponsoree s Attract new donors Pride in having played a role in launching new project or organization.

10 Downside for Fiscal Sponsor The Sponsor takes on administrative burdens (such as providing donor acknowledgment letters and any grant reports to foundation or governmental funders); $ Cost of staff time to do admin work Sponsoree s donations will be reflected on the fiscal sponsor s books and reported on its Form 990 tax return; The fiscal sponsor is responsible for ensuring the funds it receives for the project are used to further the sponsor s charitable purposes; If the fiscal sponsor adopts the project as its own, it may be responsible for all of the project s liabilities

11 Choosing the right Fiscal Sponsor Mission alignment Compatible cultures Communication styles Agreement on type of Fiscal Sponsorship relationship. Agreement on how funds will be handled.

12 Fiscal Sponsorship Fiscal sponsorship (distinguished from fiscal agency) requires the public charity that acts as the sponsoring organization to maintain ultimate discretion and control over the use of the assets that it receives in its role as fiscal sponsor. There are 6 types of fiscal sponsorships: 1. The Grant Model or the Re-Grant Model; 2. Direct Model or Project Model; 3. Independent Contractor; 4. Group Exemption; 5. Supporting organization 6. Technical Assistance.

13 2 Most Common Types of Fiscal Sponsorships 1.Re-Grant Model 2.Project Model

14 Fiscal Sponsorship Re-grant model

15 Fiscal Sponsorship Re-grant model How it works: Sponsoree approaches Sponsor to act as its fiscal sponsor under a re-grant model arrangement (essentially, applies to the sponsor for grant funding); Sponsor determines the program furthers its mission and agrees to act as its fiscal sponsor by raising funds and making grants to support the Sponsoree (pre-approves the project as its grantee); The fiscal sponsor makes a grant application to a private foundation or solicits individual contributions to support the Sponsoree (subject to fiscal sponsor s ultimate discretion and control);

16 Sponsoree Organization Best Practices: Incorporate as a nonprofit corporation with Secretary of State by filing articles of incorporation Register with state charities division Apply for FEIN Establish a board and draft/sign bylaws Record Meeting Minutes

17 Common Pitfalls of Re-Grant Model Avoid accepting gifts earmarked for the Sponsoree Communication: donors should be aware of the arrangement Payments should be made to the fiscal sponsor and may be directed to the sponsoree Reports to fiscal sponsor.

18 Fiscal Sponsorship Project model

19 Fiscal Sponsorship Project model Project model: the fiscal sponsor conducts the project as its own. Generally, the project does not have a separate legal existence. But an advisory committee should be appointed to manage the project, subject to the sponsor s ultimate control.

20 Best Practices of Project Model Sufficient oversight by sponsor establish an advisory committee. Fiscal Sponsor owns the project and is authorized party. Sponsor identification in fundraising and other communications Clear exit plan (If one is required)

21 Sponsoree Organization Best Practices: Establish board/committee/advisory team Identify authorized point of contact for Fiscal Sponsor Detail project plain with completion/transition details

22 Practically Speaking Sponsoree often writes the grant proposal and the Sponsor staff reviews it, signs it and submits it to the funder. Sponsoree drafts grant reports and Sponsor reviews, signs and submits it to the funder. Sponsoree requests payments made, Sponsor writes checks. A good Fiscal Sponsor will review the request to make sure it is consistent with the grant requirements.

23 Ending a Fiscal relationship The project is completed. The Sponsoree changes its fiscal sponsor. The Sponsoree gets its own 501(c)(3). The Sponsoree merges with another 501(c)(3) organization. Be terminated by the fiscal sponsor due to any of the following: The sponsored project s account has a zero cash balance No significant activity has occurred in connection with the project for one year or longer

24 Overview Can be a great option for new organizations or specific projects. Build bridges. Alignment is key. Mission work. At the end of the day this is not final and can be restructured. Fiscal Sponsor Agreements are worth the time and energy.

25 Thank you to our Sponsors.